Performance and market insights - April 2024

Market Insight
May 21, 2024

Performance summary

The CC Sage Capital Absolute Return Fund returned 3.06%* in April, outperforming the RBA Cash Rate which returned 0.39%.

The CC Sage Capital Equity Plus Fund returned -1.59%* in April, outperforming the S&P/ASX 200 Accumulation Index which returned -2.94%.

The strongest contributors to performance were Sage Groups# Defensives, Domestic Cyclicals and Resources with Global Cyclicals being a detractor. Key drivers within Defensives were an overweight position in AGL Energy (ASX: AGL +13%) which rose on the back of higher forward electricity prices and a short position in Ramsay Health Care (ASX: RHC -8%) which fell as the outlook for the private hospital sector continues to look very challenged. An overweight position in Qantas Airways (ASX: QAN +8%) was the key driver in Domestic Cyclicals which rallied after giving a much-anticipated update on changes to its loyalty program which should be accretive to earnings longer term and recommencing its share buyback program.

In Resources, key drivers of performance were overweight positions in South32 (ASX: S32 +20%) which rallied with strong aluminium and copper prices during the month. Pilbara Minerals (ASX: PLS +6%) which printed a strong, clean quarterly result highlighting its future expansion options at its flagship Pilgangoora project and IGO (ASX: IGO +12%) which sold and cleared excess lithium stock that had built up at the end of last year when partners deferred shipments. On the negative side, an overweight position in James Hardie Industries (ASX: JHX -12%) impacted performance in Global Cyclicals due to fears regarding the impact of higher bond yields on the demand for US housing.

Portfolio positioning and outlook

After several months of inflation surprising to the upside, market expectations around interest rate cuts have shifted significantly. The market has now largely priced out interest rate cuts which have been pushed out to later this year in the US, and in Australia the market is pricing in the possibility of another interest rate hike. The market has pulled back from its highs given the recent rise in bond yields, although there still seems to be a large disconnect with some of the lofty valuations in the equity market. Positive sentiment to equities has been supported by strong profit results from US tech companies and this has helped to keep valuations resilient across growth stocks.

We continue to prefer companies with pricing power and those that can continue to grow regardless of the economic cycle as the lagged impact of rising costs and slower demand continues to play out. We remain positive on insurers over banks given insurer’s pricing power and the belief that the insurance margin cycle has further to run. By comparison, bank valuations are looking stretched given that there is no bad debt cycle to recover from and intense mortgage competition is unlikely to disappear in a market with low top line growth.

Within resources, we remain positive on base metals as Chinese supply moderates and the market has begun to position for the increased demand from electrification in the next few years. However, we continue to be more cautious on iron ore given the weakness in the Chinese property sector, although manufacturing and exports have grown to fill some of this slack. Lithium continues to exhibit high volatility due to a slowdown in electric vehicle (EV) demand.  Currently, we remain neutral in this sector.

We have become increasingly cautious of the consumer discretionary sector. The stocks rallied strongly with interest rate cut expectations but have been pushed out as concerns grow of financial stress and pressure on hours worked, with their valuations now hard to justify. We continue to remain more positive on the travel industry as the ageing demographic supports the demand for leisure travel.

We continue to maintain low net exposure to the Sage Groups to limit the impact of unpredictable macro risks. The portfolios remain well diversified and liquid.

Read the monthly reports for additional commentary.

* Past performance is not indicative of future performance. ^ Sage Capital uses a custom grouping system for long short positions (Defensives, Domestic Cyclicals, Global Cyclicals, Gold, Growth, REITs, Resources and Yield). With a focus on the principal macro earnings drivers for each stock, Sage Groups allow for comparisons to GICS for selecting stocks within a sector.