21 February 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’, as the impact of the central
bank liquidity surge and accompanying fiscal compensation for the effects of
government lockdown mandates lessens. Upgraded growth forecasts for 2021 had
been concealing a tendency for weakening underlying growth through the
course of the year and into 2022 as sluggish pre-pandemic growth drivers
resume their primary roles. Supply side constraints in metal markets remain
a positive influence on cyclical conditions. 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
As unprecedentedly loose monetary conditions underpinning price strength
among a broad array of assets nears an end, the speculative capital flows
connected to retail investors and supporting sector equity prices is
jeopardised. While heavily hyped energy storage innovations are stoking
interest and favourably impacting sector funding, they are yet to affect
demand meaningfully, leaving short term market balances at risk of tilting
into surplus. Higher inflation is contributing to gold price support but
creating uncertainty about central bank policy and 2022 growth prospects.
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
Similar losses across all development categories added to poor Phase I
and Phase II stock performance in recent weeks as the impact of higher
inflation took its toll on equity investments generally. The global
inflation surge and threatened interest rate rises have rebalanced the risk
outlook among retail investors. Phase I companies 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 based on macro trends and less sensitive
to sentiment changes among individual investors. 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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