3 August 2020
Where are we in the Cycle?
Of the five PortfolioDirect cyclical guideposts, two are ‘red’ and three
‘amber’. ‘Trough Entry’ has been retained as the description of the
cyclical positioning with ongoing downside risk to global growth
expectations and a metal price term structure signaling abundant supplies.
The international policy stance is more supportive but well short of fully
compensating for the impact of COVID-19 remediation measures. China’s
improved growth momentum leaves the economy with ample excess capacity. The
recent US dollar weakening is helpful but remains at risk to COVID-19
uncertainties.
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Market Directions
The balance of near term risks to sector investment returns remains
negative although credit markets have regained their composure. Rebounding
equity prices in the leading US market are optimistically anticipating a
quick resolution to earnings uncertainty and return to growth.
Pre-coronavirus global growth rates would have already been insufficient to
absorb growing mine supplies. Even with production losses, market balances
will now tilt more firmly into surplus. Expectations of medium term
deficits supporting sector valuations will not be realised. A return to
1990s style sector investment performance - when modest sector equity price
gains occurred in the midst of sometimes highly disruptive macro conditions
- remains possible after public health risks are brought under control. A
weakening US dollar and unprecedentedly low bond yields are pushing gold and
industrial metal prices higher.
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Portfolio Performance and Positioning
Gains were made in all three development classes in July although Phase
I stocks lost ground at the end of the month. Phase III stocks continue to
reflect the ebb and flow of institutional money as well as popular
sentiment. Phase II companies face the greatest risks from potential demand
shrinkage as they are the most indebted companies in the sector.
Exploration companies retain the strongest leverage to an improvement in
market liquidity because of their ongoing need to replenish working
capital. Portfolio models remain biased to the Phase I stock category with
maintenance of a large cash position reflecting ongoing downside 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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