21 August 2023
Where are we in the Cycle?
Of the five PortfolioDirect cyclical guideposts, two are flashing
‘amber’ and three have turned ‘red’. Sluggish pre-pandemic productivity
growth, now exacerbated by war in Europe, intensifying trade restrictions
and central bank anti-inflation measures, have re-emerged as constraints on
demand expansion. The post-2020 central bank liquidity surge is being
reversed, with an increasingly evident effect on bank solvency and capital
availability. A rising US dollar, one previously overt negative factor, has
stalled after a modest reversal of prior gains. Supply side constraints in
metal markets have become less severe. The cyclical positioning has been
characterised as a ‘downswing’ phase.
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Market Directions
Withdrawal of unprecedentedly supportive monetary conditions and erosion
of real incomes by surging inflation stemmed speculative capital flows
connected to retail investors. Professional money, by continuing to discount
a recession, has provided some market relief. While heavily hyped energy
storage innovations are stoking sector interest, they are yet to affect
metal demand meaningfully. Metal price risk premiums have risen without
correspondingly beneficial impacts on related equity valuations. New tax
incentives are displacing natural advantages by diverting capital for mine
development and downstream processing capacity to sponsoring nations.
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
Weak sector conditions impacted all three development categories. A
large majority of stocks in each development category suffered price
declines. Several Phase I stocks were among the largest losers in the past
week. Several Phase II stocks recovered small amounts of lost ground after
large recent losses. Phase I returns remain the most threatened by weaker
speculative capital flows, and would be a primary beneficiary of any
monetary policy easing, but 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 and heavy reliance on execution
success in sometimes unfamiliar markets. 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. More...
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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