29 August 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 adverse growth
effects from anti-COVID lockdowns, are being reversed with a marked upward
impact on the US dollar. Sluggish pre-pandemic growth drivers, now
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 are under
threat from withdrawal of unprecedentedly supportive monetary conditions and
the erosion of real incomes by surging inflation. While heavily hyped
energy storage innovations continue to stoke 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. New tax incentives will
encourage US domiciled investors to eschew foreign development locations.
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
Most Phase I and Phase II stocks lost ground during the week while the
market leaders mostly pushed higher. 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, as the performance in August has illustrated.
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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