2 May 2022
Where are we in the Cycle?
Of the five PortfolioDirect cyclical guideposts, one is ‘green’, three
are flashing ‘amber’ and one has turned ‘red’. The central bank liquidity
surge and accompanying fiscal expansion to counter the effects of anti
COVID-19 government lockdown mandates is being reversed. Sluggish
pre-pandemic growth drivers have resumed their primary roles after having
been concealed through much of 2021 by base effects distorting the pattern
of economic activity. Supply side constraints in metal markets remain a
positive influence on prices. The cyclical positioning has been
characterised as near a peak and at risk of moving into a ‘downswing’ phase.
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Market Directions
The speculative capital flows connected to retail investors and
supporting sector equity prices is being threatened by the withdrawal of
unprecedentedly supportive monetary conditions, surging inflation and the
risk of a widening war in Europe. While heavily hyped energy storage
innovations are stoking interest and favourably impacting sector funding,
they are yet to affect demand meaningfully. Equity prices are receiving a
relatively moderate boost from higher metal price risk premiums arising from
fears of market disruption due to geopolitical threats. 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
Losses again occurred across all three development categories with a
large majority of stocks producing negative returns. Uranium related
investments continued to drag the Phase I and Phase II categories lower as
the uplift in the commodity price seemed to stall at a sufficiently high
price to attract new supplies. Investment returns from Phase I companies
are threatened by the withdrawal of support by central banks for speculative
capital flows but they continue to benefit from discovery opportunities
uncorrelated with market conditions. Although further along the development
path, 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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