September Report and Special update

The Fund returned -0.6% (Class A, AUD) and -0.6% (Class B, USD) in September, while the TA 125 Index returned 0%.

Global share markets continued to move lower during the month as longer-term bond yields rose upon concerns that US interest rates may increase by a further 0.25% from the current range of 5.25% – 5.50%. The US Federal Reserve also indicated that interest rates would fall much more slowly in 2024 and 2025 than investors had expected.

Despite similar sentiment in Israel, the local equity market outperformed global shares, finishing the month unchanged from the opening level.

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.

Israel Discount Bank Ltd

Israel

Diversified Banks

Israel Discount Bank offers personal and business banking services. The Company's lending division also engages in corporate lending, factoring, commercial real estate, and asset-based lending. Israel Discount Bank operates in the United States and internationally.

Oil Refineries Ltd

Israel

Oil & Gas Refining & Marketing

Oil Refineries Ltd produces refined crude oil products. The Company provides a variety of products used in industrial operation, transportation, private consumption, agriculture and infrastructures. Oil Refineries also provide power and heat services (electricity and steam) to industrial customers, as well as infrastructure services (storage, pumping and truck loading of fuel products).

Priortech Ltd

Israel

Electronic Components

Priortech Ltd, through subsidiaries, manufactures printed circuit boards, AOI, and advanced multi-layers interconnect systems.

Market Review

The Bank of Israel left interest rates unchanged at 4.75% when it met at the beginning of September. August inflation subsequently moved back up to 4.1% year-on-year from the previous month’s 3.3%, above the 1.0% – 3.0% target range.

The technology sector has struggled to raise funds this year, with start-ups securing just US$5 billion in the first nine months of 2023, compared with US$12.4 billion in the same period last year. Although fundraising fell in the third quarter of this year, startup businesses raised $950 million in September, the highest monthly total since August 2022.

Prior to the recent terrorist attacks, discussed in more detail below, speculation had continued to grow that Israel would normalise diplomatic relations with Saudi Arabia. This followed the earlier signing of the Abraham Accords with the United Arab Emirates and Bahrain. This speculation comes after separate positive comments by Saudi ruler Mohamad Bin Salman and Israel Prime Minister Binyamin Netanyahu. Israel’s tourism minister recently attended a conference in Riyadh, the first public visit to the country by an Israeli cabinet minister.

Portfolio Commentary

The banking sector outperformed the broader market over the month and quarter, and was the largest contributor to relative returns in September.

The Fund’s exposure to the technology sector detracted from relative returns, as the Nasdaq-listed Inmode and Nice Systems underperformed, in line with recent falls in US tech stocks.

One of the largest positions in the Fund is the holding in Priortech, which was established last month when the Fund swapped its holding in Camtek for shares in its parent company. Nasdaq-listed Camtek is a leading developer and manufacturer of high-end inspection and metrology equipment for the semiconductor industry.

Camtek continues to grow rapidly and announced new orders for a further 46 systems for several High Bandwidth Memory (HBM) manufacturers for delivery next year. HBM is a critical component enabling high-performance computing in applications ranging from artificial intelligence and gaming to data centres.

The company also announced the US$100 million acquisition of FormFactor, the German supplier of high-precision metallurgy solutions for the advanced packaging and silicon carbide markets.

Special Update

The terrorist attacks of 7 October in Southern Israel and the launching of rockets on the county’s main population centres have brought the start of an Israeli military operation. This is expected to take some time and such operations are inherently uncertain. Beyond the human impact, these developments have increased the level of investment risk in the region.

The Israeli share market fell approximately 6% in the aftermath of the tragic events, with comparable movements in share prices of Nasdaq-listed Israeli stocks. Some stocks saw steeper falls, reflecting investor risk aversion rather than any fundamental change in their intrinsic value.

The Israeli economy has a track record of rebounding rapidly from military conflicts, with little impact on its longer-term growth trend. The 2014 intervention in Gaza is thought to have cost a 0.3% loss of GDP, mainly due to lower demand in sectors such as tourism and construction, while spending on the military increased.

Following the attacks, the Fund reduced its exposure to Israeli banks, whose market values appear vulnerable in the near term and which are highly correlated. This also reduced the Fund’s exposure to the local market. However, when the situation stabilises, these are likely to become attractive investment opportunities as they generate a return on equity of around 14% – 18% and offer good liquidity. Some 40% of the portfolio is directly exposed to the Israeli economy, primarily through holdings in banking, insurance, real estate and natural gas.

The Fund has an ongoing equity hedging strategy in place to provide some downside protection from major global or regional macro risk events that negatively impact share prices. The strategy is currently delivered through derivative instruments linked to major US and Israeli market indices.

A significant part of the Fund’s exposure to US-listed stocks enjoys some such protection, which expires at the end of the year. Instruments linked to the Israeli market index offer some protection from a market fall before the end of October. These positions will be adjusted accordingly as the situation unfolds.

The situation remains highly uncertain, and it remains unclear if the conflict could escalate across the region. Accordingly, the recent period of global share market volatility may continue, especially if this leads to a sustained increase in the oil price.