9 November 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 adequate
supplies. China’s growth momentum is past its strongest phase, leaving the
economy to rely increasingly on recovery in other countries to narrow the
output gap and maintain growth momentum. Recent US dollar weakness is
helpful but remains subject to reduced COVID-19 infections around the world.
Unprecedented support from global monetary conditions is the source of the
single positive cyclical signal.
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Market Directions
A weakening US dollar and unprecedentedly expansionary monetary
conditions underpinned recent gold and industrial metal price strength as
well as a broader array of asset price gains. Strong speculative capital
flows connected to retail investors are benefiting sector prices. Even
with production losses resulting from COVID-19 operating restrictions,
market balances are tilting into surplus despite optimism about the future
of energy storage as a source of metal demand. The prospect of divided US
government stymies the more radical election policy measures. 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
Phase I and Phase II companies, made up of operations most leveraged to
changes in the pace of economic activity, resumed their relatively strong
performance. Phase I company returns are the most sensitive to improved
market liquidity. Phase I companies are beneficiaries of expanded risk
appetite among retail investors with the added benefit of possessing
discovery potential uncorrelated with market trends. Phase II companies
remain the most at risk to disappointing economic outcomes as they are among
the most indebted firms in the sector. The market leaders in the Phase III
category are reflecting preference switches among institutional investors
between growth and value themes. Portfolio models are biased to the Phase I
stock category 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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