19 December 2022
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, now 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. Recent US dollar slippage has
neutralised one previously overtly 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
The speculative capital flows connected to retail investors are under
threat from withdrawal of unprecedentedly supportive monetary conditions and
the erosion of real incomes by surging inflation. While heavily hyped
energy storage innovations continue to stoke investor 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. New tax
incentives will encourage US domiciled investors to eschew foreign
development locations in favour of investments in US mine and downstream
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
Returns turned negative in all three development categories in the past
week. Uniquely, Phase I stocks accounted for all the highest stock returns
as well as the lowest stock returns across the week and over the prior four
weeks. Investment returns from Phase I companies remain the most threatened
by weaker speculative capital flows 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 carry risks arising from 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 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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