Performance summary

The CC Sage Capital Absolute Return Fund returned -0.35%* in July versus the RBA Cash Rate of 0.35%.

The CC Sage Capital Equity Plus Fund returned 2.49%* in July underperforming the S&P/ASX 200 Accumulation Index by -0.39% which returned 2.88%.

The S&P/ASX 200 Accumulation Index was up 2.88% in July driven by better than expected inflation numbers in both Australia and the US and increased investor confidence that a soft landing may be achieved, following the RBA's decision to leave the official cash rate unchanged. Commodity prices were generally strong, particularly oil which rose 14% on tighter market fundamentals as Saudi Arabia and Russia signalled production cuts while economic data in the US was stronger than expected.

The strongest Sage Groups^ were Yield, driven by a rebound in banks, Global Cyclicals, driven by strength in travel stocks on the back of upbeat trading updates, and Domestic Cyclicals as economically sensitive stocks rallied on the prospect that interest rates have peaked, and a recession may be avoided. The weakest Sage Group was Defensives as investors rotated out of a safe haven of stocks into higher risk segments of the market.

Portfolio positioning and outlook

Financial markets have become quite buoyant as falling headline inflation numbers have increased confidence around a soft economic landing and a stronger earnings outlook. The downside risk is that the market is not pricing in that global economies will remain resilient and labour markets remain tight, with wages growth to remain high and core services inflation will likely keep overall inflation above central bank targets. This means that central banks will need to keep rates tighter for longer or risk any price shocks reaccelerating inflation from a higher base. Whilst the Covid-19 related supply side shocks have abated and shipping and manufacturing pressures are unlikely to reaccelerate, it is still relatively easy to identify potential inflationary triggers. The impact of the Ukrainian/Russian conflict continues to drag on - food prices have started to reaccelerate, the Saudis are starting to cut oil supply, and Europe remains a cold winter away from gas prices surging again. The central bank dilemma is that if inflation remains well behaved, they are essentially tightening monetary policy into a slowdown as real interest rates begin to rise. With the risk that interest rates must rise if inflation picks up or the economy slows further as inflation falls, we will see more significant downside to earnings than the market is pricing.

In Australia, households remain far more exposed to interest rate pressures with the predominant variable interest rate mortgage structure. Whilst this pressure is spread unevenly, there is clear evidence that retail sales are coming under pressure as indebted households are forced to tighten their belts. This has meant that the RBA has been able to stay more dovish than its global peers, keeping interest rates lower, which has been reflected in a weaker Australian dollar. The market has been keen to buy cyclical stocks such as builders and retailers on the view that we have seen the last of the interest rate rises, but as with the rest of the world, the combination of intransigent core inflation and the long lag effects of monetary policy means that downside risks to the economy and earnings are still ahead of us and unquantified.

The hope for stimulus from China is still yet to eventuate, although there has been a positive shift in rhetoric to being more supportive of growth. Despite this, the ongoing financial stress within property developers and increasing concerns around local government financing vehicles is keeping domestic steel demand soft. Overall steel production has remained solid, but this has been through an acceleration of exports back towards record levels. Given the soft global demand backdrop and increasing seasonal supply in iron ore, we remain cautious on bulk commodity stocks. We remain more positive on oil as OPEC+ supply discipline is helping to tighten the market while demand has been more resilient than feared. Further, Chinese stimulus policies could shift preferences but seem more likely to be focussed on supporting consumer demand and the Electric Vehicle transition, rather than more commodity intensive construction and infrastructure, which further supports our stance on energy transition commodities such as lithium and copper.

Overall, across the portfolio, we retain a preference for stocks with strong pricing power able to drive their own growth independent of the economic cycle. We continue to maintain low net exposure to the Sage Groups to limit exposure to unpredictable macro risks. The portfolios are well diversified, liquid and positioned to weather the myriad of unknowns.

Read the monthly reports for additional commentary.

• ‍CC Sage Capital Absolute Return Fund monthly report
• CC Sage Capital Equity Plus Fund monthly report

* Past performance is not indicative of future performance. ^ Sage Capital uses a custom grouping system for long short positions (Defensives, Domestic Cyclicals, Global Cyclicals, Gold, Growth, REITs, Resources and Yield). With a focus on the principal macro earnings drivers for each stock, Sage Groups allow for comparisons to GICS for selecting stocks within a sector.