Performance and market insights - October 2023

Market Insight
November 14, 2023

Performance summary

The CC Sage Capital Absolute Return Fund returned 1.87%* in October versus the RBA Cash Rate of 0.36%.

The CC Sage Capital Equity Plus Fund returned -3.06%* in October, outperforming the S&P/ASX 200 Accumulation Index by 0.72%, which returned -3.78%.

The S&P/ASX 200 Accumulation Index fell -3.78% in October on geopolitical fears with the outbreak of war in the Middle East, as well as a rise in 10-year bond yields as the market factored in higher debt issuance by governments that wouldn’t be purchased by central banks, as well as more persistent inflation. Australian 10-year bond yields rose 44 basis points (bps) to 4.92% and US 10-year bond yields rose 33 bps to 4.90%. Oil fell over the month on global growth concerns, despite the conflict between Israel and Palestine, while gold rose due to safe haven demand. All Sage Groups^ other than Gold ended in negative territory. Gold benefited from its safe haven status with the weakest Sage Groups being those most exposed to rate sensitive, leveraged or cyclical companies – Global Cyclicals, Growth and REITs.

Portfolio positioning and outlook

The market continues to be buffeted by macroeconomic data points and driven by the expected trajectory of interest rates. The economy and the consumer have proved to be far more resilient to rate hikes than was expected, which is evidenced by strong spending, low unemployment and persistent inflation. After four months of being on hold, the Reserve Bank of Australia hiked rates in November on the back of a run of strong economic data and an upward surprise in inflation. The outlook commentary was still dovish, but we continue to see further tightening as more likely than not given inflation is still too high and likely to remain sticky, particularly in categories that are sensitive to labour costs. The end game of a more significant cyclical downturn seems increasingly likely, although the market continues to keep looking through it.

This combination of inflation well above target levels, a blowout in real interest and the potential for a growth slowdown leave us very cautious on equity market valuations. Some softer US economic data and a positioning unwind has given some short-term reprieve from higher yields and allowed REITs and leveraged infrastructure names to rebound from lows, but we see a risk that the broader market is ignoring a structural shift up in real interest rates and that the high multiples being paid for many growth and defensive stocks are unsustainable.

In commodities, we remain positive on oil as demand remains robust, inventories continue to fall and production cuts from Saudi Arabia and Russia remain until at least year end, however geopolitical events continue to drive a lot of volatility. We have become more 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.

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 macroeconomic risks. As always, 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.