Performance and market insights - November 2023

Market Insight
December 18, 2023

Performance summary

The CC Sage Capital Absolute Return Fund returned -1.03%* in November versus the RBA Cash Rate of 0.35%.

The CC Sage Capital Equity Plus Fund returned 4.14%* in November, underperforming the S&P/ASX 200 Accumulation Index by -0.89%, which returned 5.03%.

The S&P/ASX 200 Accumulation Index rallied 5% in November driven by a 50 basis point (bp) fall in long term bond yields despite the RBA lifting rates by another 25 bps. US equities were even stronger with the S&P500 up 9% on the back of more benign inflation and commentary from US Fed Chairman, Powell indicating the possibility of rate cuts in 2024. Commodities were mixed with oil falling 5% on weaker Chinese Purchasing Managers' Index (PMI) and inventory data, and iron ore rose 8% as China’s crude steel production remains robust. Quarterly results and commentary at AGMs were mixed with the banking and financial side of the economy weak, but companies in the real economy such as building still benefiting from a backlog of work. All Sage Groups^ ended in positive territory for the month with Growth and REITs being the strongest performers driven by lower bond yields, and Resources being the weakest, dragged down by energy stocks as prices for oil and gas declined.

Portfolio positioning and outlook

The US and Australian central banks have so far been successful in slowing inflation while not pushing the economy into a full-blown recession. Australian wage and jobs data continues to be strong with the unemployment rate at a very low 3.7% and house prices back up to near record highs, despite 13 interest rate rises. This, combined with migration driving population growth of over 2% this year and the boom in superannuation and interest benefits being received by senior Australians, is helping to prevent a collapse in consumption. At 5.3% trimmed mean inflation has come down from its highs, but is still above target, prompting RBA Governor, Bullock to maintain a hawkish rhetoric indicating further rate hikes in 2024 are possible if the decline doesn’t continue. In the US, inflation has continued to moderate, with core Personal Consumption Expenditures (PCE) inflation sitting at 3.5%, although this is still substantially above target. With the easy gains of normalising goods inflation having been made and still tight labour markets, expectations of rate cuts next year may prove to be premature. Nevertheless, we expect significant volatility around the global inflation trajectory as markets attempt to price the relative likelihood of soft versus hard landings.

After several years of earnings being distorted by the lockdowns associated with Covid-19, the outlook is returning to a semblance of normalcy. Winners and losers among retailers, healthcare and travel are washing through. However, the lingering effects of inflation and higher interest rates are still being felt acutely in poor housing affordability. Despite strong population growth and tight rental markets, the outlook for housing construction and associated retailing looks challenged at best. Similarly, across consumption sectors there are clear divergences between younger highly geared households cutting back and older wealthier ones spending more on leisure and travel. Associated dynamics are occurring in the banking sector where low book growth, competitive pressure on net interest margins and increasing compliance and technology costs are weighing on profit growth.

In commodities, we remain cautious on lithium stocks in the short term as supply appears to have been coming on faster than demand growth and supply chains still appear overstocked. We are more neutral on iron ore as Chinese steel production has remained reasonably robust with the aid of exports and policy easing measures. Oil and gas have been weaker across the year, mainly as stronger onshore US production has offset the impact of Saudi cuts, but with ongoing geopolitical tensions and prices having pulled back, it remains an attractive area for risk diversification.

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.