May Report

The Fund returned 0.1% (Class A, AUD) and 1.2% (Class B, USD) in May, while the TA 125 Index returned -0.4%.

The Israeli share market remained relatively stable in May, as investors awaited the outcome of the US debt ceiling talks, and their impact on the broader global equity market.

The local market is also focussed on whether May’s 0.25% increase in Israel’s interest rate to 4.75% represents a peak in this cycle. Most analysts expect inflation to remain elevated for some time, which will pressure the Bank of Israel to increase the interest rate to 5.00%.

Top Holdings (alphabetically)

Bank Hapoalim BM

Israel

Diversified Banks

Bank Hapoalim B.M. attracts deposits and offers personal, corporate and institutional banking services. The Bank offers corporate finance, cash management, foreign exchange, investment advice, loans, securities brokerage, custody services, investment banking, foreign trade financing, and treasury services. Bank Hapoalim operats in Israel, the Americas, and Europe.

Bank Leumi LE IS

Israel

Diversified Banks

Bank Leumi Le-Israel attracts deposits and offers banking and financial services. The Bank offers consumer loans, mortgages, lease financing, insurance, mutual funds, and merchant banking services. Bank Leumi holds significant equity stakes in a number of non-financial corporations in Israel.

Camtek

Israel

Semiconductor Materials & Equipment

Camtek Ltd designs, develops, manufactures, and markets automated optical inspection and metrology systems. The Company provides software solutions for the semiconductor industries, enabling manufacturers to improve yield and lower their production costs. Camtek serves semiconductors industry worldwide.

Electra Real Estate Ltd

Israel

Real Estate Operating Companies

Electra Real Estate Ltd invests in real estate in Israel and abroad. The Company also invests in real estate development and construction independently or through partnerships.

Payton Planar

Israel

Electronic Components

Payton Planar Magnetics Ltd. is an Israeli high-tech company that designs and manufactures planar transformers. The Company produces transformers that are significantly smaller and lighter than conventional transformers and operate at 98% efficiency and at cooler than normal temperatures.

Market Review

The decision by the Bank of Israel to increase interest rates at its 22 May meeting was in line with analysts’ expectations. This was the Bank’s tenth consecutive rate increase and brings the borrowing cost to levels last seen in early 2006.

Annual inflation remained at 5.0% in April, above the upper limit of the Bank’s 1.0% – 3.0% target range, although the market expects inflation to fall back towards 3.0% over the next 12 months.

The next meeting of the Bank of Israel on 10 July will closely consider the May inflation report, which is expected to show prices still rising significantly faster than the 3.0% target level. It will also wait to see if the European Central Bank and the Bank of England raise rates at their forthcoming meetings. Both face comparable inflation challenges, especially relating to core inflation. Consequently, there is a high chance the Bank of Israel will increase interest rates to 5.0% when it next meets.

Israel’s technology sector experienced a sharp rally during May. This followed the strong gains seen globally in such stocks following US chip developer Nvidia’s stronger than expected first quarter earnings results and second quarter revenue growth forecasts. These gains reflected soaring demand for the advanced chips needed to train generative artificial intelligence (AI) systems, such as ChatGPT. It is expected that innovation in artificial intelligence is already bringing a rapid acceleration in the earnings growth of certain tech companies.

However, the current slowdown in Israel’s high-tech services sector is expected to continue. The trend began in the middle of last year and reflects rising interest rates, falling investor risk appetite, and slowing demand in Israel’s principal export markets of North America and Europe.

Israel’s high-tech exports tend to lag movement in the technology-intensive Nasdaq market index in the US. Therefore, a substantial decline in high-tech exports could have been expected following the sharp fall in the NASDAQ during 2022. However, export growth slowed to 2.3% year-on-year but did not decline. This slowdown is expected to continue over the coming months, but the US recovery which is now underway should be reflected in Israel’s high-tech services sector next year.

Portfolio Commentary

The strongest contributor to relative returns in May was the Fund’s holding in Camtek, which gained 15% during the month, following the strong gains made by global semiconductor companies. It is a leading manufacturer of metrology and inspection equipment and software solutions for the semiconductor industry.

The Fund’s position in Planar Magnetics, which produces transformers for electric vehicles, was another large contributor to relative returns as its shares rose 20% in May.

In May, Nvidia announced it is to build one of the world’s most powerful AI supercomputers at its research and development facility in Israel. The system, called Israel-1, is expected to start early production by the end of 2023 and is valued at several hundred million US dollars.

This facility was originally established by the Israeli technology company Mellanox Holdings, which was held in the Fund, before being acquired by Nvidia in 2020. This reflects one of the Fund’s goals, which is to identify companies that demonstrate technology leadership and offer the potential of being acquired by large global tech groups at an advantageous price to shareholders.

The Fund maintains its large exposure to the natural gas sector through its holdings in Ratio Energies and The Tamar Group. These are expected to benefit as plans to extend the East Mediterranean Gas Company pipeline are progressed. This carries gas from Israel to Egypt and will be used to increase export volumes to the European Union as it seeks to diversify away from Russian supplies.

Volatility in global equity markets fell in May, which was reflected in the Israeli share market. This brought lower option prices which enabled the Fund to purchase downside market protection at an attractive price level. The Fund has established a long put spread position maturing in September to protect approximately 30% of its US portfolio from a market correction in excess of 10%.

When this position moved into the money later in May it was sold and the proceeds were used to establish a position that also matures at the end of June but is 1.5 times greater. The new position protects approximately 40% of the local market exposure from any market fall over 7% of the current market level.