3 October 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 adverse growth
effects from 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 are under
threat from withdrawal of unprecedentedly supportive monetary conditions and
the erosion of real incomes by surging inflation. While heavily hyped
energy storage innovations continue to stoke investor 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. New tax
incentives will encourage US domiciled investors to eschew foreign
development locations in favour of investments in US mine 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
A small majority of portfolio stocks moved lower in price during the
week. Advancing stocks clearly outpaced declining stocks within the Phase
III category. A clear majority of Phase I stocks were weaker despite their
overall relatively strong return. Investment returns from Phase I companies
are the most threatened by weaker speculative capital flows but they
continue to benefit from 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, 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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