5 December 2022
Where are we in the Cycle?
Of the five PortfolioDirect cyclical guideposts, three are flashing
‘amber’ and two have turned ‘red’ after supply side constraints in metal
markets have diminished. The central bank liquidity surge and accompanying
fiscal expansion, designed to counter adverse growth effects from anti-COVID
lockdowns, are being reversed. 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. US dollar slippage has removed one overtly
negative factor. 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 and downstream
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 have dominated the rankings of the strongest and weakest
prices in the past week although Phase III stocks have retained their recent
relative strength to strongly outperform during November. Investment
returns from Phase I companies remain 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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