Investors are no longer underweight commodities for the first time since December 2012, according to the October Fund Manager Survey by Bank of America Merrill Lynch.

The report said the move has been driven by inflation expectations being at a 16-month high and the lack of value seen in developed bond and equity markets. 

Furthermore, there has been a surge in oil prices in recent months with OPEC agreeing to limit supply and Russian president Vladimir Putin supporting the plans. Brent Crude is currently trading at $51.75 a barrel.

However, Adrian Lowcock, investment director of Architas, added "if OPEC fails to deliver on its promises, there is a mild winter or a slowdown in demand then we could see another slump in oil prices".

Oil jumps 6% as OPEC surprises with production cut 

Meanwhile, gold prices continue to rise, up 26% this year, due to political uncertainty in the US and across Europe.

The survey also highlighted a rotation out of healthcare/pharma, REITs and bonds, into banks, insurance, equities, and emerging markets.

Emerging market equities positions rose to their highest overweight in three and a half years, from a 24% allocation last month to 31% in October.

David Fuller's view

With most investors keeping a close eye on US markets, not least because of their size and influence, and with additional interest in next month’s Presidential Election and especially the Fed’s probable rate hike in December, we can expect some volatility.  

We also know that a number of central bankers and also international economists are calling for more fiscal spending to spur GDP growth.  There are also calls for corporations to invest in the development of their business, rather than just parking capital in financial assets or using it for share buybacks.

Against this background we should not assume that inflation will remain dormant.  In fact, the cost of living has increased for most households.  They are experiencing rising property prices in many countries, higher rents, increased school fees and insurance costs, to mention just a few contributors to the inflation which is seldom mentioned in financial reports.    

Increased portfolio weightings in commodities makes sense, given that it was the cheapest sector at the beginning of the year and has also seen a number of strong recoveries among individual resources. 

Exporters of resources are gradually relearning the ancient laws of supply and demand.  The key variable for commodities is supply. Produce less and prices will rise.  Additionally, low prices for resources also increases demand somewhat, as we are seeing. 

The rise in commodity prices will contribute to somewhat higher rates of inflation, a possibility that dour pundits had said would remain dormant because of ‘the new normal’.  Even marginally higher inflation could spook bonds but revive interest in gold and other precious metals. 

There is some understandable scepticism about higher commodity prices, not least because producers would like to see the competition lower output, so that they could maintain higher production and also sell it at rising prices.  However, the lesson has been at least partially relearned, so lower prices would most likely lead to further production cutbacks.