3 July 2023
Where are we in the Cycle?
Of the five PortfolioDirect cyclical guideposts, three are flashing
‘amber’ and two have turned ‘red’. Sluggish pre-pandemic productivity
growth, now exacerbated by war in Europe, trade restrictions and central
bank anti-inflation measures, have re-emerged as constraints on demand
expansion. The post-2020 central bank liquidity surge is being reversed,
with an increasingly evident effect on bank solvency and capital
availability. A rising US dollar, one previously overt negative factor, has
stalled after a modest reversal of prior gains. Supply side constraints in
metal markets have become less severe. The cyclical positioning has been
characterised as a ‘downswing’ phase. More...
Market Directions
Withdrawal of unprecedentedly supportive monetary conditions and erosion
of real incomes by surging inflation have stemmed speculative capital flows
connected to retail investors. Professional money, by continuing to discount
a recession, provides some market relief. While heavily hyped energy
storage innovations are stoking sector interest, they are yet to affect
metal demand meaningfully. Fears of market disruption due to geopolitical
rivalries have raised metal price risk premiums without correspondingly
beneficial impacts on related equity valuations. New tax incentives are
encouraging relocation of mine development and downstream processing
capacity. 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
Phase I stocks recouped some recent losses in the past week to post a
modest gain for the month. Phase II stocks lost ground while a large
majority of Phase III stocks had price increases. Volatility derived from
uncertainty about market liquidity, driven by central bank policies,
remained evident. Phase I returns remain the most threatened by weaker
speculative capital flows, and would be a primary beneficiary of any policy
easing, but continue to deliver value-enhancing discovery opportunities
uncorrelated with market conditions. Although further along the development
path and closer to profitability, Phase II companies carry risks arising
from their indebtedness and heavy reliance on execution success in sometimes
unfamiliar markets. 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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