GLOBAL - Fund managers are expecting only modest economic growth this year according to two new surveys published today, one of which suggests there has been a fresh loss of confidence in the European investment market.

Asked by Bank of America-Merrill Lynch if they expected the European economy to strengthen by the end of 2010, only 51% of respondents said yes. And a similar survey by Towers Watson found respondents expected only modest economic growth for the year.
 
Additionally, one in 10 managers questioned earlier this month by BofA-ML, in their February Fund Manager Survey, said they were underweight the European market for the first time since the end of Q3 2009, following uncertainty over how the European Union would approach the debt problems facing Greece and other Mediterranean member states.

In a breakdown of all European countries, one fared particularly badly. "UK Equities got hit very, very hard during the month, in terms of falling sentiment," commented Gary Baker, head of European equity strategy at Bank of America-Merrill Lynch Global Research. At least one-third of respondents are now considered to be underweight the UK, up 17 percentage points compared to the previous survey.

The survey also saw European banks named as the least popular sector to invest in by its 165 respondents, as 53% of respondents said they were still underweight that sector. Baker remarked this gave banks back "the unwanted title of the most hated sector in all of Europe", a position they had last held in March 2009.

This change in mood towards banks also saw investors re-establish their cash reserves, as global cash reserves rose by 0.6 percentage points back up to 4% after an unusually low month in January, according to BofA-ML.

"Investors, having put cash to work or drained cash holdings last month, have now tried to rebuild them in face of the market correction since then," Baker ventured. 

Despite Europe's underweight ratings and the dislike of banks, BofA-ML believes the European Union will see GDP growth this year, although it has corrected its estimate downwards to 1.7% from just over 2%. It also noted almost half of respondents do not expect the European Central Bank to increase its interest rates this year.

Towers Watson's 2010 Global Survey of Investment and Economic Expectations, meanwhile, gave a slightly more positive view of recovery. Conducted at the end of last year, its 98 respondents predicted strong growth for equities in both the Eurozone and the UK, with the former expected to return 8.5% and the latter country seeing 9% growth, both up by a third compared to the previous year's survey.

While the outlook for Europe was bright, Carl Hess, global head of investment at Towers Watson quickly pointed out that the strongest growth was reserved for Asia. "The overall picture we get from this influential group is one of recovery, with established Western markets lagging the emerging markets on most measures."

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