For the month of June, the Sage Capital portfolios remained relatively neutral across the Sage Groups^ and avoided exposure to style rotations and broad systematic macro risks.
The CC Sage Capital Absolute Return Fund delivered a net return of -1.98%* and the CC Sage Capital Equity Plus Fund delivered a net return of 1.27%*, underperforming their respective benchmarks by 1.98% and 0.99% for the month of June.
The S&P/ASX 200 Accumulation Index finished up 2.26% in June. During the month, the U.S. Federal Reserve indicated that there may be a tightening of rates earlier than anticipated given the strong economic recovery and outlook for higher inflation. This resulted in a flattening of the yield curve and a drop in the 10-year bond yield which is a key positive driver for the performance for many stocks in the Sage Growth Group (+5.3%) and REIT Group (+5.5%). Within Growth, high growth Technology stocks were particularly strong. In contrast, the Gold Group (-13.3%) fell sharply as gold is a commodity that is highly sensitive to inflation expectations and hence bond yields. The gold price did disconnect a little from real yields during the month though, which in our view should have been more supportive.
The global economy is approaching an inflection point with central banks beginning to pivot away from further monetary accommodation. This reflects a stronger recovery than expected as vaccines have enabled a faster reopening of the global economy. The strong growth, aided by low rates and fiscal support, has combined with some capacity constraints in the economy to drive a sharp bounce in inflation. The official line from central banks is that this is the transitory cycling of some Covid-19 impacts, but inflation expectations are being upgraded. We believe that whether inflation proves to be transitory or not, it will be the key driver of markets over the next year. With the risk that inflation persists and central bank tapering of QE begins in earnest, there is a risk that the yield curve begins steepening once again.
The spread of the more infectious Covid-19 Delta variant and other mutations of Covid-19 have generated some uncertainty over vaccine efficacy. While it appears that most vaccines are less effective against the Delta variant, they do appear to still provide strong protection against infection and very good protection against serious illness and death. That said, further mutations that challenge vaccine efficacy could derail the current reopening trend across the global economy.
Australia continues to experience snap lockdowns and border closures and the vaccination rollout has been slow. The recent spread of the Delta variant has provided a renewed impetus to vaccination efforts with a clear acceleration occurring. The RBA has recently begun pivoting away from its commitment to ultra-loose monetary policy. The ending of the term funding facility for banks and limiting the duration of bond purchases should begin to see fixed mortgage rates rise and begin to temper growth in the housing market. The services sector is rebounding strongly with forward employment indicators showing ongoing strength and skilled labour shortages becoming an issue.
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