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Investors shun commodities as China ‘hard landing’ risk re-emerges

Fund managers are avoiding hard-falling commodities as they begin to worry again about China's economic fate.

Investors shun commodities as China ‘hard landing’ risk re-emerges

Major investors are sweeping their portfolios clear of commodities as they start to fret again that the Chinese economy could suffer a ‘hard landing’, hitting demand for the world’s raw materials.

Allocations to commodities among global fund managers have fallen to their lowest point in four-and-a-half years, according to a study of 231 money managers responsible for $661 billion worth of assets.

One in four investors are now worried that a Chinese ‘hard landing’ is the greatest tail-risk – or known unknown – they face.

This month’s survey, compiled by Bank of America Merrill Lynch, marks the first time in 14 months that the outlook for China growth has been negative. 

Sentiment towards the world’s fastest growing major economy had improved after inflation fears were tamed and an economic downturn seemed to have been averted. The installation of a new panel of leaders increased investor confidence that the economy could be managed to a gradual slowdown, rather than a destabilising slump.

But the growing concerns over China – pipped only by a eurozone crisis on investors’ list of worries – comes after a string of weaker-than-expected data from the world’s second largest economy, particularly the surprisingly low first quarter GDP reading of 7.7%.

With commodity prices increasingly swayed by Chinese demand, a corresponding aversion to commodities is unsurprising. A net 29% of fund managers are underweight to commodities, the survey shows.

The disliking for commodities comes as the chasm between falling resources prices and rallying equities continues to grow, in contrast to the loose correlation between the two asset classes seen in the past. Commodity prices have broadly been declining for nearly two years, with the CRB commodity index dropping 22%. The FTSE All Share index has risen by 3% during that time.

Capital Economics analyst Julian Jessop says evidence of renewed sluggishness in the global economic activity has undermined demand for industrial commodities. But equity markets, which look further into the future, ‘are more likely to look beyond such near-term weakness’.

‘We don’t expect much of an improvement in the performance of industrial commodities simply because monetary policy is set to remain loose, unless the world economy grows much more strongly,’ Jessop wrote in a research note published on Monday.

Fund managers are also averse to emerging market equities, with just a net 3% of investors

reporting an overweight to the sector, having fallen from a 43% overweight in February.

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by Daniel Grote on Apr 23, 2018 at 14:05

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