31 August 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 as demand falls in external markets. The recent US dollar
weakness is helpful but remains subject to COVID-19 uncertainties. Global
monetary conditions are now offering unprecedented support.
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Market Directions
Rebounding equity prices in the leading US market are optimistically
anticipating a quick resolution to earnings uncertainty and return to
sustained economic expansion. A weakening US dollar and unprecedentedly
expansionary monetary conditions have underpinned recent gold and industrial
metal price strength as well as, more broadly, asset prices.
Pre-coronavirus global growth rates would have already been insufficient to
absorb more quickly growing mine supplies. Even with production losses,
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
Phase I stock returns continue to run ahead of those in the more
advanced development categories. Returns among stocks in the Phase III
category, driven by more general equity market conditions, have been less
strong and less volatile than returns among Phase I or Phase II companies.
Phase II 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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