China slows, commodities bubble investors biggest fears - BarCap

Commodity investors now fear a slowing Chinese economy more than U.S. financial regulations and many worry of a bubble if markets keep rallying with little heed to fundamentals, a survey by Barclays Capital found.

Absolute returns, or profits, remained the main reason for investing in commodities for a second straight year -- compared with the traditional objective of portfolio diversification.

But while investors saw the potential for further upside in commodities from continued economic recovery, they expressed wariness over growing risks in China and the sharp price run-up in many markets of late, the survey showed.

"China is a bigger concern now than before," Kevin Norrish, BarCap's director of commodity research, told reporters on Thursday as the London-based investment bank unveiled the findings of its sixth annual commodity investors survey.

"This time last year, there was no concern about liquidity tightening in China. But the inflation in food prices and the property market bubble has changed that," he said.

"Now there's concern that if something goes wrong, policy could tighten up too quickly and interest rates would go up faster than anticipated, hitting demand for almost everything China consumes."

Investors in last year's poll cited U.S. financial regulations as their top concern, amid moves to rein in Wall Street post-crisis. A raft of new laws have surfaced since, including limits on the amount of proprietary money a bank can bet on a market.

This year's survey revealed concerns about a possible price bubble after a number of niche commodities, including cotton and silver, hit multi-year highs and posted wild price swings as futures exchanges upped trading margins, or deposits.

"I think markets such as copper and crude oil could continue doing well but the others, where the fundamentals are more suspect, could fall back quite a bit," Norrish said.

The survey showed copper as the commodity best poised for returns in 2011, securing 26 percent of the votes from the more than 300 respondents, who included pension fund managers, hedge fund traders and high net worth individuals.

BarCap has a price target of $9,950 for a tonne of copper on the London Metal Exchange CMCU3 by the third quarter of 2011, compared with Thursday's record high of $9,091.

Norrish said he believed the metal, used largely by the construction and power industries, "has potential to strike $10,000".

Grains took the second-highest number of votes in the survey on expected price gains, at 23 percent, while crude oil came in third, with 19 percent.

Survey highlights:

* Direct investment inflows expected into commodities in 2011, vs 2010 estimate of around $70 billion

Votes

- Less than $50 billion 14 pct

- Around $50 billion 10 pct

- $50-70 billion 50 pct

- More than $70 billion 26 pct

* Commodity seen as best performer in 2011

Votes

- Gold 8 pct

- Crude oil 19 pct

- Grains 23 pct

- Steel 5 pct

- Diesel 3 pct

- Copper 26 pct

- Sugar 0 pct

- Steam coal 10 pct

- US natgas 6 pct

* Annual average benchmark commodity returns expected over

next five years (2010 average returns at around 5 percent)

Votes

Expected return

0-10 pct 3 pct

0-5 pct 10 pct

6-10 pct 60 pct

Above 10 pct 28 pct

source