In the previous year of the Jewish calendar, 5783, which concluded with the recent celebration of Rosh Hashanah, the Israeli financial markets faced a challenging period. From a financial standpoint, this year began amidst a global backdrop where central banks worldwide were implementing a policy of monetary tightening and substantial interest rate hikes. These measures were aimed at addressing the pervasive inflation that had, with unrelenting force, swept across global markets. The predominant concern in financial circles was the possibility of major economies experiencing a significant growth slowdown alongside surging inflation.

The Israeli capital markets were not immune to the mounting apprehensions. In the first three months of the Hebrew year, the key market indices experienced substantial declines as pessimism pervaded every facet of financial discourse. Dire scenarios of a global economic contraction cast a somber shadow. However, as time passed, the restrictive monetary policies enforced by central banks around the world began to impact demand. Additionally, moderation in commodity prices and a marked improvement in supply chains contributed to a recalibration of the supply-demand equilibrium, leading to a reduction in inflationary pressures.

Netanyahu has been generating 'a lot of damage' to the Israeli economy, warned Zvi Eckstein, former deputy governor of the Bank of Israel pic.twitter.com/j0Ba67px04

— CNBC International (@CNBCi) September 19, 2023

The profound fear of a global economic downturn combined with high inflation, as previously foreseen, was contradicted by encouraging data indicating a soft landing in the American market. As inflation significantly receded, the labor market remained robust, even witnessing a decrease in unemployment. Consequently, the specter of a recession, which had loomed almost ominously over the markets, was relegated to the fringes.

In Europe, the data similarly began to paint a picture of economic resilience. Initial concerns of an economic contraction were disproved as data revealed only a slowdown. The unemployment rate remained low, and a relatively mild winter in Europe alleviated serious concerns about energy prices, resulting in a sharp decline in gas prices and an upturn in disposable income and private consumption. The world's leading indices responded promptly, and the screens were once again adorned with the reassuring hue of bright green. Remarkably, however, the Israeli market did not partake in this celebratory return to prosperity.

הבורסה בניו-יורק נצבעה הלילה בכחול-לבן 🇮🇱🇮🇱🇮🇱🇺🇸🇺🇸🇺🇸
צפו בכבוד המיוחד שקיבלה הלילה מדינת ישראל בבורסה הגדולה בעולם, שם היה לי הכבוד לנעול את המסחר בטקס מרשים וחגיגי ששודר למאות מיליונים בכל העולם. כמשקיע לשעבר אני אומר לכל המשקיעים באמריקה - השקעה בישראל היא ההשקעה הטובה ביותר… pic.twitter.com/RCOCXppxa2

— ניר ברקת (@NirBarkat) September 19, 2023

Significant concerns about potential damage to the local economy due to proposed judicial reform laws, as well as apprehensions about Israel's credit rating, cast a shadow over investor sentiment in the Israeli stock market. Foreign investors, in particular, began to reassess the viability of investing in Israel, with a special emphasis on the high-tech sector, which serves as the linchpin of the Israeli economy. Consequently, many investors chose to reduce their holdings in the domestic market and divert a portion of their investments overseas.

In an evaluation conducted by the Bank of Israel in April, forecasts indicated potential damages of approximately 14 billion NIS annually in a mild scenario and a staggering 48 billion NIS per year in a severe scenario over the next three years. In August, in the financial stability report for the months spanning January to June, the Bank of Israel raised the risk assessment from "medium-low" to "medium to high." It also underscored the increasing uncertainty surrounding legislative changes, which in turn elevated the risk premium associated with the Israeli economy.