The CC Sage Capital Absolute Return Fund returned 0.79%* in August, outperforming the RBA Cash Rate which returned 0.36%.
The CC Sage Capital Equity Plus Fund returned 0.79%* in August, outperforming the S&P/ASX 200 by 0.32% which returned 0.47%.
During the month, individual company share prices were volatile day to day as companies released their earnings results. Top positive contributors to performance were Sage Groups^, Resources and Defensives, with Domestic Cyclicals being a detractor. Performance in Resources was driven by a short position in Mineral Resources (ASX: MIN -26%) which is struggling with lower lithium and iron ore prices, higher capital expenditure and a weak balance sheet, and a long position in gold and copper miner Evolution Mining (ASX: EVN +9%) which delivered a strong result. Defensives was driven by short positions in ASX (-4%) which underperformed after ASIC alleged it misled the market on its failed upgrade to its core CHESS settlement system, casting further doubts on its ambitious new technology roadmap. A2 Milk (ASX: A2M -22%) delivered a solid result but announced that supply constraints would impact profits in the short term due to issues with its manufacturing partner Synlait.
Other positive contributors were long positions in WiseTech Global (ASX: WTC +25%) which delivered a strong result, demonstrating strong pricing power and a range of new products, and Brambles (ASX: BXB +17%) which pleased the market with a solid result, operating leverage and capital management.
On the negative side, Domestic Cyclicals were impacted by a short position in JB Hi-Fi (ASX: JBH +17%) which hit new highs after announcing a solid result and stronger than expected sales for the first few weeks of the new financial year. A long position in Ampol (ASX: ALD -12%) was weaker due to elevated capital expenditure and softer refining margins tempered market expectations of capital management.
Markets continue to take a “glass half full” view of the world as signs of softening growth across the global economy are treated as confirmation that we are on a glide path to a goldilocks soft landing. The shift in policy stance by the US Federal Reserve towards an easing bias and reasonably clear communication that the first interest rate cut will take place at the September meeting has given global markets confidence that this soft landing can be achieved. However, recent softening conditions in the US labour market have been taken more negatively by markets and highlight the risk that a soft landing is far from assured. In fact, historically it is quite a rare outcome as lags on the impact of policy changes mean that by the time central banks get around to cutting interest rates, significant negative momentum has already established itself within the economy. This remains a risk for the global growth outlook through 2025.
Several other risks still exist, notably a more persistent inflation outlook which constrains the magnitude of any policy easing. To date, gains have been made in the falling inflation rate from a shift back to deflation in tradable goods which is a result of a normalisation in supply chains post Covid-19, but also the continued expansion by China of its manufacturing base as it attempts to offset domestic weakness. Non-tradables inflation such as housing, medical costs and insurance remains well above pre-Covid-19 trends. The increased global protectionism that is manifesting in response to Chinese manufacturing dominance, geopolitical tensions and war all remain as inflationary risks that could upset the soft-landing scenario. Market valuations aren't providing sufficient compensation for these risks at the moment.
On the domestic front, the Australian consumer continues to defy bearish expectations and reporting season trading updates, which showed some tentative signs that the worst may be behind us with tax cuts and the prospect of interest rate cuts over the next 12 months providing a potential tail wind for further market gains. However, a deteriorating employment environment, constraints on immigration, a softening in the private capital expenditure cycle, negative terms of trade dynamics, increasing mortgage stress amongst indebted households and a looming hole in housing construction activity all present risks to the domestic consumption outlook.
A more persistent domestic inflation outlook leaves the RBA out of sync with other global central banks with interest rate cuts less likely in the short term. There is continued strength in the older, wealthier cohorts and this continues to manifest itself in the demand for services like travel, particularly at the premium end, but even this end of household consumption may be vulnerable to interest rate cuts and negative wealth effects if a recession occurred.
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