Key Takeaways (Click on the subtitles below to jump to each respective section):
- Israeli shares plunge as conflict intensifies, underperforming the Middle Eastern market
- Israel saw the 10th largest weekly loss in 26 years
- Risk in the Middle East is now on par with that of Developed Markets
- Although it shot up, Israel risk remains below historic records
- Israel and Palestine’s “extra-market” risk is the highest in the Middle East and similar to that of Russia and Ukraine
- All Israeli sectors have fallen since the start of the conflict, including Energy
- Energy sector in the Middle East remains flat, despite a rise in oil prices
- Not all Middle Eastern country markets fell
- Saudi Arabia and UAE dominate Middle Eastern risk
- Israeli shekel risk rises but remains below that of several major DM and EM currency risk
1. Israeli shares plunge as conflict intensifies, underperforming the Middle Eastern market
- Israeli shares plunged 9% in the first week after the Hamas attack on October 7, for a year-to-date loss of 11%.
- The Middle East market also dropped but to a lesser extent and is still showing a positive year-to-date return (of 8%).
- Israel has been greatly underperforming not only the Middle East but also the global Developed and Emerging Markets.
 The analysis in this study is as of October 13, 2023. The Israel market is represented by Axioma Market Portfolio Israel LMS, which includes large, medium, and small capitalization stocks. The Middle East portfolio includes all shares from the Axioma Worldwide Equity Factor Risk Model (WW4) that belong to the following 11 countries: Bahrain, Egypt, Israel, Jordan, Kuwait, Oman, State of Palestine, Qatar, Saudi Arabia, United Arab Emirates.
2. Israel saw the 10th largest weekly loss in 26 years
- Despite the current war potentially being the biggest crisis in Israel’s history, its market decline last week was only the tenth largest one-week drop in 26 years.
- The loss was similar in magnitude to the weekly losses seen around similar escalations such as the October 2000 Events or the start of the Lebanon war in 2006.
- Yet, the decline was less than half the one seen the week the WHO declared COVID-19 a pandemic.
3. Risk in the Middle East is now on par with that of Developed Markets
- Israel’s risk climbed much more than in the Middle East, Developed or Emerging Markets: Israel’s risk rose nearly 20% in one week, while the risk in the Middle East, Developed and Emerging markets ticked up between 3% and 9%.
- Still, Israel’s risk remained well below levels seen at the beginning of the year.
- By October 13, the Middle East risk was below that of Emerging Markets and on par with that of Developed Markets.
 This is likely due to the concentration of the Middle East portfolio in one Saudi Arabian oil company that has lower volatility than most companies.
4. Although it shot up, Israel risk remains below historic records
- While Israel’s risk shot-up, it ended the week near the long-term median and well below previous peaks.
- Current risk level is less than half records seen at the height of the Global Financial or COVID Crises.
- Keep in mind however that it took time for risk to rise to the peaks of these previous crises and we would expect Israel’s risk to continue climbing.
5. Israel and Palestine’s “extra-market” risk is the highest in the Middle East and similar to that of Russia and Ukraine
- Most countries in the Middle East saw their extra-market risk rise, with Israel and Palestine showing the highest extra-market risk in the region.
- Still, Israel and Palestine’s risks are currently well below those of Turkey and Lebanon, and similar to that of Russia and Ukraine.
- One week after the Russia-Ukraine war started (on March 3, 2022), the two countries’ risk were substantially higher than those of Israel and Palestine after the first week of conflict (October 13, 2023).
- Lebanon’s risk was off the chart, more than 20-fold larger than that of Israel.
 “Extra-market” risk is the risk related to the country over and above that of other risk-model factors in WW4, which can be interpreted as how similar to, or different from, the country is from the overall world market.
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6. All Israeli sectors have fallen since the start of the conflict, including Energy
- All Israeli sectors were down, with Energy, Financials and Consumer Discretionary suffering double-digit losses in five business days, after being the only sectors with strong positive YTD returns before the attack.
- Only Consumer Discretionary still showed a positive year-to-date return by October 13, while Materials and Utilities became the biggest losers so far in 2023.
- Financials had the largest negative contribution (of 45%) to the Israel return since the attack; despite being among the largest losers, Energy and Cons Disc together represent less than a tenth of the Israeli market and therefore were responsible for only about 15% of the weekly loss.
7. Energy sector in the Middle East remains flat, despite a rise in oil prices
- The Middle East Energy sector remained relatively flat for the first week of the conflict, despite the rise in oil prices. Perhaps this is an indication that oil production is likely to suffer and therefore, oil companies won’t be able to benefit from higher oil prices.
- Energy’s contribution to the Middle East risk is nearly 80%, significantly surpassing its weight of 50%.
- All other Middle East sectors fell, with Financials and Consumer Discretionary dragging down the Middle East market the most (Financials due to being the second-largest sector in the Middle East, and Consumer Discretionary due to having the largest loss last week).
- All countries in the Middle East were negatively affected by the start of the conflict, except Egypt, Oman, and Qatar.
- Israel (-9%) and Palestine (-6%) saw the largest weekly declines, and Israel posted the largest year-to-date loss.
- Despite last week’s losses, most Middle Eastern countries still posted positive year-to-date returns.
- Although incurring nearly a third of Israel’s losses, United Arab Emirates had the second largest negative contribution to the Middle East return last week, due to its large weight in the portfolio.
- Saudi Arabia remained relatively flat over the five business days and continued to be the driver of the Middle East year-to-date positive return, as it represents over 60% of this market.
9. Saudi Arabia and UAE dominate Middle Eastern risk
- Effectively it is two countries that steer the Middle East risk: Saudi Arabia and United Arab Emirates (which together represent more than 80% of the Middle East market).
- Interestingly, Saudi Arabia’s contribution to the Middle East risk (of nearly 87%) is much higher than its weight would suggest, while United Arab Emirates’s risk contribution is a third of its weight.
- In fact, all other country’s contribution to the Middle East risk is much less than their respective weights in the market, and that includes Israel.
10. Israeli shekel risk stays below that of several major DM and EM currency risk
- Even after dropping to an eight-year low against the US dollar, the Israeli new shekel (ISL) risk against the greenback stayed well below that of the Russian ruble (RUB) and Hungarian forint (HUF) among emerging country currencies, but also below the Norwegian krone (NOK) and Swedish krona (SEK) among developed market currencies.
- Keep in mind however that we are in the incipient stage of this crisis, and we expect both currency and equity risk to rise in the foreseeable future.