The CC Sage Capital Absolute Return Fund returned 2.02%* in June, outperforming the RBA Cash Rate which returned 0.33%.
The CC Sage Capital Equity Plus Fund returned 1.84%* in June, outperforming the S&P/ASX 200 Accumulation Index which returned 1.01%.
Top contributors to performance were short positions in Mineral Resources Limited (ASX: MIN -25%), and Fortescue (ASX: FMG -13%), while long positions in Insurance Australia Group Limited (ASX: IAG +15%) and Macquarie Group Limited (ASX: MQG +7%) also contributed. Larger negative contributors were a short position in Commonwealth Bank of Australia (ASX: CBA +7%) and a long position in ResMed Inc. (ASX: RMD -7%).
In the mining sector, we are seeing continued weakness in iron ore as inventory builds while steel production remains lacklustre with weak Chinese property demand, negative steelmaker margins and a saturated export channel. Lithium prices continued to languish as the take-up of electric vehicles (EV's) outside of China has been disappointing, while within China more hybrids are being sold with smaller batteries. This price weakness impacted both Mineral Resources (which closed its high-cost iron ore Yilgarn Hub early) and Fortescue which was pressured by a large shareholder selling a stake at a discount. IAG was a positive at the end of the month, upgrading earnings on lower catastrophes and implementing a new reinsurance structure to limit downside exposure and release capital.
The main negative was a long position in ResMed which was impacted by surprisingly positive results from the more detailed review of Eli Lilly's SURMOUNT-OSA study for its weight loss drug Zepbound. Patients achieving disease resolution for sleep apnea were over 40% of those receiving the highest dose by their definition. Not surprisingly, ResMed was hit as its addressable market appears under threat. However, clinical trials are designed to achieve endpoints and real-world experience has been less dramatic. Our view is that GLP-1s will help increase diagnosis rates more than they lift cure rates in a largely undiagnosed population and remain positive on ResMed.
Further evidence of sticky inflation domestically has thrown the cat amongst the pigeons for the RBA's policy path. What seemed like imminent interest rate cuts at the start of the year has now turned into the possibility of interest rate hikes. We have been of the view that services inflation that becomes embedded in wages is much stickier. Additionally, higher interest rates are exacerbating the situation by limiting housing supply and encouraging spending among those with net assets, thereby making matters worse. The structural drivers of higher electricity prices are making the task of getting inflation back to the RBA's target band difficult. This means that the RBA is going to need to make some tough choices between preserving the gains in employment that were achieved during the Covid-19 era and tolerating inflation outside of its target band, leaving the economy exposed to any further supply shocks.
The equity market is continuing to discount the very real possibility of a hard landing and more significant earnings downside. The changing interest rate outlook, coupled with signs of accumulated stress on households impacting spending, leaves us cautious on retailers and discretionary stocks. Our preference in this sector remains travel-related stocks. The baby boomer demographic has displayed very strong travel demand, helping bolster premium demand, and generally benefits from higher interest rates.
We anticipate ongoing weakness in iron ore and lithium markets. Excess industrial capacity (particularly in advanced manufacturing sectors such as automotive and renewable energy) created in China due to domestic policy that encourages the economy to diversify away from housing has led to dumping fears in Europe and the US, and a raft of tariffs to be proposed on steel and electric vehicles (EVs). This is likely to see EV and lithium demand continue to disappoint and narrow the areas for further steel production as the Chinese property sector continues to contract. We remain positive on base metals as copper remains far more constrained in the medium term, even if battery demand disappoints.
Within in the Yield group, the environment for insurers remains constructive, while banks are historically expensive. Insolvencies in Australia have picked up to near previous cycle highs which could eventually weigh on banks that may have to use bad-debt provisions that were accumulated over the Covid-19 crisis period rather than release them into profits.
We continue to maintain low net exposure to the Sage Groups^ to limit the impact of unpredictable macroeconomic risks, with the portfolios being well diversified and liquid, and positioned to weather the myriad of unknowns.
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