By now most investors are tiring of their inboxes being filled by sell-side economists and strategists talking about reflation, how much more optimistic they are relative to consensus, and for how much longer the reflation trade will persist.

To be clear, there were very few people talking about a strong V-shaped recovery this time last year. Indeed, a scan of the forecasts of leading sell side economists in April 2020 shows consensus* forecasts of 3% for the CY21 for Australia and 3.8% for the USA.

Indeed, peak pessimism was not reached until September 2020, when economic growth downgrades ceased and modest upgrades commenced. Currently, consensus for CY21 has risen to 5.7% in the USA and 4.4% for Australia.

By contrast, our forecasts for the US in 2021 - which we published in mid-April 2020 - was 6.5% (represented by the cross in Chart 1). For Australia (Chart 2) we were even more optimistic, forecasting 7.0% economic growth. As we moved through 2020, it was clear the expected contraction in economic growth in 2020 was going to be less than expected and hence we reduced our forecast rebound in Australia's economic growth in 2021 to a still sizeable 6.0%.

Much of our more upbeat analysis was based on: (i) the nature of the shock being more akin to a natural disaster; (ii) the quantum of the fiscal packages; (iii) excess credit growth; (iv) the outlook for vaccine development; (v) and the prospect of pent up demand.

One year on, the clambering to upgrade growth estimates has only intensified. Over the past two months, consensus forecasts for Australian economic growth in 2021 have been upgraded a further 0.7%. In the USA the revision over the past 2 months is a remarkable 1.6%.

In other words, consensus economic growth forecasts are now more realistic, but the upward revisions are not yet complete and there is still scope for consensus to upgrade economic growth further in coming months to nearer our long held forecasts.

Indeed, when we compare our forecasts for economic growth to consensus there are now examples of economic growth forecasts for the US that exceed our forecast. The most notable is the Bank of Canada's recent upgrade of 2021 US economic growth from 5.0% to 7.0%. Given the US is Canada's largest trading partner, the Bank of Canada has a strong incentive to get its US outlook near the mark! The Bank of Canada also lifted its global growth forecast in 2021 to 6.8%, which is 1.25% higher than any global growth year since IMF data commenced (1980) and 0.8% above the IMF's April forecasts!

However, one of the largest gaps between consensus and our own 2021 forecasts is for Australia. We remain 1.5% above the consensus forecast and around 1% above the most optimistic forecaster. Given there remains an appreciable gap between our forecasts and other forecasters, it's reasonable to ask what supports our optimism?

1. Australia's data continues to consistently beat economic forecasters

Charts 3 and 4 show our calculation of economic data surprises for economic activity and inflation relative to consensus forecasts (US vs Australia). A positive reading represents economic data beating consensus expectations weighted by data importance and time decay. Clearly, Australia's economic activity data is not only continuing to beat increasingly upbeat economic forecasts, the positive data surprises are larger in Australia.

2. Real economic growth is expanding at pace

Secondly, our nowcasting techniques (Chart 5) for gauging in real-time how fast the economy is expanding already suggest that real economic growth is expanding at 4%yoy by the end of 1Q2021. That is, we are about to see a very solid 1Q GDP print for Australia that we expect will be the catalyst for a further upgrade of the consensus view.[1]

Clear trends and themes have emerged in investment markets as a result of the pandemic and its effect on discretionary and non-discretionary spending and where we live. Exploring these themes was the focus of Sage Capital's recent webinar, which delved into how these dynamics are playing out in Australia and around the world.

Bricks and mortar drives markets

The webinar provided perspectives on the nature of the current housing boom and how long it can continue. It explored a related theme of consumer spending and how it has shifted one year after the first COVID lockdowns.

The housing market cycle was the main theme during the session, given low interest rates the world-over have stimulated a boom in residential property markets. Detached dwellings in particular have benefitted, as people seek more space at home when they are prevented from travelling too far from their homes due to stay-at-home orders and border closures.

As a result, apartment prices have not experienced the same gains as stand-alone homes. Flagging demand for inner-city properties is also the result of many people embracing the opportunity to move out of the city given the widespread adoption of the work-from-home way of working.

Inner city apartments notwithstanding, the booming housing market isn't just good news for property, it also has flow-on effects to other sectors. The strong residential real estate market has translated to high demand for mortgages, which is good news for lenders and also service providers such as mortgage insurers.

It's worth noting the lending sector is strong for another reason. At the start of the pandemic, many lenders made very large bad debt provisions, assuming borrowers would be stretched as a result of the pandemic leading to shut downs in many areas of the economy. These provisions, at least in Australia, have proven to be too generous, largely due to government stimulus programs helping borrowers to meet their obligations and taking the pressure off lenders.

While this has been good news for financial institutions and also the housing market, concerns are emerging about whether the market is running too hot. Governments and regulators are also worried about housing affordability. As a result, some countries are taking action to moderate house price growth.

As examples, New Zealand has taken steps to cool its housing market and Canada has recently tapered its bond-buying program. The Reserve Bank of Australia has not given any indication it's going to steer away from its lower for longer approach to interest rates. But that does not mean investors should not be informed by actions in other jurisdictions. It's a trend of which our portfolio managers should be aware, as these same trends could play out in other markets.

What's happening at the checkout?

Turning to consumer spending patterns, one of the fundamentals we're always curious about is the connection between housing market movements and consumer spending, and how this may play out across the investments in our portfolios.

Retail spending is highly correlated with house prices. So when house prices are strong, we're much more likely to buy a new car, renovate and buy furniture and appliances. But this trend often reverses as interest rates and home loan repayments rise, and people are less inclined to spend money on non-discretionary items.

We are also closely watching shifts in consumer spending as a result of the pandemic, investigating whether and when these shifts normalise and who the winners are in the short- medium- and long-term.

When it comes to discretionary and non-discretionary spending, consumers will look for alternate ways to spend their money if recreational travel remains off the table. Which is why Sage Capital has been scouring the market for retailers with a real digital capability that may have been so far largely overlooked by investors.

Retailers that are strong omni-channel marketers that have a demonstrated ability to do online fulfilment are well placed, especially those with strong national store networks, so they can easily deliver orders on the same day they are placed.

This is a real advantage over online competitors that rely on big fulfilment centres for retail distribution. Achieving same day delivery is going to be very difficult for these operators and require significant capital expenditure to maintain their competitive position.

Our ability to add value

At Sage Capital, we understand these trends and aim to position the portfolio accordingly. These insights help us form a view on when to rotate in and out of stocks exposed to the housing market and the retail sector.

As for the future, there are still many unknowns. These include the COVID-19 vaccination rollout in Australia and around the world and how that may affect international border openings and the future of international travel. The way these themes play out has implications for any investments exposed to the movement of people and goods across borders.

These are just some of the themes we have been investigating at Sage Capital and that inform our approach to portfolio management. We look forward to sharing further insights form our webinars in the future.

As a long short manager, the investment team is able to use its shorting powers to benefit from a falling market. At the same time, it can go long stocks when markets rise. This investment style, and the diversified nature of the portfolio, helps mitigate risks and provides protection when markets correct.

Sage Capital is an Australian long-short equities manager with two investment strategies, the CC Sage Capital Equity Plus Fund and the CC Sage Capital Absolute Return Fund. Long-short strategies are often popular with investors when traditional asset classes are challenged. It's a strategy that aims to provide consistent returns through market cycles.

Both Funds have performed well for investors over the one year to 31 March 2021. The CC Sage Capital Equity Plus Fund delivered a net return of 43.59%* and the CC Sage Capital Absolute Return Fund delivered a net return of 9.98%*, outperforming their respective benchmarks for the same period by 6.12% and 9.89%.

*Past performance is not indicative of future performance.

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