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Business News/ Opinion / Online-views/  Investor allocations to commodities at lowest level since February 2009

Investor allocations to commodities at lowest level since February 2009

Investor allocations to commodities at lowest level since February 2009


The global economy is slipping into a downturn. The JP Morgan Global All-Industry Output index, a survey-based measure of seasonally adjusted month-on-month growth in output in both manufacturing and services, fell to 50.3 in June 2012, very near the stagnation level of 50 and growing at the slowest pace since August 2009. The global manufacturing index, at a three-year low, is showing contraction, while the global services index also shows “the weakest expansion of output during the current near three-year period of growth". The downturn is broad-based, affecting Europe, the US, China, Japan, the UK and Russia. The Purchasing Managers’ indices show, however, that India was one of the few bright spots, with output hitting a four-month high in June.

Yet most stock markets haven’t been unduly perturbed. The Sensex has had a decent bounce off its lows of early June, ditto for the Dow Jones Industrials and FTSE 100 and even the French CAC 40 index is not pointing towards doom and gloom. Foreign institutional investors (FIIs) have started to dip their toes again into Indian markets; there has been steady buying by FIIs, albeit in small quantities. Fund-tracker EPFR Global says in the second week of July, Emerging Market Equity Funds posted back-to-back weeks of inflows for the first time since mid-March, while flows into Asia ex-Japan Equity Funds were the highest since the third week of February. Chinese equities, however, are decidedly down in the dumps, as the chart shows.

Nevertheless, fund managers did put some of their cash to work in June, which explains the improvement in the markets. Average cash balances with global fund managers had jumped to 5.3% in June, the third highest level on record after March 2003 and December 2008. That has now been pared back and cash balances in June were at 4.9%—still very high and above BofA-ML’s buy signal for equities, which is triggered when cash goes above 4.5%. BofA-ML’s risk and liquidity indicator moved up a tad in June, but is still way below its average. Fund managers are also underweight on equities for the second consecutive month, which has happened only three times in the past decade—in 2003, 2008 and 2011.

Also See | How it fared (Graphic)

The BofA-ML fund manager survey is often taken as a contrarian indicator. When pessimism is rife and fund managers hoard cash, it’s usually time to start stocking up on equities. Consider, for instance, the BofA-ML readings of December 2011, just before the sharp rally in the markets. Average cash balances then were at 4.9%, the same level as now. The risk and liquidity indicator too was at the same level as now. Investors were 8% overweight equities—they’re underweight now. They were 23% overweight emerging markets, versus 19% now. So we do have all the ingredients of a good rally, provided there’s a trigger. In January 2012, the trigger was the long-term refinancing operations of the European Central Bank, aided by better growth data from the US and expectations of easing by emerging market central banks.

This time, too, the markets are looking to policymakers for their next fix. But the survey shows that fund managers believe there won’t be further monetary easing by either the US or European central banks before the last quarter of the current year. Global policy easing “is currently insufficient to allay growth fears". Nevertheless, with bond yields at record lows in the US and negative in some European countries, it’s a matter of time before investors start allocating more money to risk assets.

The question is: where will the money go? Taking the BofA-ML survey as a contrarian indicator, commodities could be the big beneficiary. Allocation to commodities has plunged to its lowest level—fund managers are now 13% underweight the asset class—since February 2009. Any indication of policy action from China should see commodities make a comeback.

What about India? In early January 2012, investors were 61% underweight Indian equities. In early July, they scaled back their underweight position from around 30% in June to less than 15%. Hopes of a rate cut have faded and the poor monsoons may be an additional risk. The only factor sustaining the Indian market is the hope that the government will finally pull a rabbit out of its hat after the presidential election.

Manas Chakravarty looks at trends and issues in the financial markets. Your comments are welcome at

Graphic by Prajakta Patil/Mint

Also Read | Manas Chakravarty’s earlier columns

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Updated: 18 Jul 2012, 10:53 PM IST
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