17 April 2023
Where are we in the Cycle?
Of the five PortfolioDirect cyclical guideposts, three are flashing
‘amber’ and two have turned ‘red’. The central bank liquidity surge and
accompanying fiscal expansion, designed to counter adverse growth effects
from anti-COVID lockdowns, are being reversed. Sluggish pre-pandemic growth
drivers, exacerbated by the Russian-Chinese attack on Ukraine and current
central bank anti-inflation measures, have re-emerged as demand
constraints. Recent US dollar slippage has neutralised one previously overt
negative factor. Supply side constraints in metal markets have diminished.
The cyclical positioning has been characterised as being in a ‘downswing’
phase.
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Market Directions
Withdrawal of unprecedentedly supportive monetary conditions and erosion
of real incomes by surging inflation have stemmed speculative capital flows
connected to retail investors. Professional money, by continuing to discount
a recession, provides some market relief. While heavily hyped energy
storage innovations continue to stoke sector interest, they are yet to
affect demand meaningfully. Fears of market disruption due to geopolitical
rivalries have raised metal price risk premiums without correspondingly
beneficial impacts on related equity valuations. New tax incentives are
encouraging a relocation of mine development and downstream processing
capacity. 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
Positive investment returns were posted across all three development
categories, in contrast to a week earlier, with market volatility driven by
indecision among investors about the interest rate trajectory in the coming
year and China’s growth outlook. Phase II stocks provided the strongest
returns in the past week. Phase I returns remain the most threatened by
weaker speculative capital flows, and would be a primary beneficiary of any
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. 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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