Merrill Lynch says its Survey of Fund Managers for May serves as a reminder that the seeds for the current bout of equity market turbulence were sown earlier this year.

Merrill Lynch’s latest monthly survey of global fund managers, which sought the opinions of 204 investors around the world, was completed on May 11, a day before the world’s stock markets stumbled. As such, it shows investors’ mindset immediately before the slide began, and worries about the economy, inflation and rates had all increased. Another 79 managers participated in the regional surveys. Collectively, those fund managers oversee US$919-billion in assets.

“This survey has been flagging investors’ macro concerns for a number of months now,” said David Bowers, chief global investment strategist at Merrill Lynch, in a release. “The only real surprise had been the market’s resolute failure to reflect these anxieties.”

One of the more unexpected findings of May’s fund manager survey is the extent to which global growth expectations have deteriorated since the start of 2006. While equity markets appeared to have discounted an upward revision in growth, an increasing number of respondents have been struggling to see how this can be sustained over the coming year. Only 14% of managers now see equities as undervalued, compared with 24% in April.

Managers are less sure that the global economy is going to grow over the next 12 months. Forty-three per cent now think that the economy will get either a little or a lot weaker over that time frame, up from 39% in February. And 70% of the respondents believe that global core inflation will be higher in 12 months’ time, which is a jump from 56% for April.

Not surprisingly in light of those concerns, the institutional investors’ appetite for risk seems to be waning. That is reflected in rising cash positions, shorter investment time horizons and lower-than-normal risk in some portfolios.

When it comes to expectations about the U.S. dollar, the survey shows that the managers and asset allocators are the most downbeat on the greenback over the next 12 months than they have been in the history of the survey. When asked which of three major currencies — the U.S. dollar, the euro and the yen — is most likely to depreciate over the next year, 76% said the dollar. The next closest was the euro at 10%.