The CC Sage Capital Absolute Return Fund returned -0.45%* in March versus the RBA Cash Rate of 0.30%. Over the quarter, the CC Sage Capital Absolute Return Fund returned 1.46%* versus the RBA Cash Rate return of 0.82%.
The CC Sage Capital Equity Plus Fund returned -0.52%* versus the S&P/ASX 200 Accumulation Index return of -0.16%. Over the quarter, the CC Sage Capital Equity Plus Fund returned 3.81%* versus the S&P/ASX 200 Accumulation Index return of 3.46%.
The S&P/ASX 200 Accumulation Index finished down -0.16% in March. The strongest Sage Groups^ were Gold and Resources with the weakest being REITs and Yield. With company reporting season behind us, most of the Sage Group^ movements this month can be viewed as knock-on effects from the collapse of Silicon Valley Bank and Credit Suisse. Gold was strong driven by a weaker USD and flight to safety effects as people withdrew deposits from US banks. Relative strength in Resources was driven by a weaker USD and continued optimism about the Chinese economic recovery and a boost from corporate activity in the lithium space at the end of the month.
Weakness in REITs was driven by debt contagion fears as regional banks were large lenders in the US commercial real estate space. The Yield Sage Group underperformance was driven by both the reduction in interest rates globally with lower investment yields and increased discounting by banks on mortgages who are competing aggressively to re-sign customers as their fixed rates loans expire over the next six months.
We believe that current market expectations for interest rate cuts later this year, juxtaposed with strong company earnings growth, is a very unlikely outcome for equity markets. The lagged and blunt impact of monetary policy makes a soft-landing scenario such as this a nigh impossible balancing act for central bankers to manage towards. Overall, the outlook for the global economy became less clear during the month of March. The collapse of Silicon Valley Bank and later Credit Suisse, led to significant changes in global interest rate expectations as people withdrew bank deposit and rushed to safe havens in US treasuries and gold. Ironically, despite the significant increase in interest rates, this was not a credit event, but an old-fashioned duration mismatch caused by a combination of lending long and borrowing short, and deficient regulation. The reaction from US Federal Reserve officials was lightning fast and reopened the all-important bond market after a two week impasse. However, some caution is warranted as it will take time to determine the full impact these events have had on credit availability and flow on effects to the real economy.
Headline inflation continues to weaken globally with lower goods, logistics and energy prices but core inflation remains stubbornly high and well above target. We believe central bankers, wary of the mistakes of the past, are unlikely to change their tightening bias but will tread more carefully as signs of weakening growth and economic stress will likely become more obvious over the next six months. Recent moves by OPEC to put a floor under oil prices with production cuts and the inability of the US to respond through further releases from their Strategic Petroleum Reserve, increase the risk of a rebound in headline inflation as well.
In Australia, consumer spending remains resilient, but the combination of higher rents, higher mortgage costs and lower savings buffers makes us cautious on the outlook in the second half of the year. Increased migration offers some hope to ease the tightness in labour markets, but in the short term is likely to exacerbate inflationary pressures through increased consumption and by adding pressure to an already very tight housing rental market. The RBA has recently paused in its tightening path, to observe the impacts of recent volatility and the roll-off of fixed to variable mortgages. This likely raises the risk of more work to be done later if inflationary pressures become more embedded.
Overall, we continue to prefer companies with resilient earnings streams and pricing power in industries such as healthcare, insurance and telecommunications. We are cautious on banks as aggressive competition for deposits and loans will reduce margins going forward. We continue to focus on individual company earnings to drive stock selection and maintain low net exposure to the Sage Groups to limit exposure to unpredictable macro risks. The portfolios are as always, well diversified, liquid and positioned to weather the myriad of unknowns.
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