EUROPE – Fund managers in the euro-zone see equities in the euro-zone as undervalued and are guardedly positive about the outlook for the European economy, according to a survey by Merrill Lynch.

A net 51% of the European fund managers surveyed in Merrill’s monthly fund manager survey said they saw equities in the euro-zone as undervalued. Some 49% of respondents saw a stronger European economy.

In terms of monetary policy, a net 62% of the euro-zone fund managers in the poll saw European Central Bank policy as too restrictive, from 38% in December and 78% in November.

The report found that a net 69% of worldwide respondents to the survey expect the global economy to be strong in a year’s time. This compares to 67% in December and 37% back in October.

On a global basis, fund managers’ cash levels fell to 4.2% in January from 4.4% in December, which the firm’s chief investment strategist David Bowers said was “among the lowest that we have ever recorded in our survey”.

He said the reason why stocks are not being bought, despite looking so cheap, is due to two possible reasons. First, it may be due to the market’s risk aversion. Or it may be that people are already fully invested. “There is no cash waiting in the wings,” Bowers said at a news briefing.

Merrill’s director of European equity strategy Michael Hartnett added: “Europe has an asset that everyone one wants - the euro.” He said the euro is the most undervalued of the major currencies. Merrill has a target for the euro of 1.12 to the US dollar by year-end.

Hartnett added that European stocks represent the second cheapest market in the world after emerging markets, adding that the firm sees the DJ Stoxx index reaching 2,300 at year-end.

Asset allocation was another issue thrown up by the survey. Bowers said asset allocators are now wondering whether corporate bonds and government bonds should be treated as separate asset classes.

Merrill surveyed 69 fund managers in the euro-zone, with an average of 139 billion dollars under management.