WASHINGTON, Nov. 21 (UPI) -- By the sadly grim logic of the Middle East, Hamas terrorists helped kick off the coming Israeli election campaign by blowing up a dozen people on a bus. This act came just hours after voters in Israel's Labor Party primary chose Haifa Mayor Amram Mitzna, a fresh new face of the country's center-left, to carry their standard in the forthcoming January 28 election.
With violence rising, the prospect of a U.S.-led war on Iraq, and the uncertainty that always attends national elections, Israel appears to be a highly risky proposition for investors. On the other hand, as regular readers of the "bottom line" know, elections can be an investment opportunity. (A bullish column on the likely victory by Brazil's center-left president-elect Luiz Inacio Lula da Silva preceded a rally of more than 20 percent in the country's equity markets in dollar terms).
The question, as always for investors, has to do with the future. How will the multiple players in this drama interact? There are, as mentioned above, the U.S., the Palestinian quasi-government, terrorist groups Hamas and al Qaida, Iraq, and Mayor Mitzna. As well, we have the complicating contest for leadership in Israel's center-right Likud Party, pitting current Prime Minister Ariel Sharon against former Prime Minister Binyamin Netanyahu in a November 28 primary.
The Likud contest is likely to go to Sharon, the more so after the recent bombing and the broader campaign by terrorists it may signal. The more active Palestinian and other terrorists are in the coming weeks, in Israel and around the world, the more it reinforces the hawkish Sharon, whose whole career has been built on suspicion of Palestinian leader Yasser Arafat.
Netanyahu's first move in the race, in fact, has been to try to outhawk even Sharon. Last week, Netanyahu belittled a U.S. peace plan (one that Sharon has promised to talk about) as "off the agenda" in light of the U.S.-Iraq drama. Netanyahu has also promised to expel terrorist-enabler (some would say "sponsor") Arafat, something Sharon has come to the brink of doing, but not completed, under U.S. pressure.
Such tactical efforts, however, seldom work. This was demonstrated last month, when the former Labor leader, Binyamin Ben-Eliezer, walked out of the unity government, prompting the breakdown in coalitions that has led to the current necessity for elections under Israel's parliamentary system.
Ben-Eliezer ostentatiously declared that he could no longer take part in the unity government given a decision by the cabinet to maintain and increase funding for Israeli settlements at the same time it was reducing social welfare payments. Labor voters, however, decided that this was a merely opportunistic conversion coming from a man who had participated in Sharon's government for some time. This is likely to be Netanyahu's fate among Likud voters.
Even if Netanyahu should win, however, it would hardly represent a victory for dovish thinking in Israeli politics. It would merely indicate that his recent more-hawkish-than-Sharon statements have convinced Likud voters Netanyahu is willing and able to be as tough as Sharon, perhaps more.
In December and January, the Israeli campaign will pit the Likud winner against the more dovish Mitzna. Mitzna advocates peace talks with the Palestinians, and was noted for his role, as a ranking officer in 1982, in asking to be relieved from duty during Israel's alleged tolerance of violence by extreme Christian groups during the invasion of Lebanon, led by Sharon. As a former general, however, and in his campaign, he is hardly an extreme dove.
A reliable source in the Labor Party tells me that Mitzna plans to issue statements of support for the government (insofar as it is dealing with those individual attacks) during any terrorist assaults on Israel, throughout the campaign. "He will advocate greater openness to negotiation, but refrain from seeming to blame the government's response to violence as having caused the violence itself," the advisor says.
This is smart politics, and also, it would appear, a sincere reflection of Mitzna's thinking, namely, that he will be well to the left of Likud in his willingness to talk, but somewhat to the right of the previous Labor government in his willingness to take action while such talks are going on.
Whatever message emerges in the campaign, Mitzna's emergence as party leader makes this much clear: Labor and Likud, will each have a clear message. The winner will have a mandate, either to stress toughness while being willing to talk under Likud, or to stress negotiation while responding to terror attacks under Labor.
The other key actors are U.S. President George W. W.Bush and Arafat.
Bush will have a stronger hand as his triumph over Iraq, military or diplomatic, emerges. He will use this hand to push Israel to advance talks with the Palestinians offering land for peace. But he will also push Arab states to offer peace for land. That is, he will put pressure put to bear on Saudi Arabia and others to stop their financing of terror networks, and to rein in Arafat and make him control Hamas and other terror groups.
Arafat and the Palestinians, including Hamas and other terrorist groups, are the other major players. Palestinians would strongly prefer to see a victory by Mitzna, but the shrewd thinkers among them are keen to avoid saying so. "They should stay out of the debate," advises Ghasan Andoni, director of the Centre for Rappochement between Peoples, because if the Palestinians seem to be endorsing Mitzna, it will harm him. Why vote for the man favored by those bent on the destruction of Israel?
Nevertheless, peaceful Palestinian factions are bound to engage in such activism, and terrorist leaders are bound to strike out at Israel. Why don't they just refrain from doing so, instead of helping Likud? Well, in the words of famous football coach Bill Parcells, "you are what you are." Arafat believes his cause just, and will want to make his case before the international press. Terrorists believe Sharon is intolerable, and they believe violence works. They will escalate.
All this leads to a rather contradictory, or at least muddled, picture. Violence against Israel, and the prospect of interminable tension, hardly gives people confidence in stocks and the economy. On the other hand, weakened terrorist forces, and a victory by an incumbent prime minister willing to talk peace, but refusing to do so with those who promote or shrug at attacks on Israel, all in a context of rising prestige by Israel's chief ally, America, would seem to be positive factors.
From an investment standpoint, it may be easier to leave aside the question of how all these tangled forces will interact from day to day, and look at a few fundamental probabilities over the months to come. Within the next four months, the following things are likely to have taken place.
1. The U.S. will have replaced the government of Iraq. The most likely alternative is, it will have achieved a spectacular disarmament of Iraq without even having to go to war. Either helps Israel.
2. Hamas will have launched further strikes in Israel, and other terror groups will have launched terror strikes around the world. This is hardly a positive, either morally or in terms of conficence. Nevertheless, Israel will have launched attacks of its own against Hamas and other terror networks in Palestine, while working with the U.S. to allow its broader Middle East peace plan to inch forward.
3. Israel will have re-elected Ariel Sharon as prime minister, a statesman of under-appreciated strategic insight: See his speech at Oxford University in the early 1990s, for example, on the problem the Middle East's lack of democracy outside of Israel, and the world-historical problem this poses for the U.S. and Israel. Or -- should Sharon lose -- it will have elected a peace-making former general, Mitzna, or a former prime minister, Netanyahu, each eager to establish their own bona fides as a tough but reasonable leader.
The results should be positive. There may be a dip in the market in December or January if (as is likely) there is an unexpected surch by Mitzna. A similar scare took place in Brazil this fall when it became clear Lula would be elected president of Brazil. If this analysis holds, and the U.S. is moving ahead in Iraq, while Mitzna is waging a critical and smart campaign, there would be an opportunity to increase holdings at a lower price.
Bottom line: Institutional investors with a position on the Tel Aviv exchance may want to increase their holdings, even in the runup to the November 28 Likud primary. Small investors can take a stake in Israel through more than a dozen companies that list shares on the New York exchange, including telecom and software companies, or through the braoder Israel Fund (ISL). This is not a play for the timid, but then, most of the best investments aren't.
(Gregory Fossedal is chief investment officer of the Democratic Century Fund, managed by the Emerging Markets Group, www.dcfund.net. His firm may hold some of the securities mentioned his articles. Individual investors should contact their own investment professional before making any decisions to buy or sell these or any related securities.)