Fund manager sentiment has soured sharply as expectations of global growth and inflation sank to two-year lows, finds the latest Bank of America-Merrill Lynch survey of fund managers worldwide.

The survey for October* found that confidence in profit growth had plunged to an 18-month low, while expectation of steepening yield curves had reached a three-year low point.

Only a net 32% of respondents expected the global economy to strengthen over the next 12 months, down a resounding 20 percentage points from September.

Nevertheless, only 8% of respondents forecast another global recession in the near term.

Investors have responded by increasing their cash positions. “Cash balances are high, but investors are retreating to benchmark positions rather than staging an exodus from markets,” said Michael Hartnett, chief investment strategist at BofA-Merrill Lynch Global Research.

Against this backdrop, emerging markets allocations have taken a hit, with an 18-percentage point weighting decrease month-on-month. Energy and materials were the only segments to suffer more.

China saw sentiment turn more negative, with a net 35% of respondents expecting the nation's economy to weaken, an increase from 25% in September and 6% in August.

India leads global emerging market (GEM) investors’ country preferences for October, followed by China, Taiwan and Indonesia.

That compares with last month when Taiwan led the pack, followed by Mexico, Korea, India and Poland.

GEM investors are overweight technology, health care and telecoms, and underweight financials, energy, industrials and materials.

Meanwhile, the Philippines led Asia-Pacific investors’ list, followed by New Zealand, Malaysia and India.

And for the first time in 10 years, global investors do not view global emerging market currencies as undervalued.

While emerging markets and the eurozone fell out of favour, the US and Japan saw allocations rise.

Investors increased their weighting to the US by 16 percentage points from September, and to Japan by 9 points.

Investors’ preferred sectors in Japan are industrials, telecoms, autos and technology, while they are shunning utilities, pharmaceuticals, materials, media and retail.

Japanese fund managers’ inflation expectations are on the rise. A net 46% of respondents expect consumer prices to climb in the next year, up from a net 18% last month.

Turning to stimulus measures, the consensus is that the European Central Bank will launch a quantitative easing programme involving sovereign bond purchases in the first quarter of next year.

A majority of managers forecast that the US Federal Reserve will first raise interest rates in the second quarter of next year.

* A total of 220 managers with a combined $640 billion of assets under management participated in the survey from October 3-9. A total of 103 managers with combined AUM of $264 billion took part in the regional poll.