16 May 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, designed to counter the adverse
growth effects of anti COVID-19 government lockdown mandates, is being
reversed. Sluggish pre-pandemic growth drivers, exacerbated by the
Russian-Chinese attack on Ukraine, 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 threatened by the withdrawal of
unprecedentedly supportive monetary conditions and surging inflation. 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 higher metal price
risk premiums arising from fears of market disruption due to geopolitical
threats. 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
Growing losses hit all stocks within all three development categories
with the heaviest losses among the earliest stage companies. Uranium
related investments were especially hard hit by the sell-off. 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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