30 May 2022
Where are we in the Cycle?
Of the five PortfolioDirect cyclical guideposts, one is ‘green’, three
are flashing ‘amber’ and one has turned ‘red’. The central bank liquidity
surge and accompanying fiscal expansion, designed to counter the adverse
growth effects of anti COVID-19 government lockdown mandates, 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 near a peak and at risk of moving into a ‘downswing’ phase.
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Market Directions
The speculative capital flows connected to retail investors and
supporting sector equity prices is threatened by the withdrawal of
unprecedentedly supportive monetary conditions to counter surging
inflation. 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
Outcomes were mixed during the week with companies in the Phase II
development category delivering the strongest returns. Phase I stocks were
generally among the weakest. 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 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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