UK/US- institutional investors remain upbeat about the prospects for world markets despite lowering their expectations for growth, profits and prices.

Merrill Lynch’s latest edition of the fund manager survey, which canvasses almost three hundred managers, shows more than a third believe global equity markets are undervalued while a quarter are convinced equities are undervalued by at least 15%.

More than six out of ten believe that world markets will be higher a year from now and a third of the panel is still anticipating double digit returns from equities in the next twelve months.

In contradiction to this, however, managers are becoming more reluctant to “buy on the dips” according to the survey with only 69% (opposed to 79% last month) saying they would buy if the market fell 10% in the next three months.

US equities remain out of favour with institutional investors, one in three of whom believe they have the worst outlook for corporate profits. Three out of ten also believe the US has the worst quality of earnings.

Although the US remains the market most investors would underweight, other markets are losing their allure. “There are increased signs of scepticism about Eurozone corporate profits," says the report.

"Institutional investors are beginning to wonder whether Japanese equities may be relatively expensive and that emerging markets are not so cheap after all,” it adds.

David Bowers, Merrill Lynch’s global investment strategist, says: “fund managers remain surprisingly hopeful despite the equity sell-off of the last three months.”