Investors take bullish bets on commodities to record highs

After some relative calm seen in the price of oil, fund managers are putting some of their money back to work in commodities, new data on Tuesday showed.

Global investors added to their allocation of commodities this month, according to a survey carried out by Bank of America Merrill Lynch, which said the jump in exposure to commodities in March was the largest ever on record. This comes after investors hoarded money in cash at the start of the year amid one of the worst starts to the year on record for equities.

Traders work on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
Traders work on the floor of the New York Stock Exchange.

While many managers are still technically "underweight" on the commodity benchmarks, bullishness on the sector has dramatically improved in the last month as oil prices have climbed closer to $40 per barrel and iron ore prices have soared.

Commodity exposure jumped to 9-month highs, with around 13 percent of the 200 fund managers surveyed now "underweight". This is sharply down from the 29 percent of the investors that said they were "underweight" their benchmarks in February and marks the largest month-on-month jump since 2006, when the bank first started collecting the data.

The survey's respondents have a total of $500 billion under management and were polled between March 4 and March 10.

Meanwhile, cash levels spiked to around 5.6 percent on average last month, according to BofA ML, the highest since November 2001. As "risk-on" sentiment has creeped back into markets, fund managers have also started adding to their allocations of high-yield debt and stocks, the data showed.

Over the past four weeks, stocks have staged an impressive rebound from their February lows. Stocks rose for the fourth consecutive week last week, with the major U.S. indices up around 1 percent on the week.

But this recent "relief rally" has dampened volatility to levels that are perhaps too low, BlackRock's Global Chief Investment Strategist, Russ Koesterich, warned on Tuesday.

"Against the backdrop of continued uncertainty in the global economy, the recent rally is beginning to look a bit excessive. This is particularly evident in the sharp drop in volatility. The VIX Index, a key measure of equity market volatility, has fallen to about half of its February peak. Meanwhile, the VVIX, which measures the volatility of volatility (or, more precisely, how frequently volatility spikes occur), is back to its lowest level since last August," he said.

"Given the still uneven pace of global growth and tighter financial market conditions suggests the potential for a rise in volatility — which would imply another bout of stocks selling off. March may have come in like a lamb, but the lion may be lurking," he added.