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During the month of June, the CC Sage Capital Absolute Return Fund delivered a net return of 4.07%* outperforming its benchmark by 4.02%. The CC Sage Capital Equity Plus Fund delivered a net return of -6.70%*, outperforming its benchmark by 2.07%.
The S&P/ASX 200 Accumulation Index finished June down -8.77% erasing all gains for the financial year resulting in a -6.47% return for FY22. Weakness in the equity market was driven by fears of a recession, sharp rate hikes (US +75 bps, Australia +50 bps) and the Chair of the US Federal Reserve, Jerome Powell signalling that further sizable increases in interest rates would be required to fight the high level of inflation.
All Sage Groups^ ended the month down with the weakest being Gold reflecting the market’s more cautious view on the gold price as interest rates rise. Yield was dragged down in large part by the banks, on fears of slower credit growth and the rising risk of bad debts. Domestic Cyclicals was driven by consumer discretionary and building stocks on fears of a recession, and REITs - as real estate valuations are highly sensitive to interest rates. Defensives fell the least, held up by the more economically resilient supermarket and gaming stocks.
The market outlook is clouded by some significant and divergent themes. At the forefront is the elevated inflation outlook and central banks' response of higher interest rates and quantitative tightening. This is occurring globally with the US largely leading the pace and Europe and Japan lagging. This tightening of financial conditions is most apparent in higher bond yields, the multiple compression that has occurred across equity markets and the meltdown in excess liquidity proxies such as cryptocurrencies. However, we have also seen leading indicators of economic activity like manufacturing PMIs turn negative which could present a potential red herring for markets. This contraction in manufacturing is the beginning of an unwind of a giant inventory cycle that was driven by Covid-19 lockdowns and a shift in consumption from services to goods. Reopening has seen these trends begin to reverse and it is likely that manufacturing activity softens with new orders contracting until inventory levels have normalised. This may be interpreted by markets that central bank tightening is working and that inflation has peaked, however we see that this may be too early for these impacts to have flowed through the economy and frankly policy is still very loose. This may not stop markets having a relief rally around long duration assets and rate sensitive discretionary names.
On the other side of the inventory cycle is an energy shock that is still flowing through the global economy and that provides little prospect for a rapid moderation in inflation. Given that over two thirds of activity in developed economies is driven by the services sector and that labour markets remain very tight, central banks are unlikely to back off from their tightening cycles until there is clear evidence that core inflation is moderating. In the short term, there will be tension between weaker manufacturing activity and softer goods inflation and tight labour markets, high energy prices and policy tightening.
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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