Performance and Market Update - August 2020

Market Insight
September 10, 2020

The equity market continued its positive trajectory, finishing up 2.8% in August, a bounce of 34% off the March lows, but remains in negative territory for the year to date.

As a market neutral strategy that aims to provide an uncorrelated source of returns whilst eliminating equity market exposure, the CC Sage Capital Absolute Return Fund returned 0.09% after fees, outperforming the RBA Cash Rate by 0.08% during the month.*

As an active extension strategy that aims to always retain exposure to equity markets, the CC Sage Capital Equity Plus Fund returned 2.79% after fees, underperforming the S&P/ASX200 Accumulation Index by 0.05% during the month.*

In August, the S&P/ASX 200 Accumulation Index was up 2.83%, with liquidity and low interest rates driving technology and growth stocks in particular.

Market review

The reporting season saw significant volatility across the market with positioning seemingly as important as the quality of results. Some of the interesting trends were strength across the retailing space, the move to online and income support from the government, and early super withdrawal enough to offset the move higher in unemployment. Many businesses had some level of disruption though, such as a slowdown in elective surgery in healthcare or an exposure to leisure and hospitality that was affected by lockdowns. None were quite as impacted as the travel sector though, which largely ground to a halt. The mining sector sailed through unaffected, while the significant exposure to iron ore was a material boost to profits and dividends.

We are approaching a very interesting juncture in the outlook for markets. Prospects of a successful vaccine for COVID-19 have increased significantly in recent months. There are now around 200 vaccines in development and a dozen of those are in late stage clinical trials. We see a markedly increased chance of having a successful vaccine candidate by early 2021.

This has significant implications for the earnings and returns of a range of companies. Humans are highly adaptive and have responded to coronavirus lockdowns by materially shifting their spending patterns. They are spending less money on travel, eating out and socialising and much of that spending has shifted into new areas including home office, homewares and electronics. This has been confirmed in the recent reporting season where retailers with an exposure to these spending patterns, in particular those with a meaningful online presence witnessed a boom in sales. Conversely, those companies with exposure to travel or transportation didn’t have earnings to report. While unemployment has spiked, government stimulus, and rent and loan deferrals have insulated earnings for significant parts of the listed market.

A vaccine is likely to see life return largely towards the “old normal” and for spending patterns to reverse. However, we are also likely to see some more permanent changes in behaviour, with the increased acceptance of working from home probably the most significant. This has the potential to drive significant long-term shifts in demand for CBD office space, transportation and the viability of related businesses. However, it will be difficult to disentangle these shifts in spending patterns and structural changes from the impact of government stimulus and support measures, and a recovery from lockdowns and social distancing. In the short-term, the market is more likely to focus on recovering earnings and we maintain some exposure to affected industries such as travel and hospitality.

Portfolio Positioning

Another potential impact of positive vaccine news is a rotation away from high priced technology shares. We have previously discussed the exponential impact that falling real interest rates have on the valuations of companies with high growth rates. Conversely, it doesn’t take much in the way of positive growth news and slightly higher bond yields to drive a significant valuation correction across the market. While we are wary of shorting companies that are delivering good earnings growth, we also don’t want the portfolio exposed to a significant valuation rotation. As such, we are maintaining a neutral stance on average across the growth stocks and have also taken some profits in our long gold position.

* Past performance is not an indicative of future performance.