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During the month of July, the CC Sage Capital Absolute Return Fund delivered a net return of -4.15%*, versus its benchmark of 0.10%. The CC Sage Capital Equity Plus Fund delivered a net return of 3.31%*, versus its benchmark of 5.75%.
July was a strong month for equities following a weak June with the S&P/ASX 200 Accumulation Index up 5.75%, driven by macro data indicating that the US economy is slowing, which moderated inflationary fears which in turn led the market to revise down the extent of interest rate hikes required to tame inflation. As a result, bond yields fell with the Australian 10-year bond yield falling a hefty 60 bps to 3.06%, driving equity valuations higher. The strongest Sage Groups^ were REITs, where valuations are highly sensitive to changes in bond yields, Growth, driven by expensive and loss making stocks which tend to perform well when bond yields fall, and Yield. Resources was the only Sage Group which fell, driven by broadly lower commodity prices on the back of expectations of lower global demand.
Equity markets have been driven by macro factors in recent months and stock correlations are well above historic averages. The market is attempting to digest the biggest inflationary shock in decades and gauge the extent of monetary tightening required to tame it. This has led to a broad fall in stocks with cyclical earnings exposure, but the market reverted sharply in July on the perception that growth and inflation have peaked. As highlighted last month, we believe this is a false signal driven by a sharp inventory cycle that is causing manufacturing to soften. Momentum in the global services economy is strong, although softening, with employment robust and wages growth beginning to catch up with inflation. Central banks still have a tough job in front of them to bring inflation back to target, with strong labour markets and a structural energy shock meaning that a recession is likely required. The recent snap back in risk appetite is likely to be short lived.
In the short term, it is likely the August reporting season will turn attention back to individual company earnings which should see stocks becoming more responsive to company specific idiosyncratic news. Interest rates in Australia and the rest of the world have only just begun to rise so will have limited impact on current results, which we expect to be broadly strong. With more rate rises to come, outlook statements will be more important than ever - although we expect a broad degree of caution from companies. Given the significant valuation multiple compression experienced by many companies already (60% of companies are now trading 20% off their 12-month high), a lot of bad news has been priced in and earnings or outlook statements that are not as bad as expected could drive material share price rebounds. However, macroeconomic data will still play an important role in equity market performance from here, with the RBA closely watching wages growth, labour force and monthly retail sales data.
We retain a cautious stance towards markets as company earnings come under pressure as margins retreat from peak levels. We maintain low net exposure to the Sage Groups to limit exposure to these systematic macro risks while focusing on individual company earnings to drive stock selection. The portfolios as always, remain well diversified, liquid and positioned to weather the myriad of unknowns.
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