22 August 2022
Where are we in the Cycle?
Of the five PortfolioDirect cyclical guideposts, one is ‘green’, one is
flashing ‘amber’ and three have turned ‘red’. The central bank liquidity
surge and accompanying fiscal expansion, designed to counter adverse growth
effects from anti-COVID lockdowns, are being reversed with a marked upward
impact on the US dollar. Sluggish pre-pandemic growth drivers, now
exacerbated by the Russian-Chinese attack on Ukraine, have resumed their
primary roles after having been concealed through much of 2021 by distorted
patterns of economic activity. Supply side constraints in metal markets
remain a positive influence on prices. The cyclical positioning has been
characterised as having commenced 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 withdrawal of
unprecedentedly supportive monetary conditions and the erosion of real
incomes by surging inflation. While heavily hyped energy storage
innovations continue to stoke interest, they are yet to affect demand
meaningfully. Fears of market disruption due to geopolitical rivalries have
raised metal price risk premiums without correspondingly beneficial impacts
on related equity prices. New tax incentives will encourage US domiciled
investors to exchew foreigh locations. 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
The direction of weekly returns across all three development categories
were split with Phase II stocks being especially weak. Investment returns
from Phase I companies are the most threatened by the reversal of support
for speculative capital flows by central banks but they continue to benefit
from discovery opportunities uncorrelated with market conditions, leaving
them prone to short term volatility. Although further along the development
path and closer to profitability, Phase II companies carry risks arising
from 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 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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