The CC Sage Capital Absolute Return Fund returned 1.03%* in May, outperforming the RBA Cash Rate which returned 0.37%.
The CC Sage Capital Equity Plus Fund returned 1.21%* in May, outperforming the S&P/ASX 200 Accumulation Index which returned 0.92%.
The strongest contributor to performance was Sage Group^ - Domestic Cyclicals, with a short position in APE Eagers (ASX: APE -20%) being particularly meaningful, as the company gave weaker earnings guidance with slowing car sales and improved supply pressuring margins back towards pre-Covid levels. Other strong contributors included a short position in Ramsay Healthcare (ASX: RHC -10%) which fell as analysts downgraded 2025 growth expectations on a slower recovery in Australian surgeries, and long positions in South 32 (ASX: S32 +11%), Telix (ASX: TLX +21%) and AGL Energy Limited (ASX: AGL +8%). Telix reported encouraging efficacy data for its prostate cancer therapeutic, whilst AGL benefitted from increasing energy price expectations as supply issues saw NSW power prices spike, and South 32 was lifted by strength in its key commodities of alumina, aluminium and copper.
On the negative side, the Yield Sage Group was the biggest detractor, with a short position in Bendigo and Adelaide Bank Limited (ASX: BEN +12%) having the largest impact as it lowered provisions for credit impairment (a one-off positive). Other tough long positions for the month were James Hardie Industries plc (ASX: JHX -14%), Telstra (ASX: TLS -6%), IGO (ASX: IGO -12%) and BlueScope (ASX: BSL -7.4%). James Hardie surprised the market with weaker 2025 guidance, citing the potential for softer renovation activity in the US market due to higher interest rates. BlueScope however has been affected by softer steel spreads. Telstra remained weak with a change in price adjustments in post-paid mobile weighing on the stock (although this may be a timing issue), while lithium stocks were weak generally, and IGO was a long hedge in the space.
The path of inflation and interest rates remains pivotal for equity markets. While the RBA has been stressing that year-on-year inflation was falling, the run of stronger monthly prints if continued will eventually mean that the RBA is confronted by inflation that is both above its band and rising. At the same time, we have been seeing early signs of consumer weakness with many retailers reporting slowing sales, softening employment and wage trends and a tick up in mortgage arrears. However, with many parts of the economy remaining robust and with sticky inflation, the RBA is constrained from cutting interest rates and the task of achieving a soft landing becomes harder.
In the US, Artificial Intelligence (AI) investment is clearly picking up with more than 40% of S&P 500 companies mentioning AI in earnings calls. The economic benefits to date are still quite narrow, primarily benefiting the “enablers” such as chip makers and cloud and data centre providers. How quickly or not these economic benefits broaden as use cases expand will likely be crucial to equity market underpinnings in the medium term.
US GDP growth is moderating, unemployment is ticking up, consumer spending is slowing and inflation continues to surprise to the upside. These factors are narrowing the earnings base that is supporting the market. In China, weakness in Electric Vehicles (EV) and property sales could continue for some time, with stockpiles of unused EVs building and a reticence to stimulate domestic consumption.
In this environment, we prefer stocks with sustainable barriers to entry and stable market structures that give them pricing power. We still prefer insurers over banks (generally) within the Yield group, as we are yet to see the relative valuation gap close. Within Cyclicals, we remain cautious on retail stocks where a combination of high inflation and high interest rates are eroding discretionary spending power over time and prefer areas where the demographic has stronger disposable income such as travel.
Within Resources, we still prefer base metals amidst the increased demand from electrification across the next few decades. We are cautious on iron ore in the medium term and see the Simandou project in Guinea potentially shifting the balance to excess supply. Lithium still looks challenged with adequate supply, and excess inventories across the production chain could even increase as supply ramps up over the next few years.
We continue to maintain low net exposure to the Sage Groups to limit the impact of unpredictable macro risks. The portfolios remain well diversified and liquid.
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