Institutional investors have regained some confidence in the global economy and are not rushing to endorse the “Double Dip” market scenario, according to the latest Merrill Lynch Fund Manager Survey.

Of the 298 managers polled, 48% said they expect stronger economic growth this month, compared to 43% last month. While very few institutional investors expected that markets would get a lot stronger, the majority said they expected some improvement over the coming year. “Fund managers are wondering if they have been a little too hasty in going negative on recovery,” said David Bowers, Merrill Lynch chief global investment strategist. “Institutional investors are not rushing to endorse a ‘Double Dip’ scenario — at least not yet.”

Those polled said industrial commodity price expectations have improved slightly and corporate profit expectations and earnings growth expectations have stabilized. Even at this point, more fund managers prefer stocks that are cyclical to those that are defensive.

Regionally, managers said things are looking better for the U.S. and worse for Japan. According to the survey, managers see the outlook for U.S. corporate profits as increasingly favourable, now second only to emerging markets. There was also an increase in those who saw the U.S. as having the best quality of earnings, now second only to the UK.

Japan is now the region that institutional investors see having the least favourable corporate profits outlook and worst quality of earnings. “Fund managers are stepping away from the abyss,” Bowers said. “Market and economic conditions have not gotten worse since August and they are getting more open-minded about the U.S.”

While fund managers worldwide are heading toward optimism, overall investor sentiment has declined, according to the survey. Institutional investors showed a significant rise in aversion to risk, with a net 26% of managers having a lower-than-normal risk in their portfolios. Fund managers remain overweight in cash and, in general, they see that equities are undervalued with 26% of those surveyed saying that equities are undervalued by 15% or more.

The 298 institutional investors polled manage US$702 billion in funds. The survey was conducted between September 5 and 12.