27 June 2022
Where are we in the Cycle?
Of the five PortfolioDirect cyclical guideposts, one is ‘green’, two are
flashing ‘amber’ and two have turned ‘red’. The central bank liquidity
surge and accompanying fiscal expansion, designed to counter the adverse
growth effects of government lockdowns to contain COVID-19 outbreaks, 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 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 as surging inflation becomes
the primary policy concern. While heavily hyped energy storage innovations
are stoking interest and favourably impacting sector funding, they are yet
to affect demand meaningfully. Fears of market disruption due to
geopolitical rivalries are raising metal price risk premiums without similar
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
Stocks across all development categories suffered heavy losses once
again as markets reacted to growing fears of a policy induced recession.
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 adjustments have been made to pare exposure to
uranium related investments and introduce fresh early stage exposure.
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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