7 September 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 as demand falls in external markets. The recent US dollar
weakness is helpful but remains subject to COVID-19 uncertainties. Global
monetary conditions are now offering unprecedented support.
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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, more broadly, asset prices. Speculative capital flows are
strong. Pre-coronavirus global growth rates had already appeared
insufficient to absorb more quickly growing mine supplies. Even with
production losses, 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
Phase I stock returns continue to run ahead of those in the more
advanced development categories, helped by rising risk appetites among
retail investors and heightened bottom of the cycle leverage after prolonged
periods of historically weak returns. Returns among stocks in the Phase III
category reflect more general equity market conditions in which growth is
being priced at a premium to cyclical stocks. Phase II mining companies face
the greatest risks from potential demand shrinkage as they are the most
indebted in the sector and most likely to undershoot weakening market
conditions. Portfolio models remain biased to the Phase I stock category
which has the strongest leverage to improved market liquidity because of the
ongoing need among smaller companies to replenish working capital. 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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