28 September 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 abundant
supplies. China’s improved growth momentum leaves the economy with ample
excess capacity and increasing dependence on recovery in other countries to
close 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 prices. Strong speculative capital
flows connected to retail investors are benefiting sector prices.
Pre-coronavirus global growth rates had appeared insufficient to absorb more
quickly growing mine supplies. Even with production losses arising from
COVID-19 restrictions, market balances are tilting into surplus. A return
to 1990s style sector investment performance - when modest sector equity
price gains occurred in the midst of sometimes highly disruptive macro
conditions - remains possible after public health risks are brought under
control.
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Portfolio Performance and Positioning
Sector prices weakened in the past week. Prices of Phase I and Phase II
stocks have been showing the strongest leverage to improved economic
conditions. Phase III stocks have remained more aligned to movements in
broader market conditions. Phase II mining companies face the greatest
risks from potential demand shrinkage as they are the most indebted in the
sector and most likely to undershoot weakening market conditions. Portfolio
models remain biased to the Phase I stock category which has the strongest
leverage to improved market liquidity because of the ongoing need among
smaller companies to replenish working capital. 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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