17 August 2020
Where are we in the Cycle?
Of the five PortfolioDirect cyclical guideposts, two are ‘red’, two are
‘amber’ and one is green. ‘Trough Entry’ has been retained as the
description of the cyclical positioning with ongoing downside risk to global
growth expectations and a metal price term structure signaling abundant
supplies. China’s improved growth momentum leaves the economy with ample
excess capacity as demand falls in external markets. The recent US dollar
weakening is helpful but remains at risk to COVID-19 uncertainties. Global
monetary conditions are now offering unprecedented support.
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Market Directions
A weakening US dollar and unprecedentedly expansionary monetary
conditions are pushing gold and industrial metal prices higher. Although
credit markets have regained their composure, near term risks to sector
investment returns remain high. 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 are tilting into surplus. 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
Returns softened across the three development categories in the last
week. Phase I stocks were relatively strong, continuing to run ahead of
those in the more advanced development categories during the month to date.
Returns among stocks in the Phase III category, driven by more general
equity market conditions, have been less volatile than returns among Phase I
or Phase II companies. Phase II companies face the greatest risks from
potential demand shrinkage as they are the most indebted in the sector.
Portfolio models remain biased to the Phase I stock category which has the
strongest leverage to improved market liquidity because of the ongoing need
among smaller companies to replenish working capital. Cash positions remain
elevated.
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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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