Fragile Coalition, Volatile Markets: Geopolitical Risks and Israeli Equities in 2025

The political stability of Israel's coalition government, led by Prime Minister Benjamin Netanyahu, has long been a critical factor for investors in Israeli equities. As of June 2025, the coalition's precarious balance of power—sustained through fiscal concessions and judicial reforms—has created a paradox: short-term policy continuity coexists with long-term fragility. For investors, this duality presents both opportunities and risks, particularly in sectors tied to defense, fiscal policy, and judicial governance.

Coalition Dynamics: A Pyrrhic Budget Victory

Netanyahu's coalition secured passage of its 2025 budget in March, allocating a record $207 billion to defense (up 30% from 2024) while raising taxes and freezing public sector wages. This move temporarily stabilized the government but deepened fiscal vulnerabilities. The deficit is projected to hit nearly 5% of GDP, with the OECD warning that persistent military spending and weak structural reforms—such as integrating Haredi (ultra-Orthodox) youth into the workforce—threaten long-term economic growth.

The budget's trade-offs have immediate market implications. Defense contractors like Israel Aerospace Industries (IAI) and Elbit Systems are beneficiaries of elevated military spending, while sectors reliant on consumer spending—retail, real estate, and tourism—face headwinds from austerity measures. shows volatility aligning with coalition stability: sharp dips followed leadership crises, while brief recoveries coincided with budget passage.

Judicial Reforms: A Double-Edged Sword

Netanyahu's push to curb judicial independence has advanced through amendments to the Basic Law of the Judiciary, granting the executive greater control over judicial appointments. While this strengthens his legislative agenda, it risks eroding investor confidence in the rule of law—a cornerstone of stable governance.

The Supreme Court's recent block on Netanyahu's attempt to dismiss Shin Bet chief Ronen Bar underscores ongoing judicial resistance. Such clashes could escalate into a constitutional crisis, deterring foreign investment and destabilizing equity markets. Sectors exposed to regulatory uncertainty, such as technology and real estate, may suffer disproportionately.

Economic Headwinds: Fiscal Deficits and Socioeconomic Fault Lines

The budget's prioritization of defense and Haredi interests over economic reforms has exacerbated fiscal imbalances. With public dissatisfaction over cost-of-living pressures and corruption scandals (e.g., “Qatar-Gate”) simmering, Netanyahu's coalition faces mounting political risk.

highlights the trajectory: debt is projected to surpass 70% of GDP by 2026, a level that could trigger credit downgrades and higher borrowing costs. This risks a self-reinforcing cycle of austerity, lower growth, and market selloffs.

Investment Implications: Proceed with Caution

For investors, the path forward is fraught but navigable:

1. Defense Sectors: Companies benefiting from elevated defense budgets, such as IAI and Elbit, may see short-term gains. However, geopolitical escalation (e.g., renewed conflict with Gaza or Iran) could amplify volatility.
2. Equity Market Exposure: Consider underweighting Israeli equities broadly unless the coalition demonstrates fiscal discipline. The TA-25 Index's sensitivity to political headlines suggests downside risks if coalition cohesion frays further.
3. Hedges Against Currency Risk: The shekel's value is vulnerable to fiscal and geopolitical instability. Investors might pair equity exposure with shekel-denominated bonds or inflation-linked instruments.
4. Monitor Judicial-Tech Tensions: Sectors like cybersecurity and fintech, which rely on robust legal frameworks, could face uncertainty if judicial reforms undermine regulatory predictability.

Conclusion: A Government on Borrowed Time

Netanyahu's coalition is a house of cards built on fiscal largesse and judicial concessions. While defense stocks and sectors insulated from austerity may offer pockets of upside, the broader equity market faces headwinds from fiscal deficits, political volatility, and the looming threat of a constitutional crisis. Investors would be wise to tread carefully, focusing on defensive plays and hedging against the inevitable turbulence ahead.