Fund managers have slashed commodity allocations to their lowest level in three years, a shift that points to waning confidence in the outlook for demand for raw materials in China and fears that the global economy will slide into recession.
Bank of America’s monthly global fund manager survey showed a net 3% of fund managers with “underweight” positions in commodities in May after consulting 247 institutional investors, who collectively manage $708 billion USD assets.
Investor confidence in commodities has weakened markedly, falling 17 percentage points in the past two months, the worst deterioration since August 2015, according to Bank of America data.
Most major commodity prices have fallen over the past 12 months, with the exception of gold, sugar and beef. The S&P GSCI Commodity Total Return Index, the most-watched commodity benchmark, has fallen 27% since reaching a near eight-year high in June 2022
Francisco Blanch, chief commodity strategist at Bank of America, said the decline in commodities was due to rapidly rising U.S. interest rates and loose economic sanctions in response to Russia’s war in Ukraine, which allowed Moscow to minimize oil and gas exports. loss of income.
“The combination of loose commodity sanctions on Russia and reduced funding in the (global financial) system has caused a sharp pullback in commodity prices,” Blanche said.
Sentiment in commodities was also dented by evidence that a rebound in Chinese economic activity after the easing of coronavirus lockdown restrictions in November has faded, with official surveys of purchasing managers showing manufacturing activity contracted in April and May.
“Growth in China’s major sectors is stagnating, especially real estate,” said Duncan Wrigley, chief China economist at consultancy Pantheon Macroeconomics.
Wrigley said he expected the Chinese government to introduce limited new measures to support growth, but cautioned that policymakers in Beijing remained concerned if they implemented another major stimulus on the same scale as the 2007 response plan, could create another debt hangover. -08 Global financial crisis.
Iron ore prices and some Chinese property stocks rose on expectations of massive property-related stimulus, but Aakash Doshi, senior commodity strategist at Citigroup in New York, warned that Beijing was aiming to “support, not stimulate” domestic economic activity. .
“For metals, energy and grains, China’s real commodity consumption appears to be weak and unlikely to rebound anytime soon,” he said.
Ricardo Leiman, a commodities trading veteran who is now chief investment officer at KLI Asset Management, said the decline in investor activity, driven in part by the growth of algorithmic trading, has led to structural changes in commodities markets.
“Investor participation has dropped off dramatically. If you look at where the market is positioned relative to open interest (active derivatives contracts), it’s one of the lowest it’s been in the past 20 years,” said Lehman, who is a co-founder of two Former CEO of commodities trading firms Noble Group and Engelhart.