20 June 2022
Where are we in the Cycle?
Of the five PortfolioDirect cyclical guideposts, one is ‘green’, three
are flashing ‘amber’ and one has 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, is
being reversed. 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 base effects distorting the
pattern of economic activity. Supply side constraints in metal markets
remain a positive influence on prices. The cyclical positioning has been
characterised as near a peak and at risk of moving into 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 as surging inflation becomes
the primary policy concern. While heavily hyped energy storage innovations
are stoking interest and favourably impacting sector funding, they are yet
to affect demand meaningfully. Fears of market disruption due to
geopolitical rivalries are raising metal price risk premiums without similar
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
Stocks across all development categories suffered heavy losses as
markets reacted to the possibility of higher than anticipated interest rates
in response to worsening inflation outcomes. Investment returns from Phase
I companies are threatened by the withdrawal of support by central banks for
speculative capital flows but they continue to benefit from discovery
opportunities uncorrelated with market conditions. Although further along
the development path, 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 been made to pare exposure to 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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