24 July 2023
Where are we in the Cycle?
Of the five PortfolioDirect cyclical guideposts, two are flashing
‘amber’ and three have turned ‘red’. Sluggish pre-pandemic productivity
growth, now exacerbated by war in Europe, intensifying trade restrictions
and central bank anti-inflation measures, have re-emerged as constraints on
demand expansion. The post-2020 central bank liquidity surge is being
reversed, with an increasingly evident effect on bank solvency and capital
availability. A rising US dollar, one previously overt negative factor, has
stalled after a modest reversal of prior gains. Supply side constraints in
metal markets have become less severe. The cyclical positioning has been
characterised as a ‘downswing’ phase.
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Market Directions
Withdrawal of unprecedentedly supportive monetary conditions and erosion
of real incomes by surging inflation have stemmed speculative capital flows
connected to retail investors. Professional money, by continuing to discount
a recession, provides some market relief. While heavily hyped energy
storage innovations are stoking sector interest, they are yet to affect
metal demand meaningfully. Metal price risk premiums have risen without
correspondingly beneficial impacts on related equity valuations. New tax
incentives are diverting capital for mine development and downstream
processing capacity to sponsoring nations. 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
A partial recovery in Phase I stocks was not enough to cover losses
among the majority of stocks in the Phase II and Phase III development
categories in the past week. Phase II stocks were specially weak as company
specific losses due to development problems impacted outcomes. Phase I
returns remain the most threatened by weaker speculative capital flows, and
would be a primary beneficiary of any policy easing, but continue to deliver
value-enhancing discovery opportunities uncorrelated with market
conditions. Although further along the development path and closer to
profitability, Phase II companies carry risks arising from their
indebtedness and heavy reliance on execution success in sometimes unfamiliar
markets. 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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