Money managers are the most bearish on commodities in more than four years as a majority expected a weaker Chinese economy for the first time in 14 months, a Bank of America Corp. survey showed.
A net 29 percent of the fund managers surveyed were underweight the asset class in May as their positions “collapsed” to the lowest level since December 2008. One in four now consider a “hard landing” in China as the biggest risk to their investments. The bank surveyed professional investors who together oversee $517 billion.
“There has been a marked uptick” in concern about China, said John Bilton, an investment strategist at Bank of America’s Merrill Lynch unit, at a press conference in London today. “A hard landing is not our core scenario, but certainly investors are right to start thinking they should at least hedge some of that tail risk.”
A gauge of raw-material companies on the MSCI World Index has fallen 4.3 percent so far this year, the only industry group on the equity benchmark to decline in 2013. In Europe, the Stoxx 600 Basic Resource Index has slumped 16 percent.
Investors reduced their holdings in emerging-market equities this month to a two-year low. A net 3 percent remained overweight in the asset class in May, compared with 13 percent in April. Holdings in energy companies slumped to a record low, the survey showed.
“Contrarians should start buying emerging markets, and think about global energy and material companies and commodities,” said Bank of America’s Bilton. “Divergence in global growth means we are starting to get some quite interesting spread positioning.”
Respondents bought Japanese stocks for a seventh-consecutive month, bolstered by the Bank of Japan’s quantitative-easing program. A net 31 percent were overweight the country, the highest proportion in seven years. Even so, that is only half of the peak allocation in December 2005.
Hedge funds’ net exposure to equities climbed in May to plus 45 percent, the highest level in almost seven years. So-called liquidity conditions were the best in more than five years, according to the survey.
Investors’ allocation to banks also rebounded this month, with a net 14 percent overweight the industry, the largest proportion among fund managers since December 2006.
Holdings in U.S. equities remained unchanged at 20 percent overweight, while holdings in euro-area stocks stayed at 8 percent underweight for a second month. The total allocation to equities fell for a second consecutive month to a net 41 percent overweight from 47 percent in April.
Bank of America conducted the global survey of 177 professional investors between May 3 and May 9.