14 December 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 adequate
supplies. China’s growth momentum is past its strongest phase, leaving the
economy to rely increasingly on recovery in other countries to narrow the
output gap and maintain growth momentum. Recent US dollar weakness is
helpful but remains subject to reduced COVID-19 infections around the world.
Unprecedented support from global monetary conditions is the single positive
cyclical signal.
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Market Directions
A weakening US dollar and unprecedentedly expansionary monetary
conditions have underpinned recent industrial metal price strength as well
as a broader array of asset price gains, including for gold. Strong
speculative capital flows connected to retail investors are supporting
sector prices. Even with production losses resulting from COVID-19 mine
operating restrictions, market balances are tilting into surplus. Energy
storage changes as a source of rising metal demand remain too far in the
future to have an effect now. 1990s style investment performance - when
modest sector equity price gains occurred in the midst of sometimes highly
disruptive macro conditions - remains the underlying theme. More...
Portfolio Performance and Positioning
Strong gains were made across all three development categories with
uranium sector stocks benefitting from US policy developments. Phase I and
Phase II companies benefit the most from greater optimism about the world
economy and improved market liquidity. Phase I also offers uncorrelated
returns from discovery opportunities. On the downside, Phase II companies
are highly sensitive to project execution risk as they are in the early
stages of production, with the greatest working capital uncertainties, and
among the most indebted firms in the sector. The choice between the growth
and value themes driving institutional fund allocations is reflected in the
Phase III category performance which has been unusually strong. Portfolio
models are biased to the Phase I stock category. Exposure to the uranium
segment was lifted in both the Phase I and Phase II categories. 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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