Performance and market insights - March 2024

Market Insight
April 18, 2024

Performance summary

The CC Sage Capital Absolute Return Fund returned 2.85%* in March, outperforming the RBA Cash Rate which returned 0.33%.

The CC Sage Capital Equity Plus Fund returned 4.26%* in March, outperforming the S&P/ASX 200 Accumulation Index which returned 3.27%.

The S&P/ASX 200 Accumulation Index rose 3.27% in March as Australian 10-year bond yields fell 17 basis points and the market factored in diminishing odds of a recession. Commodities were mixed with gold prices up and strong demand for physical gold. Oil was strong on a more optimistic demand outlook and supply discipline by OPEC. Iron ore became weaker on concerns around the health of the Chinese economy and a slow ramp up in steel production. All Sage Groups^ ended in positive territory.

The strongest contributors to the index return were Sage Groups Gold (+16%) as the gold price hit a record high, REITs (+10%) supported by a fall in bond yields and Global Cyclicals (+7%) driven in large part by Webjet (ASX: WEB) which was up 27% after an upbeat investor day result. The weakest parts of the market were the Sage Group Growth (+1%) as many quality names gave back some of their strong gains in February, and Defensives (+2%).

Portfolio positioning and outlook

Equity markets remain buoyant, underpinned by increasing confidence that the world is moving towards an easing cycle. This confidence is further supported by macroeconomic data points related to inflation and the labour market. Market participants are heavily scrutinising comments from US Federal Reserve Board members, seeking clues into the potential timing of interest rate cuts.

In Australia, an orderly slowdown appears to be under way, although the impact of income tax cuts in the middle of this year could provide a boost to spending. Corporate profit margins remain healthy and surprisingly resilient after their Covid-19 era boost. Balance sheets are strong and while there are some signs of mortgage stress developing, households generally have substantial buffers.

While corporate earnings look solid, the risk for markets is that they’ve now priced in an overly optimistic path for interest rates. Recent inflation prints have shown a stickiness in core services inflation. Disruption to the Red Sea stemming from the shipping saga and higher oil prices both have the potential to tick goods inflation higher. Central bankers and bond markets have been winding back their interest rate cut expectations, but this has yet to be reflected in equity markets which poses a near term risk.

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 oil but more cautious on iron ore given the weakness in the Chinese economy. Lithium continues to exhibit high volatility due to a slowdown in electric vehicle (EV) demand. Currently, we maintain a neutral stance in this sector.

One area we are monitoring closely is the acceleration of generative Artificial Intelligence (AI). We currently have exposure to this thematic via a long position in Goodman Group (GMG) which is involved in building the infrastructure for datacentres.

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.