Performance and market insights - February 2024

Market Insight
March 14, 2024

Performance summary

The CC Sage Capital Absolute Return Fund returned -0.37%* in February versus the RBA Cash Rate of 0.34%.

The CC Sage Capital Equity Plus Fund returned 0.48%* in February underperforming the S&P/ASX 200 Accumulation Index by 0.31% which returned 0.79%.

The S&P/ASX 200 Accumulation Index reached a new high rising +0.79% in February. Company profit reports dominated stock price moves in February with more beats than misses due to low expectations and generally better than expected profit margins.

The strongest Sage Groups^ in the benchmark were Domestic Cyclicals (+10%) driven by a takeover offer for CSR (ASX: CSR +27%) and discretionary retailers, rallying after delivering better than feared results. REITs (+5%) contributed positively mainly due to Goodman Group (ASX: GMG +17%) and HMC Capital (ASX: HMC +14%) both of which delivered strong results and are harnessing the exploding data centre opportunity. The weakest parts of the market were Resources stocks on the back of concerns about the Chinese economy with the iron ore price down 12%. The S&P/ASX 200 Resources Index fell -6% with the Sage Gold Group* down -7% and the Sage Resources Group down -6%.

Portfolio positioning and outlook

After a policy pivot at the end of last year, the US inflation outlook seems more persistent and US Federal Reserve officials have been busy walking back expectations of imminent interest rate cuts. Recent inflation numbers have been a little higher than expected with goods inflation stabilising and services inflation persisting, driven by tight labour markets and strong wages growth. Bond yields have retraced higher as a result, but to date this has had little impact on the equity market. One reason for this has been the strength in profits which was apparent through the recent reporting seasons in the US and Australia.

Nvidia has been lifting the market to new highs with consistent profit surprises driven by demand for AI chips, but profits across the broader market have generally been solid. The other key driver has been easing financial conditions. This has occurred despite the increase in short term interest rates, likely the result of a very easy fiscal position and the run down in the Treasury General Account in combination with a solid economy and strong profit generation. This has manifested itself in falling credit spreads, strong equity prices and surging prices for gold and bitcoin. These liquidity dynamics might pull back a little as the US Treasury needs to start funding those large deficits again.

China is currently going through its annual policy setting process, targeting GDP growth at 5%. Without more direct measures to stimulate the property sector and sluggish consumer sentiment this may prove difficult to achieve. Our outlook for iron ore is reasonably neutral as weaker domestic trends in China are being offset by strength in the rest of Asia and a lack of new supply growth. Lithium remains very volatile after a collapse in prices last year as electric vehicle demand growth was slower than expected and a large destocking cycle. Some supply has been cut, but there are plenty of new low-cost projects that are likely to keep the market in surplus. After a short-term bounce for restocking, the medium-term trends remain bearish for lithium.

The domestic economy is holding up better than expected which has been reflected in better trading results from retailers, many of whom have been boosted by the persistence of higher margins. While this is still at risk of normalisation, the stage 3 tax cuts in the middle of this year are likely to deliver a significant boost to consumption. The banking sector has been running strongly on a more sanguine economic outlook and the prospect of interest rate cuts. They are now looking quite 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. Our preference remains with the insurers, where the insurance margin cycle has further to play out.

Overall, we continue to maintain low net exposure to the Sage Groups to limit exposure to unpredictable macroeconomic risks.

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.