GLOBAL - Institutional investors are "still fundamentally pessimistic" about the outlook for corporate profit growth, fixed income and credit, a survey by investment bank Merrill Lynch has found.

This month's global fund manager survey shows a gloomy outlook for corporate earnings among fund managers, even though the majority thinks that the world economy will avoid recession.

Globally, 214 fund managers participated in the study between April 5-12, almost half of which run institutional assets.

"A net 38% of respondents expect corporate profits to deteriorate over the next 12 months and a net 46% believe it unlikely corporates will grow their profits by 10% or more over the same timeframe," said David Bowers, independent consultant to Merrill Lynch.

Simultaneously, bonds stay out of favour as investors fear that inflation rise. Nearly 55% of the fund managers thought that bonds are overvalued, and there is a strong belief that stocks are cheap relatively to bonds.

"There is a fixation among institutional investors that bond yields are unusually low, and I think that needs to be addressed," argues Bowers.

Surprisingly, there is a renewed risk appetite which has prompted investors to go gone back in particular into euro zone equities, argues Bowers.

"Pressure on companies to return cash to shareholders appears strong enough to justify a pro-equity stance," he said.

He added: "This could come from re-leveraging company balance sheets via share buy backs or company buy-outs.  However this strategy might struggle in the event of an unexpected rise in credit spreads and higher borrowing costs."