28 December 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 adequate
supplies. China’s growth momentum is past its strongest phase, leaving the
economy to rely increasingly on recovery in other countries to narrow 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 single positive
cyclical signal.
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Market Directions
A weakening US dollar and unprecedentedly expansionary monetary
conditions have underpinned recent industrial metal price strength as well
as a broader array of asset price gains, including for gold. Strong
speculative capital flows connected to retail investors are supporting
sector prices and offsetting the negative effect on mining equities of
physical market balances tilting into surplus. Emerging energy storage
innovations remain too far in the future to have an effect now on metal
demand. 1990s style investment performance - when modest sector equity
price gains occurred in the midst of sometimes highly disruptive macro
conditions - remains the underlying theme. More...
Portfolio Performance and Positioning
Sector returns faltered in the past week with most stocks across all
development categories losing ground. Over the past month, uranium-related
stocks, mainly in the Phase I category, and Phase III stocks headed the
return statistics. Phase II offered modest returns for the risks incurred.
Phase II companies are highly sensitive to project execution risk as they
are in the early stages of production, with the greatest working capital
uncertainties, and are among the most indebted firms in the sector. Phase I
and Phase II companies can benefit the most from greater optimism about the
world economy and improved market liquidity. Phase I also offers
uncorrelated returns from discovery opportunities. Portfolio models are
biased to the Phase I stock category. Exposure to the uranium segment has
been lifted recently in both the Phase I and Phase II categories. 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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