11 April 2022
Where are we in the Cycle?
Of the five PortfolioDirect cyclical guideposts, one is ‘green’, three
are flashing ‘amber’ and one has turned ‘red’. The central bank liquidity
surge and accompanying fiscal expansion to counter the effects of anti
COVID-19 government lockdown mandates is being reversed. Sluggish
pre-pandemic growth drivers have resumed their primary roles after having
been concealed through much of 2021 by base effects distorting the pattern
of economic activity. Supply side constraints in metal markets remain a
positive influence on prices. The cyclical positioning has been
characterised as near a peak and at risk of moving into a ‘downswing’ phase.
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Market Directions
The speculative capital flows connected to retail investors and
supporting sector equity prices is being threatened by the withdrawal of
unprecedentedly supportive monetary conditions, surging inflation and the
risk of a widening war in Europe. While heavily hyped energy storage
innovations are stoking interest and favourably impacting sector funding,
they are yet to affect demand meaningfully. Equity prices are receiving a
relatively moderate boost from rising metal price risk premiums due to
geopolitical fears. 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
Price gains occurred across all three development categories with
especially strong share price increases in the Phase I category due once
again to uranium related exposures while the majority of stocks in the Phase
II and Phase III categories experienced negative returns. Investment returns
from Phase I companies are threatened by the withdrawal of support by
central banks for speculative capital flows but they continue to benefit
from discovery opportunities uncorrelated with market conditions. Although
further along the development path, Phase II companies remain among the
riskiest investment options due to their indebtedness, heavy reliance on
execution success and need for strong global economic conditions to initiate
sales. 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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