SUMMARY
The Pengana Alpha team was deeply saddened by the tragic events in Bondi on 14 December. Our thoughts are with the victims, their families, and all those affected. We extend our sincere condolences to the Jewish community and to the broader Australian community during this difficult time.
Summary
- Israeli equities extended their rally in November, with the TA-125 Index rising over 4%, supported by a busy third-quarter reporting season and a favourable macro backdrop.
- The Bank of Israel cut interest rates by 25 basis points late in the month, following inflation remaining within the target range, reinforcing expectations of a more accommodative policy path despite ongoing labour market tightness.
- The Fund returned 1.6% (Class A, AUD) and 1.7% (Class B, USD), with strong gains in Teva, Telsys and Nayax partly offset by weakness in ICL and Camtek, alongside underweight exposure to the banking and real estate sectors.
COMMENTARY
Market Review
Israeli equities delivered another strong performance in November, despite a busy and volatile month dominated by the third-quarter reporting season. Earnings results were mixed across the market, leading to stock-level divergence, but the broader index finished higher as supportive macro developments outweighed company-specific volatility.
The key event during the month was the Bank of Israel’s decision on 24 November to lower interest rates by 25 basis points to 4.25%, in line with market expectations. The move followed inflation data showing the annual CPI rate unchanged at 2.5%, comfortably within the Bank’s target range. The rate cut was well received by the market and reinforced expectations that monetary policy is beginning to ease.
In its accompanying commentary, the Bank of Israel acknowledged the moderation in inflation, the decline in Israel’s risk premium and the appreciation of the shekel. However, it maintained a cautious tone, highlighting continued tightness in the labour market and rising wage pressures. The Bank also noted that early indicators for the fourth quarter point to strong ongoing economic activity.
Economic data released during the month highlighted the strength of the domestic recovery. Recent indicators from the Bank of Israel point to a sharp rebound in economic activity through the third quarter, reflecting the first sustained period of normalisation following last year’s disruptions. Growth has been supported by broad-based improvements in consumption, including retail sales, employment and household incomes, alongside continued strength in high-tech and defence-related exports. High-tech service exports in particular have remained resilient, supported by global AI investment and the ongoing expansion of Nvidia’s operations in Israel, reinforcing the sector’s contribution to growth.
Portfolio Commentary
The Fund delivered a positive return in November, despite a volatile reporting season and divergent outcomes across individual holdings. Several core positions reported strong earnings and delivered meaningful gains, while others underperformed following weaker-than-expected results or company-specific developments. Sector positioning also detracted, as the Fund’s underweight exposure to banking and real estate weighed on relative performance during a month when both sectors performed strongly.
The largest positive contributors were Teva, Telsys and Nayax. Teva reported strong quarterly results and issued upbeat guidance for revenue and margin growth, with the stock rising to levels not seen since 2018. Most importantly, management reaffirmed its 2027 Austedo targets following the conclusion of price-reduction negotiations with the US government, providing greater clarity and confidence around the company’s long-term earnings profile. Telsys also performed well after delivering a solid earnings report with healthy profitability, while Nayax rebounded strongly following its results, rising more than 15% after pre-earnings concerns proved unwarranted.
The largest detractors during the month were ICL and Camtek. ICL fell sharply following the announcement of a memorandum of understanding with the Israeli government regarding the renewal of the Dead Sea concession in 2030. While the proposed compensation package provides some downside protection should ICL lose the tender, the introduction of significantly higher royalty rates reduces the overall attractiveness of the concession. This undermines the previously favourable risk-reward profile, as upside optionality has diminished while regulatory and competitive uncertainty has increased. The Fund is therefore reassessing its position.
Camtek also underperformed during the month. Elevated expectations heading into the quarter led to profit-taking following earnings that were solid but insufficient to support prior valuations. A weaker short-term outlook, alongside a broader pullback in global AI-related names, added further pressure to the share price.
Overall, the portfolio remains focused on companies with clear earnings visibility, strong balance sheets and exposure to long-term structural growth. While reporting season volatility remains elevated, the Fund is positioned to benefit from improving economic conditions and sustained strength across Israel’s globally relevant technology and healthcare sectors.