Commodities look a top bet for contrarian investors, Bank of
America Merrill Lynch said, after funds slashed their exposure to the sector at
the fastest rate in seven years, amid economic growth fears.
The proportion of fund managers saying they are "underweight"
in their allocations of cash to commodities exceeds those "overweight" by 15 percentage
points, according to a monthly survey by the bank.
While well short of the most bearish positioning on record –
with the net figure on occasion exceeding 30 points, most lately in 2015 – the growth
in the figure of 12 points month on month was unusually large.
It indicates the "largest drop since June 2010 in allocation
Economy hope fades
Indeed, the data indicated a "rotation out of commodities,
Japan, materials and banks" in favour of investing in "staples, cash, utilities
and the UK," although allocations to the UK remain weak from a historical
The broad investment trend, including the pessimism on commodity
prices reflects waning expectations for world GDP expansion, with the proportion
of fund managers expecting a stronger world economy, over those seeing a weaker
one, at 39% down 23 points from a January high.
Expectations for inflation have dropped too, with the
survey, of 180 fund managers with investments of $513bn, showing a net figure
of 60% seeing a rise in the rate of price growth, below an April high of 75%.
The findings suggested that contrarian investors should "sell
Europe, banks, technology," BofA Merrill Lynch said, while buying the UK,
resources, commodities and bonds.
Longs vs shorts
Funds' negative sentiment towards commodities has been shown
up in agriculture in data too from the Commodity Futures Trading Commission, the
US regulator, which showed the managed money net short in major US-traded ag
commodity futures and options at 244,606 lots as of late May.
That represented the second largest net short on data going
back to 2006, with bearish positioning in grains indeed at a record high.
The downbeat positioning on commodities also follows a long period
of poor returns for bulls in the sector, with the benchmark Bloomberg Commodity
Index losing value in five of the past six years, down so far in 2017 too,
touching a 13-month low in early deals on Tuesday.
The plight of the asset class has, however, provided strong
returns for investors holding short bets, a factor that fund managers such as
Schroders and CoreCommodity have sought to exploit by unveiling products
capable of holding long or short positions.