May Report

Market Review

Israel’s share market moved up strongly at the start of May in line with developed global markets. This followed strong corporate earnings announcements and hopes of early interest rate cuts across the major economies.

However, inflation in Israel remains persistent, increasing to 2.8% year-on-year in April from 2.7% in March, (0.8% from 0.6% month-on-month). This disappointed investors who had expected a fall to 2.5%, leading to a reversal of some of the market gains. Inflation is now forecast to be 3.1% over the next 12 months.

Elevated inflation meant that the Bank of Israel kept interest rates unchanged at 4.50% when it met towards the end of May. The Governor highlighted the rise in inflation and geopolitical uncertainty as factors preventing the normalisation of interest rates. The Bank noted that monetary policy remains restrictive and may remain so for some time. Futures market prices imply interest rates will fall to 4.35% over the next 12 months.

The geo-political situation remains volatile, with fighting continuing in Gaza and tension rising on the border with Lebanon. However, efforts by the US and others to negotiate a ceasefire are raising hopes the situation may de-escalate, which would strongly support share prices.

Israel’s economy bounced back sharply in the first quarter, expanding 14.1% quarter-on-quarter, having contracted by 21.0% in the final three months of last year. This helped GDP contract just 1.4% in the full year to March.

In a further sign of the vibrancy of Israel’s technology sector, US tech group Intel unveiled its new generation of processors, known as Lunar Lake. These were largely developed by the company’s teams in Israel to compete in the market for new AI-powered personal computers.

Portfolio Commentary

The Fund continues to take a positive view of Israel’s economic and share market prospects, despite the ongoing geo-political uncertainty. The Fund maintained its net equity exposure of approximately 85%.

The largest contributor to the Fund’s relative return in May was its overweight position in the printed circuit board manufacturing company Priortech. Its Nasdaq-listed subsidiary Camtek is a leading developer and manufacturer of high-end inspection and metrology equipment for the semiconductor industry. It reported strong first quarter revenue and earnings and is expected to grow revenue at 25% per year over the next few years. The share price rose 21% during May.

The largest detractor from relative returns in May was the Fund’s holding in Nasdaq-listed technology group Nice, the global leader in cloud computing software systems for call centres. While the company released better than expected first quarter earnings results in May, it also announced the resignation of Barak Eilam, who has been with the company for 25 years and CEO for the last ten. The uncertainty this creates, as the company navigates the transition to AI, led the Fund to exit its position.

The Fund increased its long-standing position in electrical components manufacturer Telsys after it underperformed upon weaker than expected first quarter earnings. These reflected customers running down their inventories of components, which they had built up during the pandemic upon supply chain concerns. This has restrained earnings over recent quarters, but the Fund now expects this to normalise, with 15% annual revenue growth, which we believe is not reflected in the current market valuation level.

The Fund also increased its position in Energix, one of Israel’s largest renewable energy companies, which also operates in the US and Poland. It provided strong forward earnings guidance with revenues growing rapidly in the US upon rising demand for electricity due to the increasing number of energy-intensive data centres. Its strong balance sheet and positive cash flow should enable it to progress its strategic plan without the need for raising further capital. It expects to deliver US$270 million per year in net cash flow within three years.