Equity market rebound short lived

As equity markets experienced a rebound in April, it was short lived as the volatility quickly made its way back reflecting uncertainty in corporate earnings and the outlook for many companies. Pleasingly, both strategies continued to outperform their benchmark returns via high success rates across relative stock selection in a risk-controlled manner.

As a market neutral strategy that aims to provide an uncorrelated source of returns whilst eliminating equity market exposure, the CC Sage Capital Absolute Return Fund returned a positive 1.84% after fees, outperforming the RBA Cash Rate by 1.83% during April.*

Similarly, as an active extension strategy that aims to always retain exposure to equity markets, the CC Sage Capital Equity Plus Fund returned 9.35% after fees, outperforming the S&P/ASX200 Accumulation Index by 0.57% during April.*

Markets carried their momentum from the end of March, rallying strongly in April. The S&P/ASX 200 Accumulation Index was up 8.78% and has bounced 21.51% off its lows in March. The market optimism was triggered by signs that new COVID-19 infections were peaking in several countries including Australia, as well as strong fiscal and monetary responses. This led many to believe that the shock from the pandemic would follow the trajectory of normal natural disasters with a sharp contraction followed by a swift recovery. Investors reduced equity risk premiums and began pricing stocks on a post COVID-19 basis. Considering this sentiment, it was no surprise that the sectors hit hardest in March bounced strongly in April.

The market has been infected by optimism recently as it surged back from its mid-March lows. This reflects the financial and economic stability provided by massive central bank liquidity support and significant fiscal support from governments. There has also been significant progress in slowing COVID-19 infection rates across many countries which has prompted the start of some easing in lockdown restrictions.

Looking at the composition of the equity market rally provides a less bullish picture. Much of the rebound has been driven by Technology and other growth and defensive stocks returning to near highs, while there has been some rebound in oversold Cyclicals. Banks on the other hand, have barely moved from their lows. We find this a concerning signal as the banks represent the engine house of the economy and have the greatest leverage to poor outcomes. This indicates that the market is still very worried about the economic outlook, but cheap money is helping to lift valuations across the market.

Portfolio Positioning

With so many possible economic and financial outcomes, we are looking to keep thematic risk tightly constrained, although with the strong bounce in markets, we have taken profits in several of the more cyclical and leveraged names that we bought for a rebound.

The investment team’s focus remains on companies who can grow earnings through this turbulent environment. We have retained exposure to Healthcare, Telecommunications and Consumer Staples, as well as select financial and technology companies. We are underweight major resource companies, preferring exposure within the mining services space. We are generally avoiding companies with excessive financial leverage or cyclical exposure and certainly the combination of both. We are also holding a long gold position.  We like gold as a financial asset and a diversifier when central banks are printing money into weak economic activity.

>View the Performance of our funds here

* Past performance is not an indicative of future performance.