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Market Review
Israel’s share market benefitted strongly from the steep rebound in global equities during November. While the ongoing military operation remains a source of uncertainty, the local equity market has historically been driven much more by global economic trends and investor sentiment. Historically, past military conflicts have generally had a limited impact on Israel’s stock market. This in part reflects the economy’s focus on high-tech businesses, many of which are driven by exports and some of which are sensitive to military spending. The technology sector accounts for almost 20% of the country’s GDP, over 34% of the government’s total tax revenue, and 54% of total exports.
Israel’s consumer price index eased to 3.7% year-on-year in September from the previous 3.8%. Inflation is expected to have eased further to 3.6% in November, with month-on-month price levels remaining constant. This enabled the Bank of Israel to keep interest rates unchanged at 4.75% when it met in late November.
The Bank said in its announcement that as the recent stability in the financial markets becomes entrenched and the inflation environment continues to moderate toward the target range, monetary policy will be able to focus more on supporting economic activity. The interest rate announcement and the Bank’s commentary led to expectations of measured rate cuts from the start of 2024. The market is now pricing in a reduction in interest rates of 0.25% in January.
The resilience of Israel’s economy was reflected in the latest report published by Moody’s, the global rating agency, on 21 November, some weeks after the terrorist attacks and outbreak of the war with Hamas. It highlighted its significant resilience to past domestic and external shocks, which it attributed in part to the country’s high growth rate, supported by the technology sector. Despite the negative short-term impact on the economy of military activity and the mobilisation of reservists, Israel has significant buffers for shock containment. Moody’s confirmed its positive long-term outlook on the economy.
Portfolio Commentary
The strongest contributors to relative performance in November were the Fund’s holdings in the real estate and technology sectors. Property companies Azerieli Group and Alony Hetz saw share price gains of 25%, while technology group Nice jumped 23% upon strong earnings results.
The main detractor from relative returns was the holding in medical diagnostics group Ilex Medical which underperformed upon weaker-than-expected quarterly results.
The Fund increased its holding in Nasdaq-listed NICE, which is now 4.5% of the fund.
The Fund sold its entire position in InMode which provides energy-based medical technology solutions. This followed a conference call with the company after it reported quarterly earnings which lagged its forecasts. The company is struggling more than previously thought to grow sales, making it a less attractive investment, despite the low valuation multiple of earnings.
The Fund also sold its position in ballistic technology group FMS which had been held in the Fund over a long period. The company benefited greatly from the demand for ceramic vests and the stock has outperformed accordingly. While the company remains attractively valued, other investment opportunities appear more compelling at the present time.
The Fund maintains a small exposure to Nasdaq-listed Global E, the world’s leading cross-border end-to-end platform for brands and retailers. Last year it acquired ‘Flow Commerce,’ a technology-based cross-border e-commerce software solution for emerging brands. The Fund will continue monitoring the company’s progress against its profitability targets.
The Fund maintains a large holding in electrical components manufacturer Telsys, which underperformed modestly after publishing its recent earnings report. However, the controlling shareholders expressed confidence in the company and continued to increase their shareholding, as it has done over recent quarters.
The Fund also holds a position in Tamar Petroleum which currently represents 3.7% of the total portfolio. The company owns a 16.75% interest in the ‘Tamar Reservoir’ which produces natural gas. The company’s largest shareholder made a tender offer for 10% of the stock at a premium to the market price, which the Fund accepted. The Fund has now established a position in Isramco, which is a US-Israeli limited partnership that provides investors with exposure to the Tamar reservoir. The Fund expects to optimize its exposure to the reservoir by switching between the two stocks.
Israel’s banking sector is attractively valued and delivers a return on equity of approximately 12%. The main risk is the exposure to the local market, but attractive fundamentals lead the Fund to remain confident in retaining its position.
Founder & CEO
Founder & Managing Partner
Managing Partner
Managing Partner
The Pengana Alpha Israel Fund invests in listed Israeli companies that produce cutting edge – both high and low tech – technologies. These Israeli listed companies have developed solid intellectual property coupled with strong global distribution.
The Fund offers Australian investors diversification within global equity exposure to a unique and promising market that is very much skewed to industries and technologies that are either limited, or do not exist, in the Australian market place, such as: the semiconductor industry, solar and water treatment technology, aerospace and electronic defence industries, and cyber security technologies.
1.Net performance figures are shown after all fees and expenses, and assume reinvestment of distributions. Performance figures are calculated using net asset values after all fees and expenses, and assume reinvestment of distributions. Index returns shown are in ILS (Israeli Shekel). No allowance has been made for buy/sell spreads. Please refer to the PDS for information regarding risks. Past performance is not a reliable indicator of future performance and may not be repeated, the value of investments can go up and down.
2. Inception 1st January 2018.
3. Annualised Standard Deviation since inception
4. Relative to Tel Aviv Stock Exchange 125 Index
Please note: This fund is only open to Wholesale Investors.
