GLOBAL- Fund managers are more optimistic about the prospects for the world equity markets than they have been for a year according to the latest Merrill Lynch fund manager survey.

The survey, which canvasses over three hundred managers with combined assets of $734bn, shows that the stock market conditions indicator has risen for to second successive month to a twelve month high.

Yet the survey’s author David Bowers issues a word of warning. He says: “institutional investors say that stock markets are undervalued and interest rates will come down, which are positive signs. However, we may be facing a weakening nominal sales environment that would make the market look negative.”

Three quarters of those institutions surveyed believe the market is “seriously oversold”, up from a shade over a half of all respondents last month. Fund managers are also confident that concerns about inflation have disappeared and they now expect interest rates to drop.

Half the panel now thinks global equities are undervalued, almost three out of ten feel by 15% or more. One of the reasons the market is deemed cheap is because many investors are making surprising low equity risk premium assumptions.

The survey suggests that cash holdings are also building strongly with the net balance of fund managers overweight in cash rising to its highest level in over a year. The mean cash balance rose to 5.2% in October from 4.8% in September.

“Cheap valuations and rising cash balance can make potent combinations…especially when combined with lower interest rates,” said Bowers.

The survey suggests that if institutional investors start to buy, they are likely to opt for global emerging markets opposed to US equities.

It also says that Japan is most often cited as having the worst prospects for corporate profits. Equities in the United Kingdom continue to be perceived as having the best quality of earnings, while Japan is seen as having the worst.