The CC Sage Capital Absolute Return Fund returned -0.28%* in June versus the RBA Cash Rate of 0.33%.
The CC Sage Capital Equity Plus Fund returned 1.50%* in June underperforming the S&P/ASX 200 Accumulation Index by -0.26% which returned 1.76%.
The S&P/ASX 200 Accumulation Index rose by 1.76% in June despite a further 25 basis point increase in interest rates by the RBA at the beginning of the month with strong retail sales numbers fueling expectations of more to come in the second half of the year.
The strongest Sage Groups^ during the month were Resources (+5%) and Yield (+3%) with laggards being Gold (-3%) and Growth (-3%). Resources were driven by speculation that China would offer further support for its flagging property sector and more incentives for electric vehicles at its upcoming economic policy meetings in July. Yield performed well during the month principally due to positive updates from large insurers and higher yields, with Australian 2-year bond rates increasing more than 40 basis points throughout the month. Similar to the previous month, the Gold sector was weaker as real interest rates swung further into positive territory putting pressure on gold prices, which have been on a downward since early May. The Growth Sage Group was mixed across stocks but was dragged down by large cap CSL which gave weaker than expected FY24 earnings guidance.
Australian and global equities had a strong finish to the year with the S&P/ASX 200 up 15% and the Nasdaq up 23%. Headline inflation softened across most major markets over the 12-month period and there was an emerging belief central bankers could defeat inflation without causing significant financial and consumer stress. We do not share this view. Looking through previous cycles, the impact of monetary policy lags typically take anywhere from 9 to 24 months to affect the economy. Currently, we are only nine months on from when policy became modestly restrictive in most developed markets, while Japan and Europe still have further to go. By the end of the year, we should have a much better idea how the Australian and global economy is dealing with tighter monetary policy. Core inflation remains sticky, well above central bank target ranges and market expectations for rate cuts continue to be pushed out. We believe these cuts can only occur once consumption data has significantly weakened, rather than prior to that, and until then, we expect monetary policy to maintain its restrictive stance.
In Australia, the RBA is treading cautiously by raising rates slowly, clearly cognisant of our more delicate circumstances − with a combination of higher household debt levels and elevated fixed rate mortgage roll-offs occurring over the next six months. The elevated level of low fixed rate mortgages − a legacy of the Covid-19 monetary support, and intense bank front book competition have so far masked much of the impact on most indebted households from variable rate increases. Consequently, domestic economic data such as retail sales and wages growth has proven more resilient than expectations which will keep the RBA with a tightening bias into the end of the year.
With core goods and services like rents, mortgage bills, energy and insurance weighing more heavily on the consumer in the second half, we remain underweight in consumer discretionary stocks that are cycling elevated sales and margins. Within domestic cyclicals, we prefer travel stocks to retailers given their skew towards older customers which are less impacted by rents and variable mortgage rates. With strong insurance prices growth and the weather shifting away from La Nina likely to result in lower insurance claims, we continue to see opportunities within the Australian insurance market, however maintain a cautious position towards Banks due to competition and deposit switching. Turning to resources, the combination of weak manufacturing PMIs globally and a stalling Chinese property recovery make us cautious on iron ore. Feedback suggests any forthcoming stimulus measures in China next month will be focused on revitalising consumption and electric vehicle penetration, which further supports our stance on lithium and copper.
Overall, 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.
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