August Report

Market Review

Israeli equities experienced a volatile start to August in line with other major developed markets, as US economic data suggested a rising risk of recession. However, these fears eased upon signs the service sector was strengthening and corporate earnings growth remained reasonably strong. Israeli shares outperformed upon rising expectations of an eventual ceasefire in Gaza.

Inflation in Israel increased to 3.2% year-on-year in July and the Bank of Israel now expects prices to rise by 3.1% over the next 12 months. The Bank has attributed the increase over recent months to rising unit labour costs and accelerating services inflation.

Stronger inflation led the Bank of Israel to keep interest rates unchanged at 4.50% when it met in late August. The Bank is concerned that inflation is now above its 1.0% – 3.0% target, the fiscal deficit continues to expand, the labour market remains tight and the Israeli shekel has weakened. The Bank doesn’t expect rates to fall again until the second half of next year, although markets have priced in a cut of 0.25% in April 2025.

Elevated interest rates and a labour shortage, especially in the construction industry, brought a slowdown in economic growth, with GDP expanding 1.2% in the June quarter. The Bank of Israel expects the economy to keep growing below trend over the current quarter.

Despite the slowdown in growth, Israel’s economy continues to perform relatively well. This has been attributed to the strong consumer sector, that accounts for 55% of economic activity, which has benefitted from reduced travel abroad and increased domestic spending. The technology sector, which accounts for 20% of the economy, continues to drive growth as it returns to raising capital, hiring workers and expanding exports. The country is also benefitting from the influx of 130,000 well-educated and relatively affluent Russian immigrants over the last two years.

Portfolio Commentary

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

The largest contributor to the Fund’s relative return in August was its overweight exposure to the banking sector. Along with the real estate sector, it outperformed upon hopes of an early end to the conflict.

The Fund also benefitted from its overweight position in Teva Pharmaceuticals, the world’s largest generic drug manufacturer, with 3,600 products. The company also makes active pharmaceutical ingredients and proprietary pharmaceuticals. Shares in the company rose 8% in August after it announced strong second quarter revenue growth, driven by its generic drug business, which led to several analysts upgrading the stock.

The largest detractor from relative returns in August 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 weakness in the global semiconductor sector as earnings growth appeared less certain. The share price closed down 9% in August.

The Fund maintains an overweight position in Energix Renewable Energies, one of Israel’s largest renewable energy companies, with operations in the US and Poland. It announced an agreement for technology giant Google to become a tax partner with Energix in future projects in the US, which will reach 1.5 gigawatts by 2030. A tax partnership enables large companies to receive tax benefits when they  invest in renewable energy projects. Energix is focussing on Northern Virginia which has a high concentration of data centres, which are high users of energy.

The Fund also invests in Global-e, the leading cross-border business to consumer e-commerce platform. It announced strong second quarter earnings during August, reporting a 26% year-on-year growth in revenue and a 39% jump in gross profit. The stock initially underperformed upon slightly lower earnings guidance for the full year, following the bankruptcy of Ted Baker, which was a large client. This subsequently reversed as the market recognised this as a one-off, and that the business remained strong with good earnings growth potential.

The Fund holds a position in Global fintech Nayax. It provides a comprehensive operating system and payment platform for unattended machines (e.g. vending, office drink dispensers, laundry appliances, car wash, public transport, parking and EV charging, etc.) and retailers. It announced second quarter software-as-a-service (SAAS) revenue grew 35% year-on-year, transaction revenue increased 45% and hardware revenue expanded 25%. EV charging stations in the US are now being required to install a payment terminal as is common in Israel, rather than depend on internal applications.