Fund managers are holding record underweights to the commodities sector, while emerging market sentiment has hit a near five year low, according to the latest Bank of America Merrill Lynch Fund Manager Survey.

The survey, which canvasses 248 global fund managers with assets under management of $708 billion, found extreme bearishness in Emerging Market area which is especially tied to Chinese growth, in addition to fears over U.S. Treasury volatility. According to the latest Bank of America Merrill Lynch European Fund Manager Survey, a Chinese hard landing and commodity price collapse is now the most feared tail-risk in the survey, being cited by one quarter of fund managers.

BAML emerging market

The 3 big BAML-FMS takeaways:

1. Contrarians should buy commodities & emerging market stocks near-term

June FMS shows allocations to assets tied to China and U.S. Treasury volatility are now at extremely bearish levels. China growth expectations plunged to their  lowest level in almost two years, commodities fell to a record UW, and emerging market equity allocations collapsed to their lowest levels since December 2008.

2. Bond capitulation visible but equity capitulation is not 

Indeed, the June FMS did not show a significant deterioration in investor sentiment. Global growth and profit expectations both rose, allocations to global equities jumped, and cash balances actually dipped from 4.3 percent to 4.2 percent, away from the critical 4.5 percent level that would signal a big equity buying opportunity.

3. Break resilience of U.S. story and you will break the bulls 

June FMS unsurprisingly shows rotation from Japanese equities to both the Eurozone and the U.S. (to a 13-month high). The biggest risk to consensus is that the big optimism on anything U.S. real estate related (see above chart ) proves misplaced. June pair-trades: long Telcos, short Pharma; long Energy, short Banks. (May trade of long Materials, short Banks worked well).