The global economy will improve in the next year, predict fund managers, with the bearish sentiment that has long existed among investors beginning to ease, says Bank of America Merrill Lynch.

The group’s Survey of Fund Managers for August has found that five per cent of respondents believe that the outlook for the global economy and corporate earnings is bright, compared to sentiment in July when 12 per cent of respondents predicted that the world economy would deteriorate.

Those expecting below-trend growth and inflation remained at 73 per cent in August, but 78 per cent also see a double-dip recession as unlikely.

However, attention has turned to inflation, with just one per cent of respondents expecting inflation to fall in 12 months time, compared to 12 per cent in July. Fourteen per cent of asset allocators feel global monetary policy is too stimulative, compared to five per cent in July.

A further improvement in sentiment was demonstrated by an almost neutral reading in tracking investors’ risk and liquidity conditions, said Bank of America Merrill Lynch.
“The spotlight of investor pessimism has shifted away from China and Europe to Japan and the US,” explained Michael Hartnett, chief global equities strategist at BofA Merrill Lynch Global Research. “Investors clearly remain cautious, so better news on US growth and fiscal policy would be a pleasant surprise.

“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,” added Gary Baker, head of European equities strategy.

Cash holdings were reduced in August, with seven per cent overweight in cash, compared to 13 per cent in July and 19 per cent in June. There was also a drop in allocation to bonds, with 23 per cent underweight in bonds in August.

A recovery has been seen in demand for Eurozone equities, with 11 per cent overweight in this class in August, the most positive result seen since October 2009. A month previous, ten per cent were underweight in Eurozone equities. UK equities also succeeded, with investors the most optimistic in this area that they have been since May 2007.

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