18 May 2020
Where are we in the Cycle?
Of the five PortfolioDirect cyclical guideposts, three are ‘red’ and two
‘amber’. ‘Trough Entry’ has been retained as the description of the
cyclical positioning with falling global growth expectations, a persistently
high US dollar and a metal price term structure signaling abundant supplies.
The international policy stance is more supportive but well short of fully
compensating for the impact of COVID-19 remediation measures. China’s
improved growth momentum leaves the economy with ample excess capacity.
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Market Directions
The balance of near term risks to sector investment returns remains
negative although credit markets have regained their composure. 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
will now tilt more firmly into surplus. Expectations of medium term deficits
supporting sector valuations will not be realised. 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
Prices of early stage companies slipped in the past week after posting
relatively strong gains in the past several weeks. Larger stocks in the
Phase III category continued to push higher, assisted by institutional money
flows. Exploration companies retain the strongest leverage to an improvement
in capital market conditions because of their ongoing working capital needs
and frequency of recourse to capital markets. Realising their discovery
potential also permits returns uncorrelated with macroeconomic conditions.
Phase II companies face the greatest risks from potential demand shrinkage
as they are the most indebted companies in the sector. Portfolio models
remain biased to the Phase I stock category with maintenance of a large cash
position reflecting ongoing downside risks. No changes to models has been
suggested.
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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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