The result of the latest monthly Merrill Lynch survey of fund managers paints a gloomy picture.

Most global fund managers polled by Merrill Lynch expect the global economy to weaken over the next 12 months, most have a bearish outlook on corporate profits and most are showing no signs that their risk appetite will be improving any time soon.

A net 51% of the global fund managers expect a weaker economy while a net 48% of them expect corporate earnings to decline. Those readings are at their fourth lowest level since 2001, which is likely a response to higher oil prices and inflationary pressures, Merrill Lynch says. The survey was conducted earlier this month.

However, Merrill Lynch notes that investors appear to be ôholding their nerveö despite their pessimistic economic and corporate earnings growth outlook. Majority of the global fund managers polled still believe that equities are either fairly valued or undervalued.

Sector-wise, the global fund mangers are most overweight in technology, energy and telecommunications while they are most underweight in banks, consumer discretionaries and insurance.

One bright spot in terms of expectations are global emerging markets. Around 43% of the fund managers polled by Merrill Lynch are overweight in emerging markets. Around 55% of them think that emerging markets have the best profit outlook over the next 12 months. The profit outlook for all other regions is negative, especially the US.

Fund managers that focus on emerging markets are most overweight in industrials, telecommunications, and consumer discretionaries, while they are most underweight in utilities, healthcare, and technology. In terms of country allocations, they are most overweight in Brazil, Russia, and Turkey, Indonesia and Thailand, while most underweight in Chile, Mexico and Poland, Israel and Taiwan.

There was also a sharp deterioration in the economic growth and corporate earnings outlook of Asia-Pacific ex-Japan fund managers over the next 12 months. A net 13% of them expect the economy to weaken, compared to a net 27% who expected in October that economy would grow. A net 7% expect earnings per share growth to weaken, compared with a net 20% who expected higher numbers last month.

The Asia-Pacific ex-Japan fund managers are most overweight in industrials, consumer staples and energy, and are most underweight in utilities, media, and telecommunications. In terms of country allocations, they are most overweight in Hong Kong, South Korea and Taiwan, and are most underweight in Thailand, the Philippines and Indonesia.

Country weightings tend to differ depending on the investment focus of a fund manager. Global emerging market fund managers have more countries to choose from in terms of allocations, and this sometimes leads them to ignore certain emerging markets in Asia that are among the top picks of those who focus on that region.

Merrill Lynch surveyed 189 global fund managers with $683 billion in total assets under management and 171 regional fund managers with $460 billion in total assets.

Merrill Lynch takes the net positions of fund managers in each survey question by measuring positive responses against negative responses.