December Report

Market Review

Israeli equities delivered strong returns in December, gaining 5.8% in USD terms, completing a robust second half-year performance. This contrasted favourably with global equities, which finished the month 2.6% lower. This reflected concerns that interest rates might not fall as far as had been expected and that the new US administration’s trade policy might impact global economic growth.

Israel’s annual inflation eased to 3.4% in November, from the previous 3.5%, while prices actually fell 0.4% month-on-month. This was expected to lead the Bank of Israel to keep interest rates unchanged at 4.50% when it meets early in the new year. The market is now pricing in a rate cut in July, with rates expected to fall to 4.0% by the end of 2025.

The Composite State of the Economy Index changed little in November, continuing the trend of the previous two months. However, October industrial production edged up by 0.1% month-on-month, while November saw increases in consumer credit card purchases (+5.0%), imports of consumer goods (+9.7%), manufacturing inputs (+1.1%) and job vacancies (+1.4%).

Portfolio Commentary

The Fund continues to take a positive view of Israel’s economic and share market prospects despite the ongoing geo-political uncertainty. The Fund’s net equity exposure was maintained at around 90% in December, which supported portfolio returns in a strongly rising market.

The largest contributor to Fund performance during December was the Fund’s 5% holding in the world’s largest manufacturer of generic drugs, Teva Pharmaceuticals, which gained 31% in December.

The company announced successful Phase 2 trials in its development of a treatment for inflammatory bowel disease. Its estimated market size of almost US$30 billion makes it the most significant product in Teva’s pipeline.

The company is conducting clinical trials in collaboration with French-based global pharmaceutical group Sanofi, with which it will share costs and profits on a 50:50 basis. The groups are targeting sales of US$2 – US$5 billion, which is expected to contribute US$1 billion to Teva’s free cash flow, which is currently US$2 billion.

The Fund’s holding in Silcom, which designs, manufactures, markets and supports networking and data infrastructure solutions for servers, server-based systems, and communications, also contributed to relative returns in December.

The company is an industry-leading provider of high-performance networking and data infrastructure solutions. Designed primarily to improve performance and efficiency in cloud and data centre environments, Silcom’s solutions increase throughput, decrease latency and boost the performance of servers and networking appliances.

The Fund’s 5% holding in the printed circuit board manufacturing company Priortech also contributed to relative returns in December. It announced that it has received initial orders worth US$50 million from several customers in respect of its new Hawk product for delivery in 2025. The Hawk’s groundbreaking platform is capable of inspecting and measuring wafers with 500 million micro bumps.

Annual Review

2024 was another challenging year for Israel, which faced military conflicts on multiple fronts, leading to a notable slowdown in economic growth.

The war brought an increase in military spending from US$1.8 billion per month before the conflict to US$4.7 billion by the end of 2024. This surge in spending impacted the government’s fiscal position, leading to the budget deficit expanding to 7%.

Despite these challenges, the Israeli economy and stock market demonstrated surprising resilience. This was supported by a 15% year-on-year increase to US$11.8 billion in foreign direct investment over the first half of 2024. This signalled sustained international confidence in Israel’s economic potential, especially in the technology sector, despite the prevailing geopolitical tensions.

The sale of Israeli technology businesses through acquisitions and market listings increased in 2024 by 78% to US$13.4 billion. This included the acquisitions of Innoviz Technologies (US$2 billion) and SimilarWeb (US$1.4 billion). During the year, Intel announced a US$10 billion investment in advanced semiconductor manufacturing technologies in Israel.

Israel also increased its natural gas exports to Europe, which is now established as a key energy supplier amidst the ongoing energy shortage in Europe. This was achieved by a significant increase in production capacity within the Tamar field.

This economic resilience has been reflected in Israel’s equity market, which gained 28.6% in 2024, ahead of the major global indices. The Fund also performed strongly over the calendar year, returning 22.5% in USD terms. This was driven by its exposure to the high performing semiconductor and pharmaceutical sub-sectors.

Israel faced major geo-political challenges in 2024. However, its economy has remained highly resilient, delivering strong growth in the technology, healthcare and energy sectors whilst continuing to attract significant foreign investment.

While the military situation remains unresolved, the balance of power in the Middle East appears very different from that seen at the start of the year, with Israel in a stronger position. An eventual end to hostilities should create opportunities for Israel’s further integration into the Middle East economy, supported by US security guarantees. This should accelerate economic growth and support the local share market.