21 September 2020
Where are we in the Cycle?
Of the five PortfolioDirect cyclical guideposts, two are ‘red’, two are
‘amber’ and one is green. ‘Trough Entry’ has been retained as the
description of the cyclical positioning with ongoing downside risk to global
growth expectations and a metal price term structure signaling abundant
supplies. China’s improved growth momentum leaves the economy with ample
excess capacity and increasing dependence on recovery in other countries to
close the output gap and maintain growth momentum. Recent US dollar
weakness is helpful but remains subject to reduced COVID-19 infections
around the world. Global monetary conditions are now offering unprecedented
support.
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Market Directions
A weakening US dollar and unprecedentedly expansionary monetary
conditions have underpinned recent gold and industrial metal price strength
as well as a broader array of asset prices. Strong speculative capital
flows are benefiting sector prices. Pre-coronavirus global growth rates had
appeared insufficient to absorb more quickly growing mine supplies. Even
with production losses arising from COVID-10 restrictions, market balances
are tilting into surplus. A return to 1990s style sector investment
performance - when modest sector equity price gains occurred in the midst of
sometimes highly disruptive macro conditions - remains possible after public
health risks are brought under control.
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Portfolio Performance and Positioning
Phase I and Phase II stocks continued to attract risk friendly capital
as Phase III stocks have remained more aligned to movements in broader
market conditions. Prices of stocks within the earlier development stages
also remain historically depressed, offering the strongest leverage to
improved economic conditions. Phase II mining companies face the greatest
risks from potential demand shrinkage as they are the most indebted in the
sector and most likely to undershoot weakening market conditions. Portfolio
models remain biased to the Phase I stock category which has the strongest
leverage to improved market liquidity because of the ongoing need among
smaller companies to replenish working capital. Cash positions remain
elevated.
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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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