9 October 2023
Where are we in the Cycle?
Of the five PortfolioDirect cyclical guideposts, two are flashing
‘amber’ and three have turned ‘red’. Sluggish pre-pandemic productivity
growth, now exacerbated by war in Europe, intensifying trade restrictions
and central bank anti-inflation measures, has re-emerged as a constraint on
raw material demand expansion. The post-2020 central bank liquidity surge is
being reversed, with an increasingly evident effect on investment from
deteriorating bank solvency and capital availability. A rising US dollar,
one previously overt negative factor, has stalled after a modest reversal of
prior gains. Supply side constraints in metal markets have become less
severe. The cyclical positioning has been characterised as 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, has provided some market relief. While heavily hyped energy
storage innovations are stoking sector interest, they are yet to affect
metal demand meaningfully. Metal price risk premiums have risen without
correspondingly beneficial impacts on related equity valuations. New tax
incentives are diverting capital for mine development and downstream
processing capacity to sponsoring nations. 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
Large losses were evident across the entire sector during the past week
with a further ebbing in support for those companies at the earliest
development stages. A large majority of stocks in all development categories
lost ground. Phase I returns remain the most threatened by weaker
speculative capital flows, and would be a primary beneficiary of any
monetary 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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