23 May 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’. The central bank liquidity
surge and accompanying fiscal expansion, designed to counter the adverse
growth effects of anti COVID-19 government lockdown mandates, is being
reversed. Sluggish pre-pandemic growth drivers, exacerbated by the
Russian-Chinese attack on Ukraine, have resumed their primary roles after
having been concealed through much of 2021 by base effects distorting the
pattern of economic activity. Supply side constraints in metal markets
remain a positive influence on prices. 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
The speculative capital flows connected to retail investors and
supporting sector equity prices is threatened by the withdrawal of
unprecedentedly supportive monetary conditions and surging inflation. While
heavily hyped energy storage innovations are stoking interest and favourably
impacting sector funding, they are yet to affect demand meaningfully. Equity
prices are receiving little benefit from higher metal price risk premiums
arising from fears of market disruption due to geopolitical threats.
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
Returns were mixed during the week after companies at the earliest
development stages stalled a succession of heavy losses. Battery related
investments were relatively strong. The performance of gold mine developers
lagged. Investment returns from Phase I companies are threatened by the
withdrawal of support by central banks for speculative capital flows but
they 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 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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