During the month of September, the CC Sage Capital Absolute Return Fund delivered a net return of 2.29%*, outperforming the RBA Cash Rate by 2.11%. The CC Sage Capital Equity Plus Fund delivered a net return of -5.09%*, outperforming the S&P/ASX 200 Accumulation Index by 1.08%.
The S&P/ASX 200 Accumulation Index fell -6.17% for the month of September, driven by a spike in real bond yields of around 1% as central banks continued to raise rates to tame inflation and the market becoming increasingly concerned that this would lead to a recession in the US next year. In Australia, the RBA continued its aggressive pace of monetary tightening, raising the cash rate for the fourth time in a row by 0.50% in September to 2.35%.
All Sage Groups^ fell during the month, with Resources falling the least - being the Sage Group that is least sensitive to rising real yields. The weakest Sage Groups were REITs, Global Cyclicals and Domestic Cyclicals. REITs fell the most due to being very sensitive to rising bond yields, Global Cyclicals fell on fears of a US recession, and Domestic Cyclicals fell driven by broad falls across consumer discretionary and building stocks as the market became increasingly concerned about the outlook for the Australian consumer given interest rate rises.
The market continues to be driven overwhelmingly by macro factors, with the extent to which interest rates need to rise to tame inflation being a key driver. While there are some signs that the RBA may be taking a more cautious approach to rate rises, equity markets will largely be driven by the trajectory of the US where interest rates are being hiked at a faster pace which we expect will continue into next year.
Price/Earnings multiples have come down significantly over 2022, with the Industrials ex-Banks multiple now at a more palatable 22x versus 30x at the beginning of the year, but still a few points above the 20-year average. While there is further room for multiples to contract in the face of rising real bond yields, the majority of the derating has likely already occurred, and earnings will be more in focus. As such, company commentaries during the upcoming AGM season will be under the spotlight.
On the domestic front, conditions remain strong. The housing market is slowing in an orderly fashion, with prices down ~5% from their peak in April and we are yet to see signs of significant housing stress. The labour market remains strong and with the buffer of excess savings accumulated during the pandemic, and the recent drop in the oil price providing some relief - this may lead to consumer spending staying stronger for longer. However, we remain cautious on consumer discretionary stocks, particularly those exposed to housing, being cognisant of the delay between rate rises and the impact on consumer spending, as well as the impact of the large proportion of very low fixed interest rates which roll off in 2023.
We continue to favour stocks with pricing power and resilient demand profiles with many of the healthcare stocks fitting this description. We remain cautious on iron ore as we believe recent policy changes are unlikely to improve economic growth in China in the short or medium term, while energy appears closer to a bottom as OPEC steps in to support the oil price.
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 as always, remain well diversified, liquid and positioned to weather the myriad of unknowns.
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