Commodity prices have generally fallen as global growth has slowed and many natural resources have moved into oversupply, at least temporarily.

This has also led to a weakening of commodities equities as analysts reduce medium-term price forecasts and concerns of a prolonged slowdown increase. However, we believe that in some cases, the assumptions being made are too bearish, for two reasons. 

First, the effect of a European crisis may not be as large as the market perceives – for many commodities, Chinese demand is far more important. 

With signs of China loosening monetary policy again and approving more fixed asset investment, demand for several commodities could hold up and even strengthen again despite a European recession. 

For example, in the case of steel, while Europe’s demand has grown gradually from around 210 metric tonnes (MT) to 250 MT over the last 15 years, its share of global demand has fallen from 30 per cent to 16 per cent as China's has grown far more rapidly. 

This means that even if European steel demand were to fall 10 per cent due to the crisis, this now only represents a 1.6 per cent fall in world demand compared with a 3 per cent fall 15 years ago. 

Similarly for copper, Europe’s share of global demand has fallen from just over 30 per cent to just over 16 per cent in the same period, thus diminishing the direct effect of a European recession. 

Chinese demand for base metals now dominates world consumption and will likely continue to increase its share as the economy grows. 

Secondly, due to the rapid growth of demand over the past decade, for many commodities the incremental production has been filled by higher cost marginal producers and this has led to steeper cost curves.

As a result, many commodities are now already at prices that mean some of these marginal producers are losing money and shutting down, which will support price levels at much higher levels than in the past. 

Significant falls in April and May have made valuations of energy-resource equities appear compelling, especially when compared with commodity prices and the rebound that occurred at the end of June.

With rising commodity cost curves, our view is that the downside seems limited and we see an opportunity for investors to reap the rewards of what is a pause in a longer-term structural story. 

However, with the lag time of European politics and what appears to be a staggering recovery in the US, combined with the uncertainty surrounding the regime change in China, we again find ourselves at the mercy of the political elite. 

Although we believe valuations of resource equities appear attractive across the board, certain commodities look particularly compelling in the current environment: energy, certain diversified miners, iron ore miners, certain mid cap gold miners and fertiliser companies. 

Many investors remain concerned that commodity prices are flat-lining while costs continue to rise, thus squeezing company margins.

While this is true in some cases, we see numerous companies that can improve margins from higher commodity prices by growing volumes and even reducing costs. 

In the short-term, persistent European financial issues should keep markets volatile, but over the medium-term we believe that once China has destocked and starts cutting rates, world growth will not remain below trend and resource equities can re-rate to more normal valuations.

We conclude that at current valuations, resource equities are compelling when investors are willing to look beyond the near-term uncertainty surrounding the eurozone, Chinese slowdown and other macroeconomic factors.