23 November 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 source of the
single positive cyclical signal.
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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 price gains. Strong speculative capital
flows connected to retail investors are benefiting sector prices. Even
with production losses resulting from COVID-19 operating restrictions,
market balances are tilting into surplus despite optimism about the future
of energy storage as a source of metal demand. The prospect of divided US
government stymies the more radical election policy measures which might
have threatened US market leadership. 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
All development categories made gains in the past week, led by companies
at the earliest development stages. Phase I company returns remain the most
sensitive to improved market liquidity as well as offering uncorrelated
returns from discovery opportunities. Phase II companies are highly
sensitive to development execution risk as well as economic growth outcomes
as they are among the most indebted firms in the sector. These two groups
benefit from greater optimism about the world economic outlook. Phase III
investment performance is reflecting a continuing tug of war between the
growth and value themes which have been driving institutional fund
allocations. Portfolio models are biased to the Phase I stock category
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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