18 July 2022
Where are we in the Cycle?
Of the five PortfolioDirect cyclical guideposts, one is ‘green’, one is
flashing ‘amber’ and three have turned ‘red’. The central bank liquidity
surge and accompanying fiscal expansion, designed to counter the adverse
growth effects of government lockdowns to contain COVID-19 outbreaks, are
being reversed with an increasingly marked impact on the US dollar.
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 distorted patterns of economic activity.
Supply side constraints in metal markets remain a positive influence on
prices. The cyclical positioning has been characterised as having commenced
a ‘downswing’ phase.
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Market Directions
The speculative capital flows connected to retail investors and
supporting sector equity prices are under threat from the withdrawal of
unprecedentedly supportive monetary conditions and the erosion of real
incomes by surging inflation. While heavily hyped energy storage
innovations are stoking 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 prices. 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
Stock returns in all three development categories turned negative with
especially weak outcomes among the Phase III leadership group. Investment
returns from Phase I companies are the most threatened by the reversal of
support for speculative capital flows by central banks but they continue to
benefit from discovery opportunities uncorrelated with market conditions.
Although further along the development path and closer to profitability,
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 adjustments have recently been made
to pare uranium related investments and introduce fresh early stage
exposure. 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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