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Many commodity assumptions ‘too bearish’
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12th July 2012
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JOHANNESBURG ( – With indications that China was loosening its monetary policy and approving more fixed asset investment, demand for several commodities, particularly steelmaking raw materials, could strengthen despite the global fall in prices and commodity oversupply, Investec Asset Management said on Thursday.

For this reason, Chinese demand could play an important role in helping to lower the impact of the European crisis on commodity demand.

Commodity prices had fallen as global growth slowed and some commodities moved into oversupply. But Investec Asset Management argued that some of the assumptions driving down equities were “too bearish”.

“With rising commodity cost curves, our view is that the downside seems limited and we see an opportunity for longer-term investors to reap the rewards of what is a pause in a longer-term structural commodity story,” the Investec Asset Management commodities and resources team said.

Further, the group believed that current resource equity valuations, particularly energy, certain diversified miners, iron-ore miners, certain mid-cap gold miners and fertiliser companies, were “compelling”.

“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,” it said.

In the short term, persistent European financial issues should keep markets volatile, but over the medium term Investec Asset Management stressed that once China has destocked and starts cutting rates, world growth would “not remain below trend” and resource equities could rerate to more normal valuations.

Edited by: Mariaan Webb


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