16 March 2020
Where are we in the Cycle?
Of the five PortfolioDirect cyclical guideposts, two are ‘red’ and three
‘amber’. ‘Trough Entry’ has been retained as the cyclical positioning
classification with lowered global growth expectations, a loss of output
momentum in China, the largest national user of metal, a persistently high
US dollar and less supportive policy settings acting as headwinds to
speedier cyclical progress. The coronavirus outbreak has added greatly to
the downside potential of these negative influences on cyclical positioning.
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Market Directions
The balance of near term risks to sector investment returns remains
negative. Equity prices in the leading US market, stoked by favourable
monetary policy settings, were overvalued prior to the COVID-19 shock and
remain stretched since the COVID-19 outbreak has so badly damaged earnings.
Already subdued global growth would have been insufficient to absorb growing
mine supplies. The coronavirus outbreak raises that risk for the mining
sector. 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
under control.
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Portfolio Performance and Positioning
Losses accelerated dramatically across all development categories.
Phase II stocks, covering those companies most highly leveraged to
immediate global growth prospects, remain the weakest part of the
industry. Exploration companies, with no near term earnings to protect and
depending on long term discovery potential, retain the strongest valuation
fundamentals. No changes have been made to portfolio models which remain
biased to the Phase I stock category.
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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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