25 July 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 the adverse
growth effects of anti-COVID-19 government lockdowns, are being reversed
with an increasingly marked impact on the US dollar. 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 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 the withdrawal of
unprecedentedly supportive monetary conditions and the erosion of real
incomes by surging inflation. While heavily hyped energy storage
innovations are stoking 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. 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
Weekly returns in all three development categories were positive with
stock numbers in Phase II and Phase III overwhelmingly positive. Some of
the recently most strongly performing Phase I stocks lost ground. 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 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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