7 March 2022
Where are we in the Cycle?
Of the five PortfolioDirect cyclical guideposts, one is ‘green’, three
are flashing ‘amber’ and one has turned ‘red’, as the impact of the central
bank liquidity surge and accompanying fiscal compensation for the effects of
government lockdown mandates lessens. Upgraded growth forecasts for 2021 had
been concealing a tendency for weakening underlying growth through the
course of the year and into 2022 as sluggish pre-pandemic growth drivers
resume their primary roles. Supply side constraints in metal markets remain
a positive influence on cyclical conditions. The cyclical positioning has
been characterised as near a peak and at risk of moving into a ‘downswing’
phase.
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Market Directions
The speculative capital flows connected to retail investors and
supporting sector equity prices is being threatened by the withdrawal of
unprecedentedly supportive monetary conditions, surging inflation and the
risk of a widening war in Europe. While heavily hyped energy storage
innovations are stoking interest and favourably impacting sector funding,
they are yet to affect demand meaningfully. Rising metal price risk
premiums due to geopolitical fears stoking price volatility are not
benefitting related equity prices. 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
Gains across all three development categories broke a run of weekly
losses as metal prices moved higher in the aftermath of the Russian invasion
of Ukraine. The majority of Phase I stocks, in the category which relies
most on the most risk friendly investors, made losses. Prior to the Russian
invasion, the global inflation surge and threatened interest rate rises had
already rebalanced the risk outlook among retail investors. Phase I
companies continue to benefit from discovery opportunities uncorrelated with
market conditions. Although further along the development path, Phase II
companies remain among the riskiest investment options due to 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.
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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