Performance summary

The CC Sage Capital Absolute Return Fund returned 2.54%* in January versus the RBA Cash Rate of 0.39%.

The CC Sage Capital Equity Plus Fund returned 2.16%* in January outperforming the S&P/ASX 200 Accumulation Index by 0.97% which returned 1.19%.

The S&P/ASX 200 Accumulation Index rose 1.19% in January as inflation data gave the market further confidence that interest rates have peaked. The strongest Sage Groups^ were Yield and Growth, driven by lower bond yields, and Global Cyclicals driven by more positive sentiment around global growth with the weakest Sage Group being Resources, driven by a -6% drop in the iron ore price. Lithium also continued its freefall with Platts spodumene down -13%.

Portfolio positioning and outlook

From a macroeconomic perspective, inflation continues to moderate although the market may have become too optimistic around the prospects of rapid rate cuts. Both the Reserve Bank of Australia and the US Federal Reserve have expressed concerns around the risk of potential resilience of services inflation due to tight labour markets, so greater confidence is required that inflation is moving sustainably back to targets before cutting interest rates. A potential risk to the inflation story is the disruption to shipping around the Red Sea. This has seen a surge in the shipping rates for containerised freight, which while not impacting goods inflation yet, is starting to appear in survey-based measures of pipeline inflation such as the US Purchasing Manager’s Index prices paid component. Any rebound in inflation would limit the ability of central banks to cut interest rates and risk a harder landing for the economy.

The focus for now is on the Australian company reporting season. We expect overall demand to soften over the next six months as the cumulative impact of interest rate tightening and the depletion in excess savings begin to drag on aggregate demand. A slowing trend is already visible in some measures of labour demand although the market remains quite tight. We will be looking for commentary from companies with regard to cost management, particularly labour, in this environment. Stocks sensitive to domestic demand have performed well recently as investors have lowered the probability of a hard landing in Australia. This sets up many companies to have to deliver very good earnings this reporting season to justify their share price appreciation. Those that don’t, are likely to de-rate or at best settle into a period of share price consolidation.

The end of last year saw a strong re-rating of the bank sector as the market began to focus on upcoming interest rate cuts. Historically the banking sector does well in an interest rate cutting cycle as the economy would be coming out of recession and loan losses would be at cyclically elevated levels. This current cycle has been very different with no real stress and banks have been writing back COVID-era provisions for the last few years. An interest rate cutting cycle is likely to put pressure on net interest margins further, as lending rates come down faster than average funding costs due to the banks benefiting from low interest rate deposit funding. Low book growth, an intense competitive environment and continued pressure on net interest margins leaves the sector looking expensive.

Trends across resources are similar to last year. Lithium remains very weak as a slower than expected take-up of electric vehicles has left the market in surplus, while iron ore remains solid despite a weak Chinese property sector as there has been no major new supply and Chinese steel production for manufacturing, infrastructure and exports remains strong. Energy has been rangebound as stronger onshore production in the US has tended to offset supply cuts across OPEC.

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.

• ‍CC Sage Capital Absolute Return Fund monthly report
• CC Sage Capital Equity Plus Fund monthly report

* 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.