February report

Market Review

Israel’s share market delivered strong returns in February as global equities powered ahead upon expectations of continued earnings growth, especially in the technology sector.

Israel faces its own unique geo-political challenges, but the bad news appears to be already fully priced into market valuations and hopes are rising of a ceasefire in the foreseeable future.

The mobilisation of 300,000 reservists contributed to a 19.4% annualised contraction in Israel’s economy during the December quarter, well ahead of the 10% expected by analysts. This was reflected in the 2.7% fall in industrial production in December.

However, there are signs that the economy has bounced back since the start of 2024, as the Composite State of the Economy index increased by 0.3% in January. Consumer credit card purchases increased 7% year-on-year during January and February, despite the sharp fall in tourism-related spending, as private consumption reaccelerated.

This strength was reflected in stronger jobs data, a steep fall in unemployment and better purchasing managers index (PMI) data. January inflation fell to 2.6% year-on-year (from the previous 3.0%) and the Bank of Israel kept interest rates on hold at 4.50% when it met at the end of February. This saw the Israeli shekel appreciate against the US dollar and other major currencies, which is being further boosted by the prospect of a ceasefire.

The cost of the war means Israel will need to raise US$60 billion in debt this year as it increases defence spending by 85% on its prewar budget. This will have influenced Moody’s decision to downgrade Israel’s sovereign rating from A1 to A2, which remains high for an emerging economy. The economy has a record of bouncing back strongly from regional conflicts when the fighting ends and reservists are demobilised. This is reflected in strong technology capital raising so far this year.

Portfolio Commentary

The main contributors to relative returns were the Fund’s technology holdings and its position in the Tel Aviv Stock Exchange, which gained 11% in February.

The Fund’s long held position in Payton Planners was a major contributor to relative returns in February. The technology company develops, produces, and markets unique planar transformers for markets including electrical components, communications, aerospace, electronics, military, and semiconductor manufacturers. The company has factories in the UK and US and is dual listed on the Brussels stock exchange.

Israel’s largest private equity fund FIMI acquired a 30% controlling stake in the company at a 25% premium to the market price, bringing a 23% share price gain in February. The involvement of FIMI is expected to build on its product and technology advantage to invest in sales growth and better optimise the balance sheet, ahead of further possible acquisitions.

Global fintech Nayex 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 main products are point-of-sale (POS) devices that accept swipe, contact and contactless card payments as well as mobile near-field communication (NFC) payments. The stock price appreciated 10% during February.

The company issued its full year earnings report at the end of February which announced a 36% growth in revenue as gross margins expanded to 40%. Strong operational leverage delivered a profit, in EBITDA terms. It expects 38% revenue growth in 2024, reflecting the opportunity in the unattended payments market as the company reaches one million terminals.

The main detractor from relative returns during February was the Fund’s option position, which is in place to protect the portfolio from market falls, and did not create value during a period of stronger equity markets.