The CC Sage Capital Absolute Return Fund returned -0.95%* in December versus the RBA Cash Rate of 0.25%. Over the CYTD, the CC Sage Capital Absolute Return Fund returned 7.06%* versus the RBA Cash Rate return of 1.23%.
The CC Sage Capital Equity Plus Fund returned -3.76%* in December versus the S&P/ASX 200 Accumulation Index return of -3.21%. Over the CYTD, the CC Sage Capital Equity Plus Fund returned 2.30%* versus the S&P/ASX 200 Accumulation Index return of -1.08%.
The S&P/ASX 200 Accumulation Index declined -3.21% in December as the RBA raised the cash rate by 25 basis points (bps) for the third consecutive month, which along with further increases in US interest rates, helped drive the 10-year bond yield up over 50 bps. The Gold Sage Group^ was the only group that achieved a positive return in the month as equities began to catch up to the strength in the underlying gold price. The weakest Sage Groups were Growth, Domestic Cyclicals and Yield, as a combination of higher bond yields pressured valuations for longer duration assets while the focus from central banks to tighten policy rates to combat inflation increased recession risks and the downside for cyclical earnings.
Emerging from a year which saw the sharpest increase in US interest rates in history, the outlook for equities remains uncertain. Valuation multiples fell materially on a global basis through 2022 in response to higher interest rates and while there may be some more of this to come, the market will be driven increasingly by the outlook for earnings. As central banks continue to fight inflation in developed markets, the risk of recession and material falls in earnings and markets is increasing. The big swing factor will be how rapidly inflation falls and when central banks feel comfortable in easing policy.
Inflation has already peaked and begun to recede as some of the cyclical forces have reversed. Post-COVID reopening has seen consumption expenditure shift from goods back to services and has allowed supply chains to normalise. This has seen some of the transient inflation in manufactured goods and transport dissipate. In addition, energy and food inflation have moderated as concerns over supply disruption from Russian sanctions have eased as product has found its way onto the global market via China and India. The running down of the US Strategic Petroleum Reserve (SPR) has also helped to contain energy prices. However, labour markets remain very tight in Australia as well as most developed markets and wages growth is running at levels that is consistent with core inflation, well above the RBA’s targets. While the market is beginning to price the peak in inflation and the start of an easing cycle in the second half of 2023, we see the risk that central banks keep policy tighter for longer until there is more visible weakness in labour markets. This could provide more material downside to earnings and Australia remains particularly exposed to risks from tighter policy due to the high level of household debt − with variable interest rate exposure and the potential for negative wealth effects feeding through from lower house prices.
Policy shifts in China are also complicating the outlook for markets. A rapid move away from its COVID-Zero stance as well as a shift in policy towards the housing market can drive big changes. The most immediate impact from these changes could prove to be inflationary, as a surge in infections disrupts supply chains, but more importantly we see that there is likely a surge in mobility and demand for travel as seen in the West. This is likely to boost oil demand at a time when the US has stopped reducing its SPR and may be looking to rebuild it. Any rebound in energy prices is likely to see inflation persist for longer and be negative for markets. The market is also taking a positive view on the policy shift around housing with iron prices and equities materially outperforming very weak fundamentals. We expect the market may struggle to maintain this optimism in the absence of big bang stimulus with weakening demand globally for manufactured goods and the long lags for a recovery in housing construction.
Overall, we continue to focus on individual company earnings to drive stock selection and maintain low net exposure to the Sage Groups to limit exposure to unpredictable macro risks. The portfolios are as always, well diversified, liquid and positioned to weather the myriad of unknowns.
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