GLOBAL - European investors appear to have become oblivious to the risk of inflation and instead remaining highly consumed by the outlook for growth, according to a survey by Merrill Lynch.

Merrill Lynch's Survey of Fund Managers for April found the number of investors who expect core inflation in the eurozone to rise in the next 12 months has fallen to a net 2% in April from a net 20% the month before.

Karen Olney, chief European equity strategist with Merrill Lynch in London, said today: "I am absolutely bemused that European investors in this last survey have become more relaxed about inflation than worried."

She fears there is a view among investors that nflation is transitory, though according to Merrill Lynch inflation is longer lasting than first thought: "It would be foolhardy for investors to treat inflation as fleeting, rather than something that is much more stubborn during the cycle," she said.

At the same time, a net 48% of European investors believe monetary policy is too restrictive, up from 13% six months ago, which is underscored by "dramatic swings in asset allocation", according to Merrill Lynch.

"European investors are pulling back from the commodity-based stocks they have relied on to capitalise on rising inflation, especially over the past year," states the survey.

Moreover, investors have slashed overweight positions in basic resources and utilities and reduced their overweights in oil and gas.

Olney commented: "A degree of profit-taking makes sense given the gains we have seen in sectors such as basic resources. But the question is whether these inflation-sensitive stocks have truly lost their market leadership."

She added: "A wholesale change out of commodity-exposed stocks would coincide with the view that inflation is cyclical rather than secular."

Investors have redeployed proceeds by reducing underweight positions in retail and automobiles and by making a significant move back into Insurance.

According to the survey,  in which a total of 202 fund managers participated between April 4 and April 10, fund manager's profit expectations have collapsed further, and most respondents expect profits to be cut.

Secondly, around 90% of European fund managers found consensus growth expectations at approximately 7% are too high.

"In our view, there is an acceptance that profits are going to be dire," said Olney, adding: "The market is not going to move forward until these consensus estimates come down to 0%."

David Bowers, independent consultant to Merrill Lynch, said investors are still concerned about growth and 'stagflation', though this is outweighed by worries about growth disappointing, rather than inflation going up.

"FX is becoming a big issue for asset allocators, with people becoming very concerned about the stability of the Euro's overvaluation," said Bowers.

He added: "The main casualty from an FX perspective, but also from an asset allocation perspective is the UK equity market, which people continue to be extremely negative on."

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