October Report

Israel’s share market experienced its worst month since the start of the global pandemic in March 2020. The decline largely reflected local economic uncertainty following the 7 October terrorist attacks on Israel and subsequent military action. Much of the market fall took place in the two days following these initial tragic events.

The Fund returned -8.6% (Class A, AUD) and -8.5% (Class B, USD) in October, while the TA 125 Index returned -11.5%.

Global share markets continued to weaken during the month as fears that interest rates would remain ‘higher for longer’ drove longer-term bond yields up. The economic slowdown is starting to impact some company earnings, putting further pressure on market valuation levels.

October 2023 will be remembered as one of the most challenging periods in Israel’s history. The investment team at Alpha is extremely grateful for the enormous number of supporting e-mails received from investors over the past month.

Almost everyone in Israel has been impacted by the tragic events of 7 October. Thankfully, all members of the Alpha team are safe and as well as can be expected in the circumstances. The office has remained open throughout, and the team is focused on delivering business as usual to our investors while supporting efforts to help the broader community.

Whilst this is a very challenging period for the country, we remain confident in our investments and overall strategy. We also note that history has shown (per the image below) that periods of conflict have been followed by robust recovery phases. This historical resilience, coupled with the inherent strength of the Israeli economy, reinforces our conviction in our investment approach. Whilst we cannot be sure how long this conflict will last, we have no doubts that Israel will emerge successful, and that there will be a strong rebound in both the economy and equity market.

We appreciate the trust you have placed in us, and we remain committed to transparent communication and diligent management during these testing times. We are confident that, together, we will emerge from this period with resilience and strength.

Finally, we invite you to join us for a webinar update of our portfolio and holdings which we will host at 4pm (Sydney time) on Monday 27 November. REGISTER HERE >>

Top Holdings (alphabetically)

Bank Hapoalim BM

Israel

Diversified Banks

Bank Hapoalim B.M. attracts deposits and offers personal, corporate and institutional banking services. The Bank offers corporate finance, cash management, foreign exchange, investment advice, loans, securities brokerage, custody services, investment banking, foreign trade financing, and treasury services. Bank Hapoalim operats in Israel, the Americas, and Europe.

Bank Leumi LE IS

Israel

Diversified Banks

Bank Leumi Le-Israel attracts deposits and offers banking and financial services. The Bank offers consumer loans, mortgages, lease financing, insurance, mutual funds, and merchant banking services. Bank Leumi holds significant equity stakes in a number of non-financial corporations in Israel.

Check Point Software Technologies

Israel

Systems Software

Check Point Software Technologies Ltd. develops, markets and supports a range of software and hardware products and services for information technology (IT) security and offers its customers a network and gateway security solutions, data and endpoint security solutions and management solutions.

Israel Discount Bank Ltd

Israel

Diversified Banks

Israel Discount Bank offers personal and business banking services. The Company's lending division also engages in corporate lending, factoring, commercial real estate, and asset-based lending. Israel Discount Bank operates in the United States and internationally.

Oil Refineries Ltd

Israel

Oil & Gas Refining & Marketing

Oil Refineries Ltd produces refined crude oil products. The Company provides a variety of products used in industrial operation, transportation, private consumption, agriculture and infrastructures. Oil Refineries also provide power and heat services (electricity and steam) to industrial customers, as well as infrastructure services (storage, pumping and truck loading of fuel products).

Market Review

Inflation in Israel edged down to 3.8% year-on-year in September, from 4.1% in August, enabling the Bank of Israel to keep interest rates steady at 4.75% when it met on 23 October. The local currency fell steeply after the initial attack, but later recovered, finishing the month down 5.4% against the US dollar. While positive for exporters, the depreciation brings concerns that inflation may begin to rise again.

The Bank of Israel issued a report that forecasted the economy would grow by 2.3% during the current year and 2.8% in 2024. The ongoing military operation is expected to detract 0.5% – 1.0% from GDP this year and next.

Global ratings house S&P published a special report on 25 October which maintained the AA- credit rating on Israel’s sovereign debt. However, it downgraded the outlook to negative, reflecting the elevated geo-political risks. It forecasts the economy to grow 1.5% this year and 5.0% in 2024.

More positively, the report highlighted the Israeli economy’s focus on export-orientated high-tech exports with high numbers able to work from home. This should help it remain resilient during the current period of uncertainty.

Israel is expected to receive US$14 billion in financial support from the US, which will relieve some of the current fiscal pressure. Furthermore, Israel’s sovereign debt remains at a manageable 60% of GDP, while the Bank of Israel holds foreign currency reserves of US$200 billion.

Historically, military conflicts in the region have had a limited impact on the local equity market, with a strong rebound generally following the cessation of hostilities.

Portfolio Commentary

The Fund held an overweight position in the finance sector, which detracted from relative returns when it underperformed in October, due to its focus on the challenged local economy. The exposure level to the sector was maintained as the Fund took advantage of weaker valuation levels.

The Fund’s exposure to energy also detracted from relative returns in October. Holdings in natural gas group Ratio Energy and oil refinery operator Bazan underperformed upon concerns that offshore rigs could be targeted in the conflict or natural gas exports to Egypt might be impacted. Some two-thirds of the Leviathan gas field’s output is exported to Egypt and Jordan.

The Fund’s holding in InMode, a leading global provider of innovative medical technologies, underperformed, detracting from relative returns in October. Disappointing third-quarter earnings results – due to rising input costs – and weaker forward guidance brought a 35% fall in its share price.

FMS Enterprises, which manufactures advanced ballistic protection technology, outperformed strongly, gaining 14% in October. This reflects an expected increase in demand and currency weakness, which should support exports and the value of its USD cash holdings which are worth 30% of its market value.

The Fund continued to efficiently manage its downside portfolio protection using derivative instruments.