Institutional investors have become a bit less bearish on the outlook for the global economy and corporate earnings, according to the latest edition of the BofA Merrill Lynch Survey of Fund Managers.

The survey shows a net 5% of respondents predicting that the global economy will improve in the next year, which is a slightly brighter outlook than the July survey, which found a net 12% predicting the world economy would deteriorate.

In addition, a net 78% of respondents think a double-dip recession is unlikely. However, 73% expect below-trend growth and inflation, which is unchanged from the previous month.

The survey shows an almost neutral view on the prospects for a rise in global inflation in the next year, Merrill says, reporting that just 1% expect inflation to be lower in 12 months’ time, compared to a net 12% in July. Additionally, a net 14% of asset allocators indicate that global monetary policy is too stimulative, compared to just 5% in July, it says. That said, 55% of respondents don’t expect a rate hike in the U.S. before the third quarter of 2011.

“The spotlight of investor pessimism has shifted away from China and Europe to Japan and the U.S. Investors clearly remain cautious, so better news on U.S. growth and fiscal policy would be a pleasant surprise,” said Michael Hartnett, chief global equities strategist at BofA Merrill Lynch Global Research.

“Investor sentiment on Europe has staged a remarkable recovery in the past few months, underpinned by greater optimism about Europe’s banks. Economic data now has to continue to support this shift,” said Gary Baker, head of European equities strategy at the firm.

Asset allocators reduced their cash holdings, in the latest survey, so that a net 7% were overweight cash in August, compared to 13% in July and 19% in June. While there was an uptick in allocation to equities, there was a drop in allocation to bonds, Merrill notes, 23% were underweight bonds in August, compared to a 15% underweight in July.

The survey also shows a sharp drop in investors’ appetite for U.S. and Japanese equities, but a recovery in demand for Eurozone equities. A net 14% of asset allocators are underweight U.S. equities, compared to 7% overweight in July. Global asset allocators have also reduced their exposure to Japanese equities. A net 27% were underweight Japanese equities in August, compared to a net 7% in June. Now, 11% are overweight eurozone equities, up from a net 10% underweight a month earlier.

Merrill also observes that global emerging markets increased in popularity in the latest survey, as concerns about a weakening of the Chinese economy waned. A net 38% of global asset allocators are overweight GEM equities, up from 34% in July and 31% in June. Moreover, 19% expect the Chinese economy to weaken over the next year, compared to 39% last month. This improved sentiment was supported by a shift towards commodities, Merrill says, as a net 9% are overweight commodities in August, compared to a 1% underweight in July.

On a sector basis, banks finally saw a sharp improvement in investor sentiment, moving from a net 28% underweight in July to a 19% underweight this month. This ranked alongside industrials as the biggest sector shift by investors. On the other hand, utilities and pharmaceuticals suffered steep declines in support, Merrill adds.

The survey also reveals that asset allocators think the U.S. dollar looks undervalued, while the Japanese yen is seen as overvalued.

A total of 187 fund managers, managing a total of US$513 billion, participated in the global survey from August 6 to 12.

IE