11 January 2021
Where are we in the Cycle?
Of the five PortfolioDirect cyclical guideposts, one is ‘red’, three are
‘amber’ and one is green. Cyclical conditions have been disproportionately
affected by the unprecedented surge in liquidity from central banks leaving
commodity markets at more intense risk of a slowing in monetary momentum in
the absence of other supporting factors. Stronger growth for 2021 largely
reflects base effects, concealing a tendency to weaker outcomes during the
course of the year. The cyclical positioning has been characterized as being
near a peak and at risk of moving into a ‘downswing’ phase.
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Market Directions
A weakening US dollar and unprecedentedly expansionary monetary
conditions have underpinned recent industrial metal price strength as well
as a broader array of asset price gains, including for gold. Strong
speculative capital flows connected to retail investors are supporting
sector prices and offsetting the negative effect on mining equities of
physical market balances tilting into surplus. Emerging energy storage
innovations remain too far in the future to have an effect now on metal
demand. 1990s style investment performance - when modest sector equity
price gains occurred in the midst of sometimes highly disruptive macro
conditions - remains the underlying theme. More...
Portfolio Performance and Positioning
Sector returns strengthened in the first days of 2021 with all
development categories posting positive returns. Phase I returns have been
boosted by improved investor sentiment toward uranium related stocks.
Gains among Phase II companies have been less clear-cut with relatively
modest returns for the risks incurred. Phase II companies, all in the early
stages of production or major expansions, are highly sensitive to project
execution risk, being among the most indebted firms in the sector. All
development categories have benefitted from near term optimism about the
world economy and improved market liquidity. Phase I also offers
uncorrelated returns from discovery opportunities. Portfolio models are
biased to the Phase I stock category. Cash positions have been reduced
recently to accommodate greater exposure to uranium exposed companies and a
small number of Phase II companies which have lost ground against the
sector.
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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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