30 November 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 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 industrial metal price strength as well
as a broader array of asset price gains, including gold. Strong speculative
capital flows connected to retail investors are supporting sector prices.
Even with production losses resulting from COVID-19 mine operating
restrictions, market balances are tilting into surplus. Energy storage
changes as a source of rising metal demand remains too far in the future to
have a near term effect. The prospect of divided US government stymies the
more radical election policy measures which might have threatened US market
leadership. 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
The Phase I category stocks slipped slightly after increasingly strong
gains in recent months while Phase II and Phase III stocks maintained their
ascent. Phase I and Phase II companies benefit the most from greater
optimism about the world economy and improved market liquidity. Phase I also
offers uncorrelated returns from discovery opportunities. Phase II companies
are highly sensitive to development execution risk as they are among the
most indebted firms in the sector. The choice between the growth and value
themes driving institutional fund allocations is reflected in the Phase III
category performance. Portfolio models are biased to the Phase I stock
category 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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