Performance summary

The CC Sage Capital Absolute Return Fund returned 1.37%* in May versus the RBA Cash Rate of 0.34%.

The CC Sage Capital Equity Plus Fund returned -2.00%* in May outperforming the S&P/ASX 200 Accumulation Index by 0.53% which returned -2.53%.

The S&P/ASX 200 Accumulation Index fell -2.53% in May as the Reserve Bank of Australia (RBA) unexpectedly hiked interest rates at the beginning of the month and inflation surprised to the upside at the end of the month raising the likelihood of further interest rate rises.

The Growth Sage Group^ was the only group that ended in positive territory with Gold, Domestic Cyclicals and Global Cyclicals being the weakest groups. Growth was driven by technology stocks on the back of a rally in US technology stocks sparked by a focus on the potential opportunities related to generative Artificial Intelligence and in particular Xero (ASX: XRO +18%) which reported a good result highlighting potential to improve free cash flow generation. Gold was weak due to a stronger US dollar and optimism around the US debt ceiling talks reduced investor demand for safe haven assets such as gold. Domestic Cyclicals was driven primarily by weakness in discretionary retailers on fears of the impact on consumers of higher interest rates and Global Cyclicals was weak driven by several companies in the group that reported earnings, revealing a more challenging global growth environment.

Portfolio positioning and outlook

The debate continues around whether central banks can engineer a soft economic landing in the face of high inflation as economic data releases continue to be scrutinised for clues to the next move. Recent data in the US has ignited hopes of a soft landing and suggests that the US Federal Reserve may pause raising rates. Inflation is off its highs, the manufacturing sector is clearly slowing, bank lending standards have tightened and there are some signs of a slowing in the labour markets as continuing jobless claims drift higher and the US job quits rate recedes. However, core inflation remains sticky and wages growth has settled at a high level, meaning there is no easing cycle in sight just yet.

In Australia, policy outcomes have been even more confusing as the RBA changes tack from pausing to inflation fighting. More work likely needs to be done in this regard, as real rates remain negative and below the level of other countries, while recent inflation data has displayed some more worrying trends. The path to a soft landing is narrower in Australia as high household debt and leverage to variable interest rates creates more risk around household spending and a potential recession. Consumer stress is likely to get worse from here as a large proportion of low fixed rate mortgages roll off over the coming six months. We remain cautious on discretionary retailers, preferring exposure to travel which is still in recovery mode post pandemic and there are no signs that demand is abating.

We expect the global economy to continue to slow for the rest of the year and prefer companies with earnings streams that are relatively sheltered from the economic cycle in industries such as healthcare, telecommunications and supermarkets. We have become relatively more constructive on the banks as there are signs that the fierce mortgage and deposit competition is abating, but still prefer insurers for their pricing power at this point in the cycle. On the resources front, the ongoing weakness in global manufacturing and subdued property market in China makes us cautious on iron ore and we remain more positive on oil as OPEC supply discipline provides some downside protection from economic weakness. We are positive on lithium and other transition metals such as copper and aluminium in the longer term, however our positioning in lithium stocks tend to be tempered given the extreme short-term volatility of the lithium price.

We continue to maintain low net exposure to the Sage Groups to limit exposure to unpredictable macro risks and as always the portfolios are well diversified, liquid and positioned to weather the myriad of unknowns.

Read the monthly reports for additional commentary.

• ‍CC Sage Capital Absolute Return Fund monthly report
• CC Sage Capital Equity Plus Fund monthly report

* Past performance is not indicative of future performance. ^ Sage Capital uses a custom grouping system for long short positions (Defensives, Domestic Cyclicals, Global Cyclicals, Gold, Growth, REITs, Resources and Yield). With a focus on the principal macro earnings drivers for each stock, Sage Groups allow for comparisons to GICS for selecting stocks within a sector.