Performance and market insights - December 2023

Market Insight
January 17, 2024

Performance summary

The CC Sage Capital Absolute Return Fund returned -3.96%* in December versus the RBA Cash Rate of 0.34%.

The CC Sage Capital Equity Plus Fund returned 5.03%* in December, underperforming the S&P/ASX 200 Accumulation Index by -2.23%, which returned 7.26%.

The S&P/ASX 200 Accumulation Index rallied 7.26% in December closing on its highs for the year and delivering a return of 12.4% for 2023, as bond yields fell 10% from 4.4% to 4% during the month on the back of a more dovish RBA. US equities were also strong with the S&P 500 up 4.4%, following more benign inflation, and commentary from US Fed Chairman Powell that led to bond markets pricing in close to 150 basis points of interest rate cuts in 2024. Commodities were mixed with notable moves being Brent Oil down -7%, as non-OPEC production was higher than expected, and iron ore up 7% on the back of China’s increased crude steel production. All Sage Groups^ ended in positive territory for the month with Growth and REITs being the strongest performers driven by lower bond yields. Gold was the weakest performer, as the narrative around lower inflation and soft-landing dampened demand.

Portfolio positioning and outlook

The macro environment has been a key driver of Australian equities over the past year with the inflation outlook, interest rates and bond yields influencing the varying performance of sectors during the year. With inflation continuing to slow, there is a plausible scenario that central banks could cut rates in 2024. The market is pricing this in which has been a key driver of the strong performance of equities.

During the recent high inflation environment, companies have generally been successful in passing on price increases which has helped to protect margins. However, maintaining margins from here is likely to be more difficult as the cost of doing business for many companies continues to rise at elevated levels (especially wages and rent), with company pricing power diminishing as consumers become increasingly challenged with the higher cost of living and increased interest costs.

The recent rally in the stockmarket has the S&P/ASX200 entering 2024 at its 12-month high PE ratio, however market expectations for company earnings growth for 2024 are not demanding, and could even surprise on the upside due to buffers such as the impact from the spike in migration and big spending baby boomers. As the year progresses and it gets closer to the point of the first rate cut, share prices are likely to look through any economic softness which could set the stage for another constructive year for the equity market overall.

From a sector perspective, we continue to prefer insurers over banks given the insurers’ superior earnings profile and remain cautious on consumer discretionary names as we believe a better-than-expected Christmas trading period has been priced in.

On the resources front, there are positive signs for iron ore as China steel production remains robust and various stimulatory measures continue such as the recommencement of the Pledge Supplemental Lending operation. Last month, this injected nearly $50 billion of low-cost funds into policy orientated banks to support projects such as affordable housing and infrastructure. However, given the strong rally in iron ore exposed names, we are currently broadly neutral this space.

Across the portfolios, we remain negative on lithium names given short term oversupply issues, however the recent falls may provide buying opportunities as we remain positive on the sector on a longer-term view. Overall, we continue to maintain low net exposure to the Sage Groups to limit exposure to unpredictable macro risks. As always, the portfolios are well diversified, liquid and positioned to weather the myriad of unknowns.

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.