15 June 2020
Where are we in the Cycle?
Of the five PortfolioDirect cyclical guideposts, three are ‘red’ and two
‘amber’. ‘Trough Entry’ has been retained as the description of the
cyclical positioning with ongoing downside risk to global growth
expectations, a persistently high US dollar and a metal price term structure
signaling abundant supplies. The international policy stance is more
supportive but well short of fully compensating for the impact of COVID-19
remediation measures. China’s improved growth momentum leaves the economy
with ample excess capacity.
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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.
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Portfolio Performance and Positioning
The sector lost ground in the last week across all development stages.
Phase II companies were especially weak as fears about the growth outlook
resurfaced. Phase II companies face the greatest risks from potential demand
shrinkage as they are the most indebted companies in the sector. Returns
among the larger stocks in the Phase III category, where the presence of
institutional investors is most prominent, were the least weak. 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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