Bank of America Merrill Lynch has cautioned against gloom in risk assets, such as commodities, after fund managers cut their exposure to the sector to the weakest for eight months amid nascent fears of a price collapse.
The proportion of portfolio managers overweight in commodities is only 12% higher than those underweight, as they cut commodity positions "sharply" over the last month, a survey for the bank showed.
The figure compares with 24% more fund managers overweight in raw materials a month ago, and is the weakest reading since September, when revived inflation concerns sparked interest in raw materials which should – in theory – offer a hedge against rising asset prices.
Bonds were the biggest beneficiary of investors liquidating commodity holdings.
List of threats
In fact, the decline in commodity's popularity over the last month, fuelling a drop in oil prices below $100 a barrel and sugar prices to an eight-month low, co-incided with an unwinding of inflation concerns, besides lower expectations for world economic growth.
The proportion of fund managers naming commodity price inflation as the top economic risk more than halved to 16%, overtaken by the 36% which named Europe's sovereign debt crisis as the main danger.
The risk of a "sudden drop in commodity prices" also emerged as a threat.
'Pessimism overdone'
However, fund managers may find they are taking too gloomy a perspective, following bumper economic growth figures from France and Germany, Gary Baker, the bank's head of European equities strategy, said.
"A risk for investors is that pessimism on Europe now looks to be overdone, particularly in the light of strong recent GDP data," he said.
The bank recommended a trade of reversing the flow of cash from commodities to bonds if economic growth indeed proves stronger over the summer than has been expected.
The survey, of 284 fund managers controlling $814bn of assets, showed that 34% more investors rated oil overvalued than undervalued, a figure up three points over the last month despite its price drop during the period.
The proportion seeing the gold rally has having gone too far rose to a net 33%, from 25% in April.
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