The CC Sage Capital Absolute Return Fund returned 1.35%* in October versus the RBA Cash Rate of 0.21%, an outperformance of 1.14%. The CC Sage Capital Equity Plus Fund returned 6.64%* for the month versus the S&P/ASX 200 Accumulation Index return of 6.04%, delivering outperformance of 0.60%.
October was a strong month for equity markets with the S&P/ASX 200 Accumulation Index rebounding 6.04%, largely reversing the fall in September, on speculation that central banks are nearing the peak of monetary policy tightening. Sage Group# performance was broadly the reverse of last month with all Sage Groups positive - the strongest being Yield, REITs, Global Cyclicals and Domestic Cyclicals with the weakest being Resources.
Yield was driven by strength in banks as the sector continues to benefit near term from expanding net interest margins expansions and REITs responded positively to the RBA surprising the market with a smaller 25 basis point hike to the cash rate. Global Cyclicals strength was driven by travel stocks and general improvement in sentiment globally. Domestic Cyclicals was driven by Qantas (ASX: QAN) which announced a sizeable profit upgrade and strength across discretionary retailers on the back of positive trading updates at AGMs. Resources was relatively weak driven by the large listed iron ore exposed companies (BHP, Rio Tinto, Fortescue Metals Group) as the iron ore price fell amid a new round of Covid-19 lockdowns in China and an ongoing property slump.
Markets have begun to hope that central banks globally are nearing the end of their tightening campaigns as the RBA and the Bank of Canada both increased interest rates less than expected. However, these hopes were more recently shattered by the US Federal Reserve when it indicated that a recession may be required to tame inflation and that the policy bias is towards over tightening rather than under tightening. Exactly how high interest rates need to go is still uncertain and represents a major risk for asset prices as inflation in the US is running at 8.2% with a target of 2%, and in Australia at 7.3% and rising due to higher energy prices, rents and fresh food prices from recent flooding. Given the RBA has slowed the pace of rate rises from +50 basis points to +25 basis points per meeting, rate rises are likely to continue well into 2023.
October saw a slew of trading updates from companies at AGMs, many of which were very positive with higher interest rates yet to significantly impact consumer spending. The travel sector remains strong and dining out continues to rebound. Despite increased spending on services, and given the health of consumers and a strong labour market, discretionary retailers could have a strong Christmas, before what we believe will be the inevitable slowdown next year.
We remain positive on energy stocks and cautious on iron ore. We believe there are numerous factors supportive of the oil price near term including OPEC production cuts, an end to US Strategic Petroleum Reserve releases after the mid-term elections, the EU sanctions on the import of Russian crude oil announced in June should see supply further reducing in December, and an eventual end to Covid-19 lockdowns in China boosting demand. On the iron ore front, the government led infrastructure spending is not enough to stop the overall weakening in demand with global manufacturing and the domestic property sector still softening. Construction steel sales are still ~25% below normal seasonal levels. The market remains focussed on the potential end to China’s Covid-19 zero policies, but a more substantive shift in the current policy to control the over-investment in housing would be required, given the very weak medium and long term demographic backdrop.
Overall, we maintain low net exposure to the Sage Groups to limit exposure to unpredictable macro risks, while focusing on individual company earnings to drive stock selection. The portfolios are as always well diversified, liquid and positioned to weather the myriad of unknowns.
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