FT: Israeli stock surge shows markets signalling clear winner in Middle East

Key topics:Israel’s stock market soared 80% since October 7, defying war fears.Tech, R&D, and VC funding fuel Israel’s productivity and economic growth.Israel is now the Middle East’s only developed economy and market..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.Support South Africa’s bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here.The auditorium doors will open for BNIC#2 on 10 September 2025 in Hermanus. For more information and tickets, click here..By Ruchir Sharma.The writer is chair of Rockefeller International. His latest book is ‘What Went Wrong With Capitalism’Since the October 7 2023 attacks on Israel, the best-performing major stock market in the world is . . . Israel. After taking an initial hit, the market recovered fully in four weeks, and since then is up around 80 per cent in dollar terms.This ascent continued through the recent 12-day war with Iran, when most geopolitical experts thought their worst fears of a wider conflict were coming to pass. The stock market, in contrast, kept signalling that the conflict would end soon, with Israel prevailing both militarily and economically.That message came through loud and clear in forward-looking price-to-earnings ratios, which have risen over the past 21 months by 40 per cent, compared with 20 per cent in the rest of the world and a slight decline in neighbouring Gulf markets, led by Saudi Arabia and the United Arab Emirates. Despite all the international criticism of Israel for its multiple military offensives, from Gaza to Iran, a surge in foreign buying has fuelled the rally in its stock market.Founded amid poverty after the second world war, Israel is one of the few countries to have risen from the developing into the developed ranks. Out of roughly 200 nations, about 40 are classified by the IMF as developed economies. Even fewer are classified as developed financial markets by the leading global index provider (MSCI). Israel is the only country in the Middle East to have passed either of those development milestones, and the only one anywhere to have made the transition on both fronts. Its $550bn economy is now among the largest 30 in the world.So Israel’s economic success has been decades in the making. But that wasn’t always so. Many of its founders were committed socialists. They began building an expansive welfare state and extended a generous welcome to new immigrants, which led to financial crisis by the 1980s. As occurred in the socialist states of Scandinavia, the crisis forced economic reform and a sharp turn towards capitalism and greater fiscal discipline. State-owned companies were sold, taxes streamlined and borders opened to trade..Read more:.Vitaliy Katsenelson: Embracing stock market stoicism .Since the early 2000s, as most other developed governments have increased spending and debt, Israel has cut state spending from 50 to 40 per cent of GDP, and public debt from a high of 90 per cent to under 70 per cent of GDP. The government also made some smart investments, seeding the venture capital industry that helped to launch the nation’s vaunted tech sector.Perhaps the most telling sign of its dynamism is that Israel now spends more than 6 per cent of GDP on research and development — more than any other nation and over double the global average. An unusually high share — about half — of that R&D funding comes from foreign multinationals, many involved in defence-related industries. Their work created the Iron Dome and the web of interceptor rockets that have reportedly destroyed more than 85 per cent of missiles and an even larger share of the drones launched at Israel in recent conflicts.Spillovers from defence have made Israel a global leader in fields from air-traffic control to, above all, cyber security. With more start-ups per head than any other country, its business culture is closer to that of California than the Middle East. It has 73 start-ups in the hot field of generative artificial intelligence, the third largest in the world. Half of its exports are tech products — a share few advanced economies can match — while its neighbours still export mainly oil, an old-fashioned commodity.The result is an isolated productivity miracle. Total factor productivity, which captures how well labour is using new machines, has grown four times faster in Israel than in other developed economies over the past 25 years, and that gap has widened in the past five years.In tech-driven Israel, GDP per head has nearly tripled since 2000 to more than $55,000, rising from 50 to 70 per cent of the level in the US. In petrol states — and not only those of the Middle East — incomes tend to rise, fall and ultimately stagnate with the long-term price of oil. Saudi Arabia’s per head GDP is a third of that in the US, roughly the same as it was 25 years ago.To many observers, the geopolitical situation in the Middle East still seems precarious. But the market’s optimistic take on Israel’s tech-driven economy is now showing up in economists’ forecasts, which are projecting growth at nearly 4 per cent in coming years. That’s relatively strong for a developed nation. It validates the market view that Israel is cementing its status as the region’s dominant economic force..© 2025 The Financial Times Ltd.

FT: Israeli stock surge shows markets signalling clear winner in Middle East

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