5 October 2020
Where are we in the Cycle?
Of the five PortfolioDirect cyclical guideposts, two are ‘red’, two are
‘amber’ and one is green. ‘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. China’s improved growth momentum leaves the economy with ample
excess capacity and relying increasingly on recovery in other countries to
close the output gap and maintain growth momentum. Recent US dollar
weakness is helpful but remains subject to reduced COVID-19 infections
around the world. Unprecedented support from global monetary conditions is
the source of the single positive cyclical signal.
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Market Directions
A weakening US dollar and unprecedentedly expansionary monetary
conditions have underpinned recent gold and industrial metal price strength
as well as a broader array of asset prices. Strong speculative capital
flows connected to retail investors are benefiting sector prices.
Pre-coronavirus global growth rates had already appeared insufficient to
absorb a pick-up in mine supply growth. Even with production losses
resulting from COVID-19 restrictions, market balances are tilting into
surplus. 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.
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Portfolio Performance and Positioning
Sector prices weakened again in the past week with the majority of
stocks across the three development classes posting losses. Prices of Phase
I and Phase II stocks have been showing the strongest leverage to improved
market and growth expectations over the past three months. Phase III stocks
have remained more aligned to movements in broader market conditions but all
segments need a sustained growth path. Phase II companies are most at risk
as they are the most indebted in the sector. Portfolio models remain biased
to the Phase I stock category which has the strongest leverage to improved
market liquidity. Cash positions remain elevated.
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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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