GLOBAL – Fund managers’ risk appetite has grown in the last 10 months, according to the latest survey of fund managers conducted by Merrill Lynch.

In that time, Merrill says, managers have switched away from being highly risk averse to wanting to take on risk.

A net of 11% of managers told the survey that they are taking “higher than normal” risks.

“We have travelled from the most risk averse environment to most risk recorded in the survey (March 2003) to the most risk risk-loving environment (January 2004),” the report says.

David Bowers, the firm’s chief global strategist, said the shift in risk appetite was “unlikely” to remain so high in 2004 – and that it could also be a warning sign.

“The contrarian’s call would be: people are complacent about risks,” he told a press briefing.

With risk appetite so high, the average cash level, 3.7%, is the second lowest since 2001.

Bonds’ low yields and the perception among fund managers that equities were “fairly” valued was the most striking feature of this month’s report, Bowers said.

Two-thirds of the survey saw bonds as overvalued even if yields have been falling in the last months.

“In other words, with this kind of recovery, yields ought to be a lot higher than they are today,” the report says.

A reason for low yields might be Asian central banks’ attempting to stem the decline in the dollar and the fact that the US Federal Reserve was not expected to raise interest rates until September 2004.

The appetite for equities, however, “will continue so long as investors assume that the low level bond yields is an anomaly… a misvaluation that will soon be corrected”.

“The moment investors question that assumption, then equities could become highly vulnerable.”

Nearly half of fund managers in the euro zone, 41%, see equities as undervalued. A stronger euro zone economy was expected by 86% of the managers in the area, while 90% look for improving profits in the euro zone.

The report also reveals that 35% of managers in the euro_zone see monetary policy as “too restrictive”.

The euro was seen as being overvalued by 57% of the respondents and the dollar, according to 39% of the panel, is undervalued.

“Growth is back”, Bowers said, noting that companies have enough cash flow for capital expenditure and that managers were still “up-beat” about growth expectations.