During the month of May, the CC Sage Capital Absolute Return Fund delivered a net return of -0.26%* underperforming its benchmark by -0.28%. The CC Sage Capital Equity Plus Fund delivered a net return of -2.62%*, underperforming its benchmark by -0.02%.
The S&P/ASX 200 Accumulation Index finished May down -2.60% with the RBA raising the cash rate by 25 basis points (bps) - its first rate hike since 2010, and the US Federal Reserve raising rates a further 50 bps to 100 bps. REITs was the weakest Sage Group^ for the month as real estate valuations are more sensitive to interest rates, followed by Gold, as rising rates increases the opportunity cost of holding gold, and Domestic Cyclicals was driven by weakness in builders and retailers as the market priced in the prospects of a slowing economy. On the positive side, the Resources Sage Group was the shining light driven by energy stocks on the back of a higher oil price and lithium stocks, following strong auction pricing results from global competitors.
Inflation continued to dominate global macro headlines during the month with Australian CPI printing +5.1% (its highest level in 20 years), Euro area inflation at +8.1%, the highest since records started in 1992 and UK CPI at +9%, its highest since 1982.
Although US inflation didn’t push to new highs this month, the European natural gas shortage appears to have spread across the Atlantic to the US and will probably feed inflation there in the second half of the year. We continue to believe central banks will need to raise interest rates sharply to deal with inflation before it becomes imbedded in medium term wage expectations. It is a battle we see playing out over the next 12-24 months and will likely end in the defeat of inflation at the cost of a recession.
From a stock perspective, although valuations have derated from recent highs, overall earnings expectations remain stubbornly high as analysts focus on individual company commentary, suggesting they have so far seen little impact from the rate cycle. It is worth highlighting the US only began its tightening cycle two months ago and Australia began just this month. In our view, widespread effects of rate rises will take time to flow through and only become apparent in market earnings in 2023. The disconnect between cash rate rises implied by the bond market and company consensus forward projected earnings expectations are continuing to provide a wide range of opportunities across the Sage Groups, particularly within Yield, Cyclicals and REITs.
We continue to prefer companies that either have positive earnings exposure to higher yields or reasonably defensive earnings and strong pricing power. In addition, as discount rates rise due to a higher risk-free rate and equity risk premium, valuations of high growth companies are particularly impacted. As such we remain cautious on stocks that are priced to perfection.
We expect unpredictable macro drivers to continue to be a large influence on equity markets. However, the focus on individual company earnings and utilising Sage Groups for portfolio construction allows systematic macro risks to be minimised as much as possible while benefiting from bottom-up stock selection. As always, the portfolios remain well diversified, liquid and positioned to weather the myriad of unknowns.
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