GLOBAL- The outlook for world equities has deteriorated in the past month, according to Merrill Lynch’s latest fund manager survey. In the report, which surveys 300 fund managers, institutional investors are quoted as saying equities appear overpriced and that the prospects for interest rates have deteriorated.

“Institutional investors are heavily invested, but the markets are not responding,” said David Bowers, Merrill Lynch chief global investment strategist.

The number of fund managers expecting a strong recovery in profits dropped from 30% to 24% in the past month and institutional investors continue to worry about inflation rising.

More investors now think the market is overvalued than undervalued according to the report. Those surveyed said that the market is trading some 2% above fair value, compared with at fair value a month ago. One in five polled believe equities will become increasingly overvalued in the next year.

But despite this fund managers remain fully invested and have yet to build up cash balances. “Fund managers are sweating it out,” Bowers said. “Investors believe the market can go better, but the risks are that things could get worse first.”

The Eurozone remains fund managers preferred market with 33% saying they would most like to overweight Eurozone equities, while 29% would most like to overweight emerging markets. The US market was least popular, with 38% of managers choosing to underweight it compared with 27% underweighting Japan.

Bowers says fund managers are cutting back on investment in the United States, taking a second look at Japanese equities and remaining overweight emerging markets.

The majority of fund managers remain overweight in equities and underweight bonds.