8 May 2023
Where are we in the Cycle?
Of the five PortfolioDirect cyclical guideposts, three are flashing
‘amber’ and two have turned ‘red’. Sluggish pre-pandemic growth drivers,
exacerbated by the Russian-Chinese attack on Ukraine and current central
bank anti-inflation measures, have re-emerged as demand constraints. The
post-2020 central bank liquidity surge is being reversed, with an
intensifying detrimental effect on bank solvency and capital availability.
Recent US dollar slippage has neutralised one previously overt negative
factor. Supply side constraints in metal markets have diminished. The
cyclical positioning has been characterised as being in a ‘downswing’
phase.
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Market Directions
Withdrawal of unprecedentedly supportive monetary conditions and erosion
of real incomes by surging inflation have stemmed speculative capital flows
connected to retail investors. Professional money, by continuing to discount
a recession, provides some market relief. While heavily hyped energy
storage innovations continue to stoke sector 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 valuations. New tax incentives are
encouraging relocation of mine development and downstream processing
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
After three consecutive months of negative returns, a majority of stocks
in all three development categories produced negative returns last week with
the biggest losses occurring among those in the Phase I category. Indecision
among investors about interest rate trajectories in the coming year
continues to contribute market volatility. Phase I returns remain the most
threatened by weaker speculative capital flows, and would be a primary
beneficiary of any policy easing, but continue to deliver value-enhancing
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 and heavy reliance on
execution success in sometimes unfamiliar markets. 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. More...
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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