The CC Sage Capital Absolute Return Fund returned 1.74%* in September, outperforming the RBA Cash Rate which returned 0.37%.
The CC Sage Capital Equity Plus Fund returned 3.56%* in September, outperforming the S&P/ASX 200 by 0.59%, which returned 2.97%.
Strongest contributors to performance were Sage Groups^, Yield, Domestic Cyclicals and Global Cyclicals with the main detractor being Resources. Performance in Yield was driven by short positions in the banks which sold off as investors switched into resources post the announcement of China's economic stimulus. Domestic Cyclicals was driven by a long position in Qantas (ASX: QAN +11%) which continued to rally post its August result as investors began to factor in significant valuation upside. Other positive contributors of note were long positions in WiseTech Global (ASX: WTC +15%) as investors assigned more value to its new product pipeline and Telix Pharmaceuticals (ASX: TLX +11%) which continues to broaden out its product development pipeline and shore up its supply chain.
On the negative side, Resources was a mixed bag with strong performance from long positions in South32 (ASX: S32 +22%), Sandfire Resources (ASX: SFR +26%) and BHP Group (ASX: BHP +16%) were dragged down by short positions in iron ore exposed stocks, Mineral Resources (ASX: MIN +30%) and Fortescue (ASX: FMG +19%) as well as long positions in oil related stocks, which fell due to weakness in the oil price over the month.
A key driver of markets remains the timing of interest rate cuts, both in Australia and abroad. The US Federal Reserve kicked off its interest rate cutting cycle in September with a cut of 50 basis points. It has been focusing more closely on emerging weakness in the labour market rather than the stickiness in inflation and as a result delivered a larger cut to start. The market has been quite happy with this, pricing in the probability of a reasonably sharp interest rate cutting cycle and a soft landing. Since then, we have seen some stronger employment data and the market has moderated its interest rate cut expectations, leading to some weakness in equities.
This highlights that the market is priced for perfection and remains vulnerable to both inflation and growth shocks. It is not particularly difficult to identify risks either, as conflicts in the Middle East continues to spread and may ultimately impact oil infrastructure, while the US election is also a source of uncertainty and increased tariffs could hit inflation there.
The Australian economy remains relatively healthy, although with some building signs of stress amongst leveraged households. Looser policy settings have meant that inflation has been slower to fall but is heading in the right direction. We believe a soft landing here is also a possibility, but the RBA will lag the world in interest rate cuts given the higher base and stickier inflation. As with the US, the Australian equity market price/earnings ratio is well above the historical average and it appears the market is already factoring in a soft landing without much margin for error.
China has also announced policies aimed at stimulating its domestic economy which has been a catalyst for a sharp switch out of banks and into resources. The durability of the rotation is a key debate and will depend on what and how much more policy stimulus comes out of China. In any event, the initial stimulus has resulted in market sentiment becoming less negative on the Chinese economy and further stimulus could drive it further, although some of the structural issues of poor demographics and overinvestment will continue to be a challenge.
Another factor that continues to influence equity markets is the geopolitical volatility, which has increased in the Middle East and the flow on effect to the oil price, international travel and sentiment in general. The portfolio has long exposure to energy stocks as we are constructive on the outlook for the oil price and though still long, we have slightly reduced travel exposure in light of recent geopolitical events. We believe the Big Four banks are overvalued and continue to be used as a funding source for long positions in insurance stocks, and Macquarie Bank, which has exposure to a broad range of global growth opportunities.
We have increased exposure to relatively defensive and reasonably priced stocks such as CSL Limited (ASX: CSL), ResMed (ASX: RMD) and Cochlear (ASX: COH). On the consumer front, retail sales in Australia may have bottomed and tax cuts may provide a tailwind to consumer spending in the second half of this year, however we remain cautious on discretionary retail valuations and have a preference for the more defensive supermarkets.
The portfolios are constructed using Sage Groups with a focus on individual companies within these groups. The portfolio continues to maintain low net exposure to each Sage Group to limit the impact of unpredictable macroeconomic risks and are well diversified and liquid.
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