Commodities other than oil will fail to capture much of the renewed investment appetite for risky assets that has buoyed global markets this year until more clarity emerges about demand from China, say analysts.

Investment has flowed into equities, emerging markets, high-yield debt and real estate markets in the New Year after improved US economic data and an injection of cheap loans to European banks boosted sentiment, but most commodities markets got only a brief boost.

Asset allocators such as Koen Straetmans at ING Investment Management in the Netherlands are finding opportunities in other risk-on trades until more data comes from China, the biggest consumer of copper, iron ore, steel and soybeans.   

"The macro-economic data out of China is rather clouded for the time being, so we'd like to see some data from March to judge whether end-user demand is really filtering through," said Straetmans, senior strategist at the group, which has about 330 billion euros ($439.6 billion) under management worldwide.

"We still have a slight underweight position in commodities, whereas in equities we are still slightly overweight, so we have the risk-on trade through equities and also through real estate."     

The 19-commodity Thomson Reuters-Jefferies CRB index  gained as much as 7 percent by late February. But the rise has since been trimmed to 2 percent, despite a strong rise in oil futures, while world equities have gained 11 percent.

Patrick Armstrong, joint managing partner at Armstrong Investment Managers, a multi-asset investor, has been reducing his copper position since February, from 6 percent to 2 percent, taking the view that Chinese restocking is over for the time being.

"People had moved from a very risk-off position to trying to catch up with things (commodities) that have been running," he said. "In the short term we do expect cyclical pullbacks."     

Data from fund flows tracker EPFR Global show that cumulative flows into commodity and energy sector funds have failed to match last year's inflows.

Commodity sector funds, which include physical and futures funds and equity funds holding related stocks such as miners, attracted some $3.5 billion globally to March 21, compared with $4.6 billion over the same period last year.

Energy sector funds, which include equity funds and oil and natural gas exchange-traded products linked to futures contracts, attracted some $2.5 billion globally, compared with $5.8 billion last year.

"We've been in an environment which should have been risk-on (for commodities), but very few investors have been prepared to act that way," said Kevin Norrish, managing director of commodities research at Barclays Bank, noting that participation in the base metals rally had been quite thin. "That may be because there are still dark clouds on the horizon, one of which is the high oil price itself."       

Many managers are keen to include crude oil in portfolios, based on political tension between the West and Iran rather than on underlying supply/demand fundamentals. Brent crude has been a standout performer in the commodity/energy complex, shooting up 16 percent so far in 2012, as investors seek a hedge for other risk assets to protect against an oil price spike.

"Prior to the financial crisis, the last three global recessions were caused by geopolitical events that led to an oil price spike, and that is clearly relevant today. So having some oil in the portfolio seems to make sense," said Robert Farago, head of asset allocation at Schroders Private Banking.   

"For the rest (of commodities), we prefer equities to commodities as a risk asset," he added.

Even gold, which was often valued as an alternative investment, has lost some of its appeal after sharp liquidations dented its status as a safe haven asset. "We've been reducing gold significantly," said Armstrong.

"We have been selling gold because we think it is definitely a risk asset rather than a safe haven, with the exact same implied volatility as equities."     

Gold shot up 14 percent in January and February but lurched down by nearly $100 on one day, Feb. 29, and has struggled to resume the upside since then.

Others like Farago have not completely given up on bullion, but are much more wary about including it in portfolios. "Gold looks expensive right now against inflation or against stocks ... so we are becoming more cautious on gold. We still think it has a role because extreme economic outcomes cannot be dismissed due to the level of the level of government debt out there." - Reuters