1 August 2022
Where are we in the Cycle?
Of the five PortfolioDirect cyclical guideposts, one is ‘green’, one is
flashing ‘amber’ and three have turned ‘red’. The central bank liquidity
surge and accompanying fiscal expansion, designed to counter the adverse
growth effects of anti-COVID lockdowns, are being reversed with a marked
upward impact on the US dollar. Sluggish pre-pandemic growth drivers, now
exacerbated by the Russian-Chinese attack on Ukraine, have resumed their
primary roles after having been concealed through much of 2021 by distorted
patterns of economic activity. Supply side constraints in metal markets
remain a positive influence on prices. The cyclical positioning has been
characterised as having commenced a ‘downswing’ phase.
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Market Directions
The speculative capital flows connected to retail investors and
supporting sector equity prices are under threat from the withdrawal of
unprecedentedly supportive monetary conditions and the erosion of real
incomes by surging inflation. While heavily hyped energy storage
innovations continue to stoke interest, they are yet to affect demand
meaningfully. Fears of market disruption due to geopolitical rivalries have
raised metal price risk premiums without correspondingly beneficial impacts
on related equity prices. Persistence of a 1990s-style investment
performance - when modest sector equity price gains occurred in the midst of
sometimes highly disruptive macro conditions - remains the underlying theme.
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Portfolio Performance and Positioning
Positive weekly returns in the Phase II and Phase III development
categories were offset by weakness among the majority of Phase I stocks.
Uranium exposed stocks made gains. Investment returns from Phase I companies
are the most threatened by the reversal of support for speculative capital
flows by central banks but they continue to benefit from discovery
opportunities uncorrelated with market conditions, leaving them prone to
short term volatility. Although further along the development path and
closer to profitability, Phase II companies remain among the riskiest
investment options due to their indebtedness, heavy reliance on execution
success and need for strong global economic conditions to initiate sales.
Performance within the Phase III category is more likely to be driven by
institutional allocations responding to changing macro conditions.
Portfolio models remain biased to the Phase I stock category with cash
positions reflecting the cyclical risks.
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Stock Reviews and Rating Analysis
PortfolioDirect rating reports analyse the quality and risk
attributes of proposed mineral developments. Rating criteria apply to mining and oil and gas stocks at any stage of
development. PortfolioDirect uses a five point rating
scale to measure the risk adjusted quality of proposed mineral developments
or companies.
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The 'Steak or Sizzle' blog provides summary judgements on
the top performing ASX-listed resources stocks.
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