Commentary

Worries regarding the rise of a second wave of Covid-19 in Europe, the U.S. and other parts of the world continued in October. In Israel, the significant improvement in the number of new cases and the sharp drop of severe patients in hospitals were major factors leading to the market’s positive return. As well as Covid, the eyes of the world are focused on the US election result and the likely impact of various scenarios on equity markets.

This month, the TA-125 was up by +2.1 % while the S&P500 lost -2.8%. The Fund ended the month with a positive return of +0.4% for the AUD class and +0.5% for the USD class. The two main contributing sectors were Semiconductors, with our main holding in Priortech (in which we hold 5.4%), and the Information Technology sector, with our holding in Telsys (in which we hold 4.4%).

We sold out of SolarEdge Technologies this month, one of our most successful investments and one we have held since the inception of the Fund in January 2018. SolarEdge, a global leader in Smart Energy Technology, developed the “DC optimized inverter solution” that changed the way power is harvested and managed in photovoltaic (PV) systems.  Since we bought it, the company has evolved significantly. We entered the position at a share price of $35 and we sold it at $270. SolarEdge is an excellent company with a promising future but the current share price incorporates significantly higher risk. We may reinvest in the company if there is a valuation opportunity as we still believe that the company’s long term future looks positive.

Stocks in Focus – Payton Planar

In this month’s report we will focus on one of our most promising small cap investments.   Payton Planar is a global leader of Planar Magnetics Technology. The company’s unique patented technology is used in designing planar magnetics (Planetics®) that reduce the size and weight of present transformers by up to 80%, while increasing the product efficiency and power density. Planar transformers are high frequency transformers used in isolated switch mode power supplies operating at high frequencies.

This proven winning technology is evident in the superior quality of Payton’s conventional and planar transformers. Payton continually enhance this technology through further research and development that, we believe, will enable Payton to continue to meet and exceed its customer’s expectations.

Planar Transformers (PT) has thus far been a niche market, mainly involved in medical, trains and military applications. However by 2025 we believe electric vehicles (EVs) will propel parabolic demand growth for PTs. Payton Planar is the leading PT pure player and sells to the top tier car suppliers like Delphi and Lear. The adoption of high-density electric circuits, such as SiC (Silicon Carbide) and GAN (Gallium Nitride), in EVs and 5G base stations create a demand inflection point for PTs.

We bought the stock for the Fund in November 2019 and have held the company since 2014 in our other funds. Payton has seen its earnings grow by 39% annually over the last five years and also seen increases of 9% in revenue growth and 15% in operating profit in H1 of 2020, despite the turbulence in the market caused by Covid-19.

The trends in the sector that we believe will support Payton’s future growth are:

• Miniaturization/higher power density – the need for smaller and more highly efficient products
• Increased switching frequency – allowing product size reduction
• High frequency semiconductors (Sic, Gan) – to allow high frequency power supply, all components need to be able to handle high efficiency
• Green Energy/Electrification/Efficiency – environmental trends
• The need for customization and fast reaction drive tailored solutions

We strongly believe that EVs and AI adoption will continue to drive Payton’s growth in the long-term.

Macro Developments

There is a significant geopolitical change on the macro front, which we believe will have a major impact on Israel’s economic growth. Israel has recently signed peace treaties with many of the Gulf States: the United Arab Emirates (Dubai and Abu Dhabi), Bahrain, Sudan and we expect in the near future with Oman, Morocco and Saudi Arabia. Like the discovery of the natural gas reservoirs (7 years ago) that opened up the possibility of energy independence, cooperation with the Arab Gulf States is opening up economic opportunities for Israel that are hard to even quantify today in numbers.

The Bank of Israel (BoI) is deepening its monetary expansion through credit instruments and not by an interest rate cut.  The Monetary Committee of the BoI decided in its October 22 meeting to leave the central bank interest rate unchanged at 0.1% but launched a “targeted credit” plan that it will offer to the banks in order to channel credit at a low interest rate to small and micro businesses, while requiring low margins. Over recent months the BoI has been emphasizing this “credit channel” as the path through which it will act in order to support the economy and employment.

The BoI also published an update to its macro-economic forecasts. The forecasts include two baseline scenarios – a scenario characterized by full control over the development of Covid-19 morbidity, together with a scenario characterized by minimal control over the development of morbidity. In the scenario involving full control over morbidity, GDP is expected to contract 5.0% in 2020 and growth in 2021 is expected to be relatively high at 6.5%. In the scenario involving minimal control over morbidity, GDP is expected to contract 6.5% in 2020, while 2021 growth will amount to only 2.0%.

The BoI has reported a recovery in the activity of most sectors in the third quarter of the year.

The findings of the BoI survey indicate recovery in most business sectors in the third quarter of the year, which was characterized for the most part by less severe restrictions on economic activity compared to the second quarter. Overall, the survey data reflects the recovery in activity following the economy’s exit from the first shutdown and the expectations for a deterioration in activity in the fourth quarter of the year, resulting from the tightening of restrictions on activity. However, it is important to emphasize that the scale of the decline is expected to be substantially more moderate compared to the first economic shutdown, during which the restrictions on movement, economic activity, and social distancing were more severe.

As long as the process of exiting the shutdown continues, and the return to normal activity carries on without substantial delays and without the need for the implementation of additional restrictions, it appears activity will continue to recover during the final quarter of 2020, and into 2021.