July Report

Market Review

Israel’s share market moved up strongly at the start of July, upon growing hopes of a ceasefire in Gaza. Markets gained around 5% at one stage before unwinding some of the gains, although still outperforming the US equity market in July.

Inflation remains persistent in Israel, unexpectedly edging up to 2.9% in June from 2.8% in May, a trend which contrasts with other major developed markets. The Bank of Israel raised its inflation forecasts to 3.0% (from 2.7%) in 2024 and 2.8% (from 2.3%) in 2025.

The uplift in inflation led the Bank of Israel to keep interest rates on hold at 4.50% at its 8 July meeting, in line with market expectations. The central bank highlighted the fiscal deficit, problems in the supply of new housing and inflation risks, in explaining its decision.

The Bank announced that “the growth of economic activity moderated in the second quarter”, due mainly to supply constraints caused by the war in Gaza. This led it to reduce its GDP growth forecast to 1.5% (from 2.0%) this year and 4.5% (from 5.0%) in 2025, reflecting its expectation the war will drag on throughout this year. Despite the conflict, some 46,000 new immigrants arrived in Israel last year, many from Russia and Ukraine, bringing high skill levels, which should support long-term economic growth.

Geo-political risk remains high in Israel, with threats from a range of Iran-backed terror groups ongoing. Nonetheless, Israel is expected to prevail and to resume its high rate of growth in due course. This optimism reflects its enduring ties with moderate Arab states following the signing of the Abraham Accords. This was illustrated by the US$1 billion deal signed in July with Morocco for Israel Aerospace Industries to supply spy satellites to Morocco.

Israel’s technology sector remains highly regarded globally, as shown by the US$23 billion bid by Google-owner Alphabet in July to acquire the Israeli cyber security company Wiz. The offer was rejected by Wiz but demonstrates the high quality of innovation and entrepreneurship across the Israeli technology sector. This follows Google’s announcement in June that it would take a ten-year US$300 million office lease in the new ToHa2 tower in Tel Aviv.

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 holds a net equity exposure of approximately 80%.

The largest contributors to the Fund’s relative return in July were its overweight positions in the electrical components manufacturer Telsys (+11% share price increase), medical diagnostics group Ilex Medical (+10%) and generic drug manufacturer Teva Pharmaceuticals (+8%).

The largest detractor from relative returns in July was the Fund’s holding 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. The stock underperformed upon global weakness in the semi-conductor sub-sector, falling 14% over the month.

Nonetheless, Camtek announced in July that it has received a new order worth approximately US$25 million from a tier-1 High Bandwidth Memory (HBM) manufacturer, for inspection and metrology systems which are expected to be delivered in the second half of 2024.

The strengthening of the share market led to a fall in the value of the derivative positions which provide portfolio protection from downside market risk.

In other developments, Tel Aviv Stock Exchange announced it would raise custody fees for its members from 0.01% to 0.025% of total assets in three stages over the next three years. This is expected to add US$10 million in revenue to the exchange, all of which will pass through to earnings, which are expected to increase by around 40%.