27 February 2023
Where are we in the Cycle?
Of the five PortfolioDirect cyclical guideposts, three are flashing
‘amber’ and two 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. Sluggish pre-pandemic growth
drivers, exacerbated by the Russian-Chinese attack on Ukraine and current
central bank anti-inflation measures, have resumed their primary roles.
Recent US dollar slippage has neutralised one previously overtly negative
factor. Supply side constraints in metal markets have diminished. The
cyclical positioning has been characterised as being in 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 the speculative capital
flows connected to retail investors Professional money continues to discount
a recession. While heavily hyped energy storage innovations continue to
stoke sector 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
valuations. New tax incentives will encourage US domiciled investors to
eschew foreign development locations in favour of investments in US mine and
downstream capacity. 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
Prices of a majority of stocks in all three development categories
declined with falls within the Phase I category being significantly larger.
Recent market volatility has coincided with investor indecision about the
course of US Federal Reserve policy and the outlook for Chinese growth.
Investment returns from Phase I companies remain the most threatened by
weaker speculative capital flows, and would be a primary beneficiary of any
policy easing, but they 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, 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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