October Report

Market Review

Israeli equities delivered strong gains in October. Share prices initially fell after Israel launched a ground incursion into Lebanon on 1 October. This was followed by Iran launching an intensive missile attack on Israel, raising fear of a more significant escalation. However, Israel’s restrained response – an attack confined to Iranian air defence and missile production sites – raised hopes the conflict may de-escalate.

This led to improved investor sentiment, helping Israeli equities outperform global stocks. These were impacted by rising bond yields, which were pushed up by rising fears of higher long-term global inflation.

Expectations of near-term lower global interest rates, (the European Central Bank reduced interest rates by 0.25% to 3.25% in October), hopes for a soft landing in the global economy and solid corporate earnings growth helped support equities.

Local share markets also took comfort when Israeli inflation surprised markets by easing to 3.5% in September, from the previous 3.6%. Consumer prices actually fell 0.2% month-on-month during September. Domestic inflation is expected to continue to moderate, with prices forecast to rise by 3.1% over the coming 12 months. The eventual conclusion to military hostilities will initially drive domestic demand, but the easing of supply pressures over time will eventually help bring down inflation further.

Despite the moderation of inflation, the Bank of Israel kept interest rates unchanged at 4.50% when it met in October. Markets do not expect it to reduce rates until the third quarter of 2025, even in the event of an end to hostilities.

Growth in Israel’s economy eased to 0.3% quarter-on-quarter in the three months to June, down from the previous 0.7%. The Bank of Israel highlighted that this remains below trend and forecast growth of 0.5% in 2024, rising to 4.5% in 2025.

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’s net equity exposure edged up to approximately 85% in September, which supported portfolio returns in a rising market.

The strong returns in October were spread broadly across all sectors, but financials and real estate were particularly strong. The unexpected fall in inflation lent support to the interest rate-sensitive property sector.

The portfolio was little changed during October, ahead of the third quarter reporting season which gathers pace in November.

The largest contributor to relative returns during October was the Fund’s holding 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 outperformed again in October, as its share price rose 14%. This reflected continued positive investor sentiment since announcing strong second quarter earnings results in August and a positive view of the broader Israeli market.

Real estate developer and manager Azrieli Group also outperformed in October. Its share price jumped 11% upon positive investor sentiment towards the broader Israeli stock market as the domestic macro-economic outlook improves.

The Fund holds a position in Isramco, a US-Israeli partnership which is engaged in developing the Tamar Reservoir. It also outperformed in October, rising 10%, after announcing that more than 80% of the first phase of its compressors’ expansion and upgrade was completed, increasing the reservoir’s daily production to 1.6BCF.