10 April 2023
Where are we in the Cycle?
Of the five PortfolioDirect cyclical guideposts, three are flashing
‘amber’ and two have turned ‘red’. The central bank liquidity surge and
accompanying fiscal expansion, designed to counter adverse growth effects
from anti-COVID lockdowns, are still in the process of being reversed.
Sluggish pre-pandemic growth drivers, exacerbated by the Russian-Chinese
attack on Ukraine and current central bank anti-inflation measures, have
resumed their primary roles. 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
encourage US domiciled investors to eschew foreign development locations in
favour of investments in US mine and downstream 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
Investment returns again turned negative immediately after the end of
the first quarter, with similarly sized losses across all three development
categories. Price volatility continues to be driven by investor indecision
about the course of US Federal Reserve policy. 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.
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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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