8 August 2022
Where are we in the Cycle?
Of the five PortfolioDirect cyclical guideposts, one is ‘green’, one is
flashing ‘amber’ and three have turned ‘red’. The central bank liquidity
surge and accompanying fiscal expansion, designed to counter the adverse
growth effects of anti-COVID lockdowns, are being reversed with a marked
upward impact on the US dollar. 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. Supply side constraints in metal markets
remain a positive influence on prices. 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 and
supporting sector equity prices are under threat from the withdrawal of
unprecedentedly supportive monetary conditions and the erosion of real
incomes by surging inflation. While heavily hyped energy storage
innovations continue to stoke 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. 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
Modestly positive returns across all three development categories
reinforced signs of a more positive market tone evident over the past four
weeks, although many gains have been only partial retracements of earlier
losses. Investment returns from Phase I companies are the most threatened
by the reversal of support for speculative capital flows by central banks
but they continue to benefit from discovery opportunities uncorrelated with
market conditions, leaving them prone to short term volatility. Although
further along the development path and closer to profitability, 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 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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