GLOBAL - Fund managers remain optimistic about the macro environment as less than a third now believe the global economy is in recession, however 72% expect to see "below trend growth and inflation" over the next 12 months, the latest monthly survey from Merrill Lynch has revealed.

Findings from the September Fund Manager Survey suggested investors are "capping their risk appetite", which is reflected in the increase in global cash balances from 3.7% in August to 4.1%. European fund managers, however, appear to be bucking this trend by reducing cash balances from 3.7% to 3%.

Gary Baker, head of European equity strategy at Banc of America Securities-Merrill Lynch Research, said despite increased acceptance that global economies are coming out of recession, with expectations of corporate margins increasing from -3% to 38% in two months, investors are still affected by the financial crisis as it only happened a year ago.

"We can't expect investors to shift on a sixpence, there is an emotional attachment and baggage that you take from surviving the last 12 months, which makes it difficult to embrace growth," he said.

The survey of 234 managers, responsible for assets worth $667bn (€454bn), showed the number of asset allocators overweight in cash had increased in the last month from 3% to 10%, while the proportion overweight in equities slipped from 34% in August to 27%.

Despite the move towards risk capping, respondents have increased their confidence in the eurozone, which is now almost neutral with just 1% underweight in the region compared to 13% last month.

This is the most positive stance since February 2008, when managers held it slightly overweight, as Baker suggested the rehabilitation of Europe in the  minds of investors meant it is the "second most popular region for overweight positioning in the next year after global emerging markets (GEM)".

That said, the data showed the UK is not benefiting from the increased enthusiasm for the eurozone with 10% of managers still underweight UK equities, only a slight improvement from 13% in August.

Going forward, the survey showed respondents are also optimistic about the future of European equities, with 7% intending to move into an overweight position in the next year. This is in contrast to July when 30% planned to remain underweight in the asset class.

Baker pointed out the move towards Europe highlights that "emerging markets are not the only game in town. It is starting to broaden out, and although 40% remain strongly overweight in GEM this is down from 52%". In particular, he noted among regional GEM investors there is a shift away from China - for the first time in 13 months - towards Brazil and Russia.

But the findings from the survey also showed the cautious approach to recovery means that although investors are clear about where they should be underweight - mainly defensive sectors such as telecoms, pharmaceuticals and utilities - "there is less conviction on where they should be long".

Technology and energy are the two most popular sectors but the overweight levels are 31% and 27% respectively, which Baker suggested is not a very high conviction rate, as percentages of 40-45% would mark real confidence.

"Investors essentially have neutral portfolios. They are not really there in terms of committing to how they should be investing. So equities look quite positive over the next few months," said Baker.

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