Performance and market insights - August 2023

Market Insight
September 19, 2023

Performance summary

The CC Sage Capital Absolute Return Fund returned -3.23%* in August versus the RBA Cash Rate of 0.35%.

The CC Sage Capital Equity Plus Fund returned -2.55%* in August underperforming the S&P/ASX 200 Accumulation Index by -1.82% which returned -0.73%.

The S&P/ASX 200 Accumulation Index was down -0.73% in August as the company reporting season weighed on it with consensus earnings per share (EPS) revisions of -3.6%. Total forward EPS revisions are now -9.3% calendar year to date. The most consistent theme throughout reporting season was higher than expected capital expenditure, impacting stocks across various Sage Groups, from mining to telcos to waste management companies. Commodities were on average higher, with iron ore and oil both up modestly while Australian inflation continued its downward trajectory printing at 4.9% year on year in July.

The strongest Sage Group^ was Domestic Cyclicals driven by building stocks and retailers which produced better than expected results versus low expectations. The weakest Sage Group was Defensives which proved far less resilient than one would have imagined, with most stocks within the sector underperforming in a weaker market.

Portfolio positioning and outlook

Reporting season has come and gone for another year, with continued earnings downgrades across the board but an expectation that the world and Australia in particular, may yet avoid the recession that the bond market has been warning about for some time. Globally, inflation appears to be bottoming out across many developed markets. Oil, which was the initial trigger to the inflationary spike in 2021, has continued its march upwards

since June 2023. This will most likely flow through to broader goods inflation over the next three to six months. During the last 12 months, equities have enjoyed the dual tailwind of inflation falling and better than feared growth, but with oil prices rallying and services inflation still elevated, this dynamic is becoming increasingly fragile, and we expect tougher conditions going forward.

In Australia, the consumer is slowing but is so far performing better than feared. This appears to be driven by the over 55 age cohort, who is benefiting from the combination of higher asset prices and higher deposit rates. The fixed rate to variable rate mortgage transition, although now past its peak, still has a way to go and pressure on younger more indebted consumers will continue to build over the next year. The Australian labour market remains tight, but like the US there are some signs that this tightness is easing, both hours worked and new job listings are weakening.

During reporting season, retailers bounced on the view that this is the bottom for the consumer. However, we disagree and remain cautious on the sector, particularly areas exposed to housing. A gradual slowdown is coming, whether this forms a technical recession is hard to say at this point.

Commodities have started to recover during the last couple of months driven by oil and iron ore. Oil rallied on tight supply as both the Saudis and Russians extended production cuts, while US shale output continues to slow and the US Strategic Petroleum Reserve is now no longer being sold.

OPEC+ seems intent on maintaining higher prices and years of under investment creates little slack elsewhere. We continue to like this dynamic and hold an overweight position in oil and gas. Against this, we are heading into a period of seasonally strong supply for iron ore with worsening spreads for steel producers. Steel exports are already at record levels and with Chinese local government balance sheets in severe stress, it’s viewed as unlikely there will be a material increase in domestic steel consumption.

Overall across the portfolios, we retain a preference for stocks with strong pricing power able to drive their own growth independent of the economic cycle. We continue to maintain low net exposure to the Sage Groups to limit exposure to unpredictable macro risks. 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.