Israel's paradox three years into the war: capital seeks Ssfety, defense industry investments rise

Today, Israeli citizens and authorities mark three years since the Hamas attack of October 7, 2023, which resulted in approximately 1,200 deaths and 251 people being taken hostage on that day. It was an attack that occurred against a backdrop of ignored warnings and delayed responses, shattering the promise of security made to the country's own citizens. We know what followed: three years later, Gaza is devastated, the region remains mired in conflict, and Israel is still grappling with the question of accountability for the catastrophe. What the intelligence services knew, why the intervention was delayed, and how Benjamin Netanyahu reacted during those decisive hours remain questions without a full public answer-topics we have covered in the pages of • BURSA• newspaper from 2023 to the present. Today, we turn to another topic: the Hamas attack of October 7, 2023, also undermined the promise Israel held out to investors-that an innovation-driven economy could thrive in an unstable region, shielded by its military and technological superiority. The war that erupted after October 7, 2023, transformed security risk into an immediate factor in financial decision-making. In the initial months, according to data published by the Bank of Israel, foreign investors sold off Israeli securities, while managers of Israeli savings subsequently increased their exposure to foreign assets. At the same time, the state ramped up military orders and the defense industry expanded its capabilities, while startups developing drones, sensors, autonomous systems, and military applications for artificial intelligence attracted increasing amounts of capital.

The initial financial reaction was retrenchment. The Bank of Israel initially reported that, in the fourth quarter of 2023, non-residents had liquidated tradable securities worth approximately $6.2 billion-primarily bonds and central bank certificates-explicitly linking the move to the war launched by Israel following the Hamas attack on October 7, 2023. The updated quarterly series, published on the Tel Aviv-based central bank's website, allows for a more precise assessment of the episode: net portfolio sales and redemptions totaled approximately $7.52 billion between October 2023 and June 2024-marking nine consecutive months of negative balances for this category of foreign investment.

• $40 billion - capital sent abroad by local Israeli financial institutions one year into the Gaza war

The war also affected the confidence of those managing the public's savings. In September 2024, • The Times of Israel• , citing • Calcalist• , reported that local financial institutions had channeled 151 billion shekels - approximately $40 billion - abroad in the nearly one year since the conflict began. By July 2024, the foreign exposure of savings funds had risen from 51.7% to 56.3%, and that of pension funds from 47.6% to 50%. According to reports, fund managers had initially increased their domestic market presence but shifted course starting in April 2024, amid doubts regarding the ability of Benjamin Netanyahu's government to restore growth and fiscal discipline. The 40-billion figure essentially reflects this trend and cannot be added to the total foreign capital outflows.

However, the Israeli market did not follow a straight path of collapse. On October 8, 2024, the newspaper BURSA - citing Calcalist - noted that the Tel Aviv 35 index had risen by 14.1% and the Tel Aviv 125 by 12.2% since the outbreak of the war. Share prices had recovered ground even within an economy facing severe pressures. For investors, this offered an uncomfortable lesson: a deterioration in security does not automatically trigger a decline in all asset values, nor does a stock market rally prove that all capital has returned.

From the second half of 2024, the Bank of Israel observed a resumption of net foreign investment in securities. This recovery occurred alongside direct investments and other forms of financing, yet Israeli residents maintained a significant volume of foreign holdings. Calculations based on the same official quarterly series show that, between July 2024 and June 2026, net foreign investment in Israel totaled $85.13 billion, while net investment by residents abroad reached $117.33 billion, including reserve assets and financial derivatives.

According to economics and finance experts cited by • Calcalist• and • The Times of Israel• , there are two explanations for the gap between inflows and outflows. The first is standard: residents of an economy with significant savings and foreign assets also invest abroad for diversification purposes. The second relates to the conflict: military risk, budgetary pressures, and business disruptions can make foreign investments more attractive while delaying new projects within Israel. In May 2026, the Bank of Israel noted continued geopolitical uncertainty and labor force constraints, yet also observed that the risk premium had returned to levels close to those seen prior to the October 7 attack.

Furthermore, there are investors for whom the issue goes beyond financial returns. In November 2024, Reuters reported that European institutions were reducing their Israel-related exposures-including stake sales by Storebrand and AXA and the Irish sovereign wealth fund's divestment from six Israeli companies. These decisions were driven by ethical considerations, legal risks, and reputational pressures, rather than solely by economic outlooks.

The cited sources maintain that a broader return of new investors depends on lasting security stability, a credible budget, and the ability of companies to operate predictably. This is an inference, not the result of a survey covering all investors. The Bank of Israel's July 2026 forecast conditions the recovery on a reduction in the intensity of fighting in Lebanon, the absence of new confrontations with Iran, and an easing of supply-side constraints. It also projected a public debt of approximately 69% of GDP and signaled uncertainty regarding future military spending. For investors who had excluded Israeli assets on ethical grounds, improvements in security and the budget might not suffice; a change in the circumstances that prompted the exclusion would also be a factor.

• Financial boom for military research and innovation investments

As financial capital recalibrated its exposure, military orders were multiplying. The Tel Aviv Ministry of Defense's 2024 balance sheet indicates multi-year procurement totaling 220 billion shekels - more than four times the usual annual level - with over 150 billion directed into the Israeli economy through domestic purchasing. These figures cover weaponry, ammunition, platforms, logistics, and fuel; they do not represent research alone, nor do they reflect spending fully executed within a single year. However, they illustrate the scale of public demand underpinning the military industry and offering the prospect of long-term contracts.

This demand extended to small businesses as well. Between October 2023 and September 2024, Israel's Ministry of Defense reported collaborations with 86 startups and small enterprises worth approximately $168 million - five times the level seen in the comparable prior period. Subsequently, the ministry's Director General stated that, in the 2024 calendar year alone, the institution had invested 1.2 billion shekels in startups. In the first half of 2026, the ministry's orders placed with military startups reached approximately 1 billion shekels - about $330 million - double the value recorded in the same period the previous year. For a young company, a military order signifies more than just revenue: it can validate the product and alleviate investor uncertainty regarding the existence of a market. Globes explicitly described this dynamic, citing leadership from MAFAT - the ministry's research arm - noting that firms could showcase received orders to investors, while official confirmation of the collaboration lent them credibility.

The capital raised by startups surged dramatically. Globes reported that military firms collaborating with MAFAT had raised approximately $150 million in 2024, a figure that rose to over $1 billion in 2025 through funding rounds, mergers, and acquisitions. In December 2025, the Ministry of Defense confirmed that private investment in military startups had, for the first time, surpassed government funding for these companies. In the first half of 2026, the Jerusalem Post - citing figures presented at an investment forum in Haifa - reported that startups collaborating with the ministry had raised nearly $3 billion.

• Major defense companies expanded their capabilities

Identifiable investors stand behind these figures. Sequoia Capital and Lux Capital funded Kela, a company developing a platform to integrate commercial and military technologies; the list of backers also includes In-Q-Tel, an entity linked to the US intelligence community. XTEND, a company specializing in robotics and autonomous systems, closed its Series B funding round at $70 million in July 2025, with participation from Aliya Capital Partners, Protego Ventures, Claltech, Union-Tech Ventures, and Chartered Group. Ondas acquired the Israeli company Sentrycs, which specializes in anti-drone technologies for $224.6 million in cash and stock. Funding new products and acquiring existing firms are distinct mechanisms, yet both demonstrate interest in the military capabilities of the Israeli ecosystem.

Major companies have responded through research and capacity expansion. According to data on the company's website, Elbit Systems increased its consolidated net research and development spending from $424.4 million in 2023 to $466.4 million in 2024 and $517.1 million in 2025. In the first half of 2026, these expenditures reached $309.5 million - approximately 26.9% higher than in the same period the previous year. The company attributed the 2024 increase to areas including precision-guided munitions and high-power lasers.

Iron Beam illustrates the link between research, industrialization, and military procurement. The contract announced in October 2024 - awarded to Rafael and Elbit to scale up production of the laser system - was valued at 2 billion shekels (approximately $536 million). In August 2025, Tel Aviv authorities also approved a program worth roughly $1.5 billion to accelerate the production of Merkava tanks and Namer and Eitan armored personnel carriers, alongside an expansion of industrial infrastructure. These multi-year programs demonstrate that the military drive extended beyond software and startups to encompass factories, equipment, and the capacity to manufacture weaponry in larger volumes. What is certain is that, three years after the Hamas attack of October 7, 2023, the data reveal two simultaneous reactions to the same sense of insecurity: a reduction in certain financial exposures and the accelerated funding of defense technologies. The war has impacted investor confidence but has also generated military demand that attracts companies and investors; consequently, military technology has become an increasingly significant focal point for Israeli investment. The strength of this transformation lies in its very mechanism: the state places orders and provides validation, companies handle development and production, and investors seek markets for products whose relevance has been amplified by the conflict.