Global fund managers believe that the risk of a US recession has doubled since December 2000, but do not see the US equity market as overvalued. Therefore, a record number of fund managers in the US plan to buy domestic equities, revealed a Merrill Lynch survey of fund managers around the world in March 2001.

Most fund managers also expect GDP growth to follow a more gradual "U" shaped recovery, instead of a swift "V" shaped recovery, with the upward turn beginning in 2002. While domestic US equities will be in demand, the monthly survey revealed that fund managers have turned into sellers of more cyclical equity markets like Japan and Asia Pacific.

European fund mangers, on the other hand, are more optimistic about their domestic economy. This sentiment is shared by their counterparts outside Europe, with 84% believing Europe can at least partially de-couple from the US slowdown. However, European fund managers, whilst optimistic, don't believe domestic earnings growth will be immune from the US slowdown and have cut their earnings forecast. A net 4% of European fund managers from last month see a favourable outlook for European profits, and this is a record low, according to the survey. European fund managers' earnings outlook for global corporate profits has also been downgraded to "less favourable".

Across the English channel, UK fund managers have become more optimistic on the outlook for their domestic economy. They expect GDP growth to stay steady in 2001 and 2002, although the survey found more managers this month expect inflationary pressure to rise. As for earnings, most UK fund managers have downgraded tier EPS growth forecast for 2001 to 6.3%. However, a record balance of UK fund managers see their domestic equity market as undervalued and most are buyers of UK equities. Also back in favour with UK fund managers are the cyclical sectors.

In Asia, Japanese economic optimism has improved from last month's record low following the Bank of Japan's decision to cut interest rates during February. However, the survey shows that fund managers continue to downgrade their GDP forecasts. Twenty-one percent of fund managers - the highest number since November 1998 - see the outlook for corporate profits as unfavourable, and have downgraded their EPS growth forecast for the financial year of 2001. A record number do, however, see Japanese equities as undervalued, although fewer are overweight domestic equities and fewer are underweight domestic bonds.

Across the rest of the region, Asia Pacific fund managers are more optimistic on the outlook for the global economy, and similarly on corporate profits. A second round of rate cuts from the central banks in key markets have helped improved sentiment.

The survey was of 222 institutions around the world with funds under management of $8,644 billion. It took place between 2 March and 7 March.

Portfolio breakdowns are as follows:

US fund managers:

Have turned sellers of Asia Pacific equity (ex-Japan) over the past month. The percentage of buyers minus sellers has moved from 3% in January to zero in February and -11% in March. By contrast, they have become record buyers of domestic equity (29% up from 12% in February) and strong buyers of Continental European equity (21% against 3% in February).

Their most favoured investment sectors are: financials (20% of respondents favourite); with healthcare coming second on 17%; technology third on 13%; and consumer staples and consumer cyclicals joint fourth on 10%. The least favoured sectors are transportation on 15%, basic materials on 14% and industrial capital goods on 13%.

Continental European fund managers:

This fund management group still remains small buyers of Asian equities with buyers minus sellers amounting to 4%, the same as last month. The largest increase has been in Continental Europe and emerging Europe where the ratios have respectively jumped from 36% and 9% to 43% and 14%.

UK fund managers:

This sector has become a stronger buyer of domestic equity, with the ratio of buyers minus sellers moving up from 11% in February to 20% in March. Asia, however, has fallen from 12% in February to 2% in March.

Asia Pacific fund managers:

Regionally, fund managers have become the biggest buyers of Chinese and Indian equity. The ratios of buyers minus sellers has moved from: 21% in February to 6% in March for Hong Kong equity; 17% to 25% for China equity; 0% to 6% for Indian equity; 4% to -13% for Indonesian equity; 13% to 6% for Korean equity; 4% to -13% for Malaysian equity; 4% to -6% for Philippines equity; -13% to -19% for Singaporean equity; 33% to 13% for Taiwanese equity; and 8% to -6% for Thai equity.