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The CC Sage Capital Absolute Return Fund returned -0.76%* in March, underperforming the RBA Cash Rate which returned 0.35%.
The CC Sage Capital Equity Plus Fund returned -3.85%* in March, underperforming the S&P/ASX 200 benchmark by -0.46%, which returned -3.39%.
During a month where few companies were reporting earnings and the domestic and global stock markets had sold off heavily from the news of US tariff concerns, risk management became the focus rather than stock specifics. The largest downward moves occurred in high PE, technology and consumer stocks, with a sudden momentum reversal that was difficult to completely re-align for. Nonetheless, the Sage Group# portfolio management process worked, with broad neutrality to Growth and Domestic Cyclical stocks leading to a neutral outcome in these sectors from an alpha point of view.
The strongest alpha came from Sage Group, Global Cyclicals, which was driven by a short position in James Hardie (ASX: JHX -24%) which fell post an announcement of a cash and script transaction to combine with US decking company AZEK. The transaction was received with scepticism due to the price paid and the economics of the deal relying heavily on revenue synergies.
On the negative side, the Resources Sage Group detracted, driven by a short position in Rio Tinto (ASX: RIO +5%) which outperformed as iron ore prices remained resilient in China, and a long position in BlueScope Steel (ASX: BSL -12%) which fell as peers in the US reported weaker than expected results and pricing cuts. The Domestic Cyclicals Sage Group was dragged down by a long position in Ampol (ASX: ALD -11%) as refining margins continued to weaken throughout the month causing consensus earnings downgrades.
The market outlook for the first quarter of 2025 has shifted significantly over the last quarter as the policies of the new Trump administration become clearer. The two big changes are tariffs and public expenditure cuts by the Department of Government Efficiency (DOGE) team. This combination of anew sales tax in the form of tariffs and government spending cuts could reduce net expenditure by US$1.5 trillion or around 5% of GDP. Without any offsetting personal or business tax cuts (and there are only extensions of the first President Trump tax cuts on the table) this could push the US economy into recession. The US Federal Reserve (US Fed) is also hamstrung by inflation being above target and tariffs causing a short-term spike in the price level. This limits the ability of the US Fed to make pre-emptive interest rate cuts when they are worried about inflation becoming embedded in longer term expectations.
The US government administration has clearly stated that its goal is to get the trade and budget deficits under control and long-term interest rates down, with a short term hit to growth and the stock market being a necessary pain.
The market has quite quickly priced in a contraction of earnings, but risk appetite has also shifted from euphoria to fear. This has seen valuation multiples contract across the market, but they are falling from historically elevated levels and valuation support is not obvious. Within the market, there has also been a significant reversal in momentum and outperformers have generally fallen the most.
Another uncertainty will be how other countries globally react to the US tariffs. Already, China has announced retaliatory tariffs against the US, but we have yet to see the sort of stimulus plans required to offset any growth impacts. Similarly, the ability of countries outside of the US to manage any growth shocks will have an impact on second and third order effects, shaping the likelihood of a broader global recession and the impact on company earnings.
Across the Sage Capital portfolios, we have generally been reducing beta and risk in recent weeks in response to the rising threat of US tariffs. This has seen the portfolio beta move to a minor negative position and material profit taking in outperformers. However, the size of the tariffs imposed has exceeded expectations, leading to a sharper market sell-off than anticipated. While this has contributed to some minor underperformance, the primary focus remains on maintaining a risk neutral, well-controlled portfolio - positioning the portfolios to take advantage of the significant trading opportunities we expect to emerge as the market volatility subsides.
The portfolios are constructed using Sage Groups to minimise macroeconomic risk by maintaining low net exposure across diversified, liquid investments, providing potential resilience in an uncertain environment.
Read the monthly reports for additional commentary.
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