When Politics Collide: How Israel's Shifting Coalition Could Be a Lifeline for Defensive Stocks

The political chessboard in Israel is in turmoil, and investors would be wise to heed the tremors. Prime Minister Benjamin Netanyahu's coalition, already perched on a knife's edge, has been further destabilized by the exit of the ultra-Orthodox party United Torah Judaism (UTJ). With the government's majority now trimmed to a razor-thin 61 seats in the 120-member Knesset, the calculus for Israeli equities is shifting. Here's why geopolitical risk isn't just a headline—it's a buy signal for defensive plays and a warning flare for tech/export-reliant firms.

The Political Tightrope: A Catalyst for Sector Rotation
The UTJ's withdrawal—sparked by Netanyahu's failure to codify military draft exemptions for its constituents—has handed far-right factions like Jewish Power and Religious Zionism unprecedented leverage. These parties, which oppose ceasefire concessions with Hamas, now dictate the terms of survival for the government. The result? Prolonged Gaza conflict uncertainty, stalled legislative progress, and a leadership mired in survival mode. For markets, this isn't just noise—it's a recipe for capital flight from growth-sensitive sectors and a rush into stable cash-flow generators.

Investors should treat this political instability as a harbinger of defensive rotation. Healthcare and utilities—sectors insulated from geopolitical shocks and reliant on domestic demand—are suddenly looking like bedrock buys. Meanwhile, tech and export-reliant firms, which thrive on stability and global trade, face headwinds as the risk of prolonged conflict or sanctions looms large.

Defensive Plays: Where to Look Now
Start with healthcare stocks, which benefit from steady demand and government spending. Consider companies like Clalit Health Services, Israel's largest HMO, or Maccabi Healthcare Services, both of which offer recurring revenue streams irrespective of geopolitical headwinds. Utilities like IDE Technologies, a water desalination leader, or Evogene, a biotech firm with agri-science solutions, also fit the bill. These companies are less exposed to global supply chain disruptions or diplomatic fallout.

Data showing the healthcare sector outperforming tech by 12% year-to-date, with a divergence widening in July as coalition instability peaks.

The Sectors to Avoid: Tech and Export-Dependent Plays
On the flip side, cybersecurity stocks like Check Point Software or CyberArk—long stalwarts of Israeli tech—could face pressure. While cybersecurity is a “must-have” in any environment, prolonged conflict or U.S.-Israel diplomatic tensions (e.g., over ceasefire terms) could dampen global demand. Similarly, export-reliant firms in semiconductors or agriculture may suffer if trade routes tighten or the Shekel's volatility disrupts pricing. The Shekel's weakness against the dollar (down 5% YTD) already hints at capital flight, a trend that could accelerate if political gridlock deepens.

The Sentiment Barometers: Shekel and Bonds
Two key indicators will signal investor sentiment: the Israeli Shekel (ILS/USD) and 10-year bond yields. A weaker Shekel reflects risk-off sentiment, punishing export stocks but benefiting domestically focused firms. Conversely, rising bond yields (already at 5.3% in July) could signal inflationary pressures or diminished confidence in government stability—both of which favor defensive assets.

Data showing a 3% decline in the Shekel and a 20-basis-point jump in yields during June-July, coinciding with coalition instability.

The Bottom Line: Play Defense, Monitor Politics
This isn't just about buying “safer” stocks—it's about recognizing that Netanyahu's coalition is a political time bomb. With far-right factions now calling the shots on ceasefire terms and conscription, the Gaza war's trajectory is anyone's guess. For investors, the playbook is clear:
- Overweight healthcare and utilities until the coalition's fate is resolved.
- Underweight tech and exporters until geopolitical risks abate.
- Watch the Shekel and bond yields: A Shekel rebound or a bond yield drop could signal a political truce or investor optimism—but don't hold your breath.

The Knesset's turmoil isn't just about politics—it's a market-moving event. Stay vigilant, stay defensive, and let the instability work in your favor.