5 September 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 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
Phase III stocks were unusually weak in the past week. Phase I and
Phase II stocks were split between gainers and losers. Phase I stocks
dominated the contributions to the positive investment returns. Investment
returns from Phase I companies are the most threatened by tighter controls
on 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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