The equity market drifted lower during the month, falling 3.66%, as the recovery stalled out. Good news on vaccine hopes was hit by a temporary halt in the Astra Zeneca trial while a second wave of COVID-19 accelerated through the Northern Hemisphere. Market volatility was generally lower though with a lot of stocks just range trading through the month.

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 -0.08% after fees, underperforming the RBA Cash Rate by -0.09% during the month. Since inception the CC Sage Capital Absolute Return Fund has returned 11.96% p.a. and outperformed its benchmark by 11.48% p.a.*

As an active extension strategy that aims to always retain exposure to equity markets, the CC Sage Capital Equity Plus Fund returned -3.72% after fees, underperforming the S&P/ASX200 Accumulation Index by -0.06% during the month. Since inception the CC Sage Capital Equity Plus Fund has returned 0.60% p.a. and outperformed its benchmark by 7.29% p.a.*

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Market review

In September, the S&P/ASX 200 Accumulation Index fell by 3.66%, with uncertainty around COVID-19 vaccines and a second wave of the disease across the Northern Hemisphere. There was also some disappointment as the US Federal Reserve failed to inject fresh stimulus at its regular FOMC meeting while the market also set a cautious tone heading into the US presidential election.

In comparison to recent months, September could almost be described as boring. There was a general risk-off tone across the market as more defensive areas outperformed, with the exception of US housing related exposures that powered ahead, driven by low mortgage rates and a structural underbuild.

The market is becoming more comfortable with an eventual recovery from COVID-19 impacts. This is being aided by the improved prospects of a successful vaccine, but also the likely development of a more pragmatic attitude to dealing with the virus. There are now around 200 vaccines in development and a dozen of those are in late stage clinical trials.

One of the most interesting aspects of the economic disruption has been the shift in spending patterns by households and an important driver for relative stock performance in the next year will be the extent to which this reverses. Companies with exposure to travel or transportation have been hit hard. We see increasing opportunities to buy those companies in the travel and entertainment sectors where earnings have been significantly impacted on the view that the worst is behind us and there will be an eventual return to normalcy.

With the increased acceptance of working from home this has the potential to drive significant long-term shifts in demand for CBD office space, transportation and the viability of related services businesses. This leaves us cautious on companies exposed to CBD activity.

The recent Australian budget has provided for an acceleration in tax cuts, incentives for businesses to hire and invest as well as an acceleration in infrastructure spending and housing incentives. Balancing this stimulus will be the unwind of existing JobKeeper measures and the end of loan forbearance by the banks. This should be generally supportive of economic recovery, but the market has already baked in too much benefit from infrastructure spending and housing. The existing high level of infrastructure spending and recent overbuild of high-density apartments sees little space for upside surprise. The overall demand path will be highly dependent on a return of international migration, which will come but may take several years to return to normal. We see better opportunities in broader exposure to domestic recovery outside of housing and infrastructure.

Portfolio positioning

Another potential impact of the positive vaccine news and economic recovery is a move up in bond yields and a rotation away from high priced technology shares. We have previously discussed the exponential impact that falling real interest rates have on the valuations of companies with high growth rates. Conversely, it doesn’t take much in the way of positive growth news and higher bond yields to drive a significant value correction across the market. Amongst the growth stocks, we see more opportunities in those that have had some earnings impacts from lockdowns and social distancing such as healthcare, as opposed to those that have had significant valuation expansions.

* Past performance is not an indicative of future performance. The inception date of the CC Sage Capital Absolute Return Fund and the CC Sage Capital Equity Plus Fund is 20 August 2019.