13 May 2024
Where are we in the Cycle?
Of the five PortfolioDirect cyclical guideposts, two are flashing
‘amber’ and three have turned ‘red’. Sluggish pre-pandemic productivity
growth, now exacerbated by war in Europe, intensifying trade restrictions
and reversal of the post-2020 central bank liquidity surge, has re-emerged
as a constraint on raw material demand expansion. Chinese growth momentum
has been on a weakening trend. A rising US dollar, one previously overt
negative factor, has stalled after a modest reversal of prior gains. Metal
market supply anxieties have become less severe. The cyclical positioning
has been characterised as a ‘downswing’ phase.
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Market Directions
Capital flows connected to retail equity investors have contracted with
the withdrawal of unprecedentedly supportive monetary and fiscal conditions
and the inflation surge which has cut the value of personal income and
savings. Professional money, by continuing to discount a recession, has
provided market relief for the most growth oriented and most
well-established businesses. While heavily hyped energy storage innovations
are stoking sector interest, they are yet to affect metal demand
meaningfully. Higher metal price risk premiums have not had a
correspondingly beneficial impact on related equity valuations. New tax
incentives are diverting capital for mine development and downstream
processing capacity to sponsoring nations. 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
Phase II stocks again led the weekly portfolio returns, with gains
extending beyond companies relying on their uranium exposures to include
copper and gold. A continuing dearth of discovery success and persistent
macroeconomic constraints on capital flows remain drags on performance for
the bulk of the sector despite historically low prices for exploration and
development assets. Phase I returns would likely display the greatest
leverage to eventual monetary policy easing. Although further along the
development path and closer to profitability, Phase II companies carry risks
arising from relatively high indebtedness and heavy reliance on execution
success in sometimes unfamiliar markets and untested management.
Performance within the Phase III category is more likely to be driven by
capital allocations responding to longer term views of changing macro
conditions and cross sector valuations, both primary concerns of
institutional fund managers.
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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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