Fund managers cut commodity allocations to their lowest levels in three years, a move that illustrated declining confidence in the outlook for China’s demand for raw materials and fears that the global economy is heading into recession.

Bank of America Global Monthly head of investment The survey found that a net 3 percent of managers had an “underweight” position in commodities in May after surveying the views of 247 institutional investors who collectively oversee $708 billion in assets.

Investor sentiment towards commodities has weakened significantly, falling 17 percentage points over the past two months, the steepest deterioration since August 2015, according to BofA.

Prices for most major commodities, except for gold, sugar and beef, have fallen over the past 12 months. The S&P Goldman Sachs Commodity Total Return Index, the most watched commodity benchmark, has fallen 27 percent since hitting a near eight-year high in June 2022.

Francisco Blanch, chief commodities strategist at BofA, said the drop in commodities was driven by a combination of a rapid increase in U.S. interest rates and mild economic sanctions imposed in response to Russia’s war in Ukraine, which allowed Moscow to minimize losses in oil and gas export earnings. .

“This combination of lax commodity sanctions on Russia and less money in the US [global financial] system contributed to a significant drop in commodity prices,” Blanch said.

Commodity sentiment was also dented by evidence that the recovery in Chinese economic activity following the easing of coronavirus lockdown restrictions in November had fizzled, with official purchasing managers’ surveys suggesting that manufacturing activity eased in both April and May.

“Growth is stalling in key Chinese sectors, particularly the real estate sector,” said Duncan Wrigley, chief China economist at consultancy Pantheon Macroeconomics.

Wrigley said he expected the Chinese government to introduce limited new measures to support economic growth, but warned that policymakers in Beijing remained wary of the risk of creating another debt hangover if they continued with another large stimulus program on the same scale as in response to the 2007-08 global financial crisis.

Prices of iron ore and some Chinese real estate stocks rose on expectations of a big property-related stimulus, but Aakash Doshi, chief commodities strategist at Citigroup in New York, warned that Beijing would aim to “support but not pump up” domestic economic activity.

“Real Chinese commodity consumption appears to be weak across metals, energy and grains and is unlikely to rebound in the near term,” he said.

Ricardo Leiman, a commodities trading veteran who is now chief investment officer at KLI Asset Management, said the decline in investor activity, partly caused by the growth of algorithmic trading, has led to structural changes in commodity markets.

“The participation of investors has decreased significantly. If you look at market position relative to open interest [active derivative contracts]then it’s one of the lowest in 20 years,” said Leiman, a former chief executive of two commodities trading houses, Noble Group and Engelhart.

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