16 October 2023
Where are we in the Cycle?
Of the five PortfolioDirect cyclical guideposts, two are flashing
‘amber’ and three have turned ‘red’. Sluggish pre-pandemic productivity
growth, now exacerbated by war in Europe, intensifying trade restrictions
and reversal of the post-2020 central bank liquidity surge, has re-emerged
as a constraint on raw material demand expansion. A rising US dollar, one
previously overt negative factor, has stalled after a modest reversal of
prior gains. Supply side constraints in metal markets have become less
severe. The cyclical positioning has been characterised as a ‘downswing’
phase.
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Market Directions
Withdrawal of unprecedentedly supportive monetary and fiscal conditions
and erosion of the value of income and savings by surging inflation have
stemmed speculative capital flows connected to retail investors.
Professional money, by continuing to discount a recession, has provided some
market relief but surging costs of capital are placing a cap on equity
values. While heavily hyped energy storage innovations are stoking sector
interest, they are yet to affect metal demand meaningfully. Metal price risk
premiums have risen without correspondingly beneficial impacts on related
equity valuations. New tax incentives are diverting capital for mine
development and downstream processing capacity to sponsoring nations.
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
Market leaders continued to outperform stocks in earlier stage
development categories. Phase I returns remain the most threatened by weaker
speculative capital flows, and would be a primary beneficiary of any
monetary policy easing, but continue to deliver value-enhancing discovery
opportunities uncorrelated with market conditions. Although further along
the development path and closer to profitability, Phase II companies carry
risks arising from their indebtedness and heavy reliance on execution
success in sometimes unfamiliar markets. Performance within the Phase III
category is more likely to be driven by institutional allocations responding
to changing macro conditions. A prolonged cyclical reversal in market
values for the bulk of the sector, has warranted a reassessment of which
stocks are likely to produce relatively strong future returns, including
which should have the greatest leverage to a momentum change in conditions.
Portfolio models remain biased to the Phase I stock category with cash
positions reflecting the cyclical risks. More...
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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