Resource markets have endured a torrid 2018, despite a very strong first half performance. Positive commodity and equity price movements during the first half of the year have been cancelled out by Trump-related trade uncertainty. The good news though is that the underlying fundamentals for commodities remain strong – as reflected by solid demand and falling inventory levels. 

But why the negative impact on commodity prices?

All commodities are priced in US dollars, so when the value of the US currency rises, commodities become more expensive in terms of other currencies, which in turn can negatively impact upon demand. A very high-profile example has been gold, which typically moves inversely to the US dollar. Gold has fallen victim to recent US dollar strength, reinforced by rising US interest rates.

But have the underlying fundamentals of the world economy changed?

In reality there is little evidence for this, with real demand for most commodities remaining robust and inventory levels remaining modest. The recent weakness in commodity prices – and therefore resource equities – is therefore overwhelmingly a transient phenomenon that’s driven more by speculators and traders, rather than any fundamental change in intermediate or longer-term economic fundamentals.

Ultimately, this presents a compelling opportunity for investors. The USA and China are also currently involved in trade negotiations that aim to generate a positive outcome for both sides. My view is that the latest talks between Presidents Trump and Xi will likely ease tensions and remove all of the major impediments to trade. Both leaders would stand to gain significantly from a political standpoint from such a deal.

If President Trump gets even the smallest concessions from China, it will boost his political standing in the wake of the recent disappointing mid-term elections in the U.S. Meanwhile, President Xi would further cement his position as the strongest leader of China since Chairman Mao and his profile on the global stage. Similar deals with other trading partners could quickly follow on the heels of an agreement with China.

Those assets that suffered the worst under the threat of a trade war - commodities - will likely rebound the most.

Interestingly too, Commodity bull Goldman Sachs Group is undaunted by the sell-off in raw materials and is forecasting returns of about 17 percent over the course of the coming months, describing the current situation as unsustainable and touting the recent G-20 meeting in Buenos Aires as a potential turning point.

“Given the size of dislocations in commodity pricing relative to fundamentals -- with oil now having joined metals in pricing below cost support -- we believe commodities offer an extremely attractive entry point for longs in oil, gold and base,” analysts including Jeffrey Currie said in a recent report.