20 February 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, now exacerbated by the Russian-Chinese attack on Ukraine and
central bank anti-inflation measures, have resumed their primary roles.
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
Withdrawal of unprecedentedly supportive monetary conditions and erosion
of real incomes by surging inflation have stemmed the speculative capital
flows connected to retail investors. 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 valuations. 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
Generally weaker sector prices persisted, with the prices of a majority
of stocks in all three development categories declining, although the rate
of price declines moderated somewhat. Recent market volatility has
coincided with investor indecision about the course of US Federal Reserve
policy. Investment returns from Phase I companies remain the most threatened
by weaker speculative capital flows, and would be a primary beneficiary of
any policy easing, but they 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, 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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