LONDON/NEW YORK (Reuters) - Investors are staying away from commodities, fearing that the worst is yet to come after prices plunged in April on signs of slower world economic growth.
Wealth managers have been pulling money from commodities since the start of the year, culminating in a major selloff in April when investors dumped gold, copper and oil.
Poor economic data from China, Europe and the United States has hit global growth forecasts, making investors reassess the demand for raw materials.
The 19-commodity Thomson Reuters-Jefferies CRB index was down almost 6 percent following April's rout and is still off some 4 percent since the start of the year.
Investors say it is too soon to pick up a bargain.
"We are neutral to mildly underweight commodities now and we are not exactly itching to get straight back in there," said Johan Jooste, chief market strategist at Merrill Lynch Wealth Management, EMEA, which manages some $1.76 trillion globally. "The macro story is just less supportive of commodities now."
Some $9.02 billion was pulled from commodity sector mutual funds in the month to April 26, according to data from research firm EPFR Global. This followed $8.5 billion of redemptions from commodity exchange traded products (ETPs) globally in the first quarter, according to BlackRock data.
"We are not out of the woods yet," said Andrey Kryuchenkov, an analyst at VTB Capital. "We will still need persistent physical interest in order to underpin prices and limit the downside at times when investors remain utterly unconvinced."
Commodities are particularly sensitive to economic news about China, a manufacturing powerhouse that also requires huge amounts of raw materials to build its infrastructure.
China's economic recovery unexpectedly stumbled in the first quarter of 2013, with growth sliding below the 8 percent forecast as factory output and investment spending slowed.
"The biggest concern right now in commodities is that the economic slowdown in China is going to be far more severe than anticipated," said Jeff Sica, chief investment officer at New Jersey-based Sica Wealth Management, which oversees more than $1 billion in assets.
"This slowdown is going to shake a lot of people up."
Sica is currently underweight commodities and short copper, which is particularly sensitive to Chinese demand. China is the world's biggest consumer of copper, accounting for 40 percent of demand. Managers say that without strong growth from China, commodities will not perform well and China's key export markets are struggling.
In Europe, Germany's business sentiment fell in April for a second consecutive month, missing even the lowest estimate in a Reuters poll, while orders for long-lasting U.S. manufactured goods recorded their biggest drop in seven months in March.
Multi-asset managers have been switching from commodities into equities after a good run for stocks in the first quarter.
But investors are still favouring "defensive" stocks, as an element of caution remains. These pay good dividend yields that should continue to do well in a recession because their performance is less dependent on economic growth.
"Investors are preferring the safer bets in risky assets," said Koen Straetmans, senior strategist at ING Investment Management in the Netherlands, which manages some 183 billion euros of assets worldwide. The group is overweight equities and real estate but neutral on commodities.
Commodity-focused fund managers are pinning their hopes on a rebound in the second half of 2013. They see fresh stimulus measures from central banks driving inflation, which would be supportive for commodities, particularly gold.
However, multi-asset managers and analysts are sceptical as to how much impact more stimulus will have. They are not expecting inflation to pick up this year, point out that the U.S. inflation-linked bond market already pricing it lower.
"From a tactical viewpoint, and maybe even medium term, commodities wouldn't be an area where we feel we want to take advantage of what might be perceived cheapness," Jooste said.
"We like being long equities and it's doing well, but there is still some scepticism built in about an upturn in the second half, and that's an argument we would concur with."
Ashok Shah, investment director at London & Capital, which has some $3.7 billion under management, expects the economic environment to deteriorate. In the short term he sees a stronger possibility of a deflationary rather than an inflationary environment.
"Buy blindly and hold won't work as global growth continues to be lacklustre and Europe in particular remains under pressure," he said. "The outlook for aluminium and copper continues to be incredibly difficult."
Sica is also bearish. He said oil could go into another "hopeless range", similar to the one before the slump, with Brent stuck at between $100 and $105 a barrel, and U.S. crude languishing at between $90 and $95 a barrel.
"Copper looks even more doomed than oil, truly pointing to the depths of the economic slowdown in China now," he said.
Reporting by Claire Milhench and Barani Krishnan, additional reporting by Eric Onstad; editing by Anna Willard