10 August 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 abundant
supplies. China’s improved growth momentum leaves the economy with ample
excess capacity as demand falls in external markets . The recent US dollar
weakening is helpful but remains at risk to COVID-19 uncertainties. Global
monetary conditions are now offering unprecedented support.
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Market Directions
The balance of near term risks to sector investment returns remains
negative although credit markets have regained their composure. Rebounding
equity prices in the leading US market are optimistically anticipating a
quick resolution to earnings uncertainty and return to growth.
Pre-coronavirus global growth rates would have already been insufficient to
absorb growing mine supplies. Even with production losses, market balances
will now tilt more firmly into surplus. Expectations of medium term
deficits supporting sector valuations will not be realised. A return to
1990s style sector investment performance - when modest sector equity price
gains occurred in the midst of sometimes highly disruptive macro conditions
- remains possible after public health risks are brought under control. A
weakening US dollar and unprecedentedly low bond yields are pushing gold and
industrial metal prices higher.
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Portfolio Performance and Positioning
Similar gains were made in all three development classes in the opening
week of August although advancing stocks ran more clearly ahead of declining
stocks within the Phase III category, driven by more general equity market
conditions, than in Phase I. Phase II companies face the greatest risks
from potential demand shrinkage as they are the most indebted companies in
the sector. Exploration companies retain the strongest leverage to an
improvement in market liquidity because of their ongoing need to replenish
working capital. Portfolio models remain biased to the Phase I stock
category with maintenance of a large cash position reflecting ongoing
downside 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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