During the month of December, the CC Sage Capital Absolute Return Fund delivered a net return of 0.02%* outperforming its benchmark by 0.02%*. The CC Sage Capital Equity Plus Fund delivered a net return of 2.74%*, underperforming its benchmark by -0.01%. Both portfolios remained relatively neutral across the Sage Groups^ allowing each strategy to be well insulated from unexpected systematic macro risks while benefiting from bottom-up stock selection.
The S&P/ASX 200 Accumulation Index ended December 2.75% and 17.23% for the year. The market was weaker at the start of the month as concerns lingered around the emergence of the Omicron Covid-19 variant and comments from the US Federal Reserve signalling inflation may not be transitory and tapering may be accelerated. The strongest performing Sage Groups during the month were Resources (+7.5%), Yield (+5.0%) and REITs (+4.8%) with the weakest being Growth (-4.0%).
As we look forward, market direction and stock performance is likely to be increasingly driven by inflation expectations and central bank policy and less by the vagaries of Covid-19. While the hyper-infectious Omicron Covid-19 variant is surging around the world, the silver lining is that it appears to have mutated into more of an upper-respiratory infection and the mortality rate has been plunging. This is beginning to look more like a disease that can be lived with on par with influenza than one requiring ongoing controls and restrictions. While this may ultimately help relieve pressure on the beleaguered travel industry, the strength of the broader economic recovery may now be moving out of the goldilocks zone.
Economic strength combined with supply chain disruptions has seen inflation surge well above expectations. In its recent minutes, the US Federal Reserve acknowledged that this inflation pressure isn’t merely transitory but has broadened out across the economy. Importantly, the US economy and many others around the world are now near full employment and there is evidence that higher inflation is now feeding back into stronger wage growth. This dynamic threatens the longer-term stability of inflation expectations and has caused the US Federal Reserve to accelerate its tapering of asset purchases and bring forward its expectations of interest rate rises. This is likely to present a very different and more challenging environment for asset prices moving forward. Higher interest rates are likely to see valuation multiples compress across the market which will favour Cyclical and Yield Sage Groups over the Growth Sage Group, but may see a broader defensive tone if the market views that central banks need to drive a recessionary outcome to control inflation.
As always, the portfolios are well diversified and we remain relatively neutral across the Sage Groups which allows the portfolio to be well insulated from systematic macro risks whilst benefiting from bottom-up stock selection.
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