Market Review
Israel’s share market finished 2023 strongly, reflecting positive global sentiment as economic data remained robust and hopes increased of early interest rate cuts.
However, despite global markets edging up further in January as December quarter corporate earnings remained strong, Israeli shares weakened after a good start to the month, closing 1.3% down. This reflected the ongoing conflict in Gaza, but also moderating expectations for cuts in US interest rates as inflation remains above target.
Earlier in January, markets were pricing in US interest rates to fall by 1.74% (i.e. almost seven 0.25% cuts) over 2024. However, sticky US services and wage inflation led to expectations that the Federal Reserve would only begin cutting later in the year and at a more gradual pace.
This led to a weaker Israeli share market as market pricing came to reflect the geo-political risks more fully; we believe it now looks attractively valued given the attractive prospects of its many quality companies.
Israel’s consumer price index eased further to 3.0% year-on-year in December, from the previous 3.3%. Price pressures are moderating further as the Israeli shekel appreciates in anticipation of a possible cease-fire, reducing import prices. January CPI is forecast to fall to 2.7%. This has led the market to price in a 40% likelihood of the Bank of Israel again cutting interest rates this month by 0.25% from the current 4.50%. Further rate cuts are expected throughout 2024.
The Israeli economy remains in reasonably good shape, with November industrial production expanding by 2.5%. An end to military hostilities would be expected to accelerate economic growth, supporting equity valuation levels.
Portfolio Commentary
The largest contributor to relative returns in January was the Fund’s new holding in the Tel Aviv Stock Exchange. The position was first established early in January but was then increased when the Fund participated in a US$100 million capital raise later in the month, which was oversubscribed. High overseas investor interest, including from Bill Ackman, founder of leading hedge fund Pershing Square Capital Management, was seen as a vote of confidence in the Israeli stock market.
The Exchange benefits from multiple revenue channels – trading fees, registration fees, clearing fees, and income from information services – which have strong growth potential. Low fees and low volumes by global standards imply good opportunities to expand earnings over the long-term. Having returned 15% in January, it is still valued at an attractive 22 times current earnings, which fully reflects the current geo-political environment.
Another strong contributor to relative returns in January was the holding in the global fintech Nayex, which 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. Its revenue streams derive from terminal sales, software as a service, and clearing, with 70% recurring revenue at high margins. The company currently has over one million terminals deployed worldwide, from which it receives a growing monthly income. It has invested heavily in innovations such as smart EV chargers, apps, and other services for retail customers. Despite strong revenue growth it remains attractively valued at 20 times 2025 earnings, having appreciated 27% in January.
The main detractor to relative returns in January was the Fund’s exposure to the financial sector, especially banks, which declined about 5-7% over the month.
Another recently established holding in the Fund is Teva Pharmaceuticals, the world’s largest generic drug manufacturer, with 3,600 products. The company also makes active pharmaceutical ingredients and proprietary pharmaceuticals. The company has reduced its debt levels over recent years, reducing the need to refinance at high interest rate levels, which will support earnings. New launches of generic drugs and original products represent an opportunity to grow earnings. This is not reflected in the current valuation of seven times earnings that is based on the perception of it being an unexciting generic company, rather than an innovative biomedical group.
An improving global economic outlook, easier monetary policy, and the prospects of lower geo-political risk and earnings growth in attractively valued portfolio companies give us grounds for optimism. This is demonstrated by the Fund’s high 82% net equity exposure, which reflects its limited derivative positions that protect the portfolio from downside market risk.
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.
