GLOBAL - More than 50% of fund managers expect to witness double-digit profit growth over the next year, according to a new Bank of America-Merrill Lynch survey.

Accompanied by the news that asset allocators have remained overweight in Europe for a second consecutive month and that two-thirds of respondents now see a double-dip recession as unlikely, the mood in the investment industry seems increasingly positive.

Additionally, according to the November Fund Manager Survey, the euro-zone remains the most undervalued region in the world with 22% of those questioned agreeing. Despite these positive indicators, the outlook was not perfect, with many investors focusing on what was branded "a defensive asset allocation".

"You've got investors, essentially, very narrowly huddled in three high-conviction overweights, which are oils, telecoms and health care, which sounds awfully like the situation at the start of the year, despite everything that's gone on," said Gary Baker, head of European equity strategy at Bank of America Securities - Merrill Lynch. "It's still quite a defensive asset allocation," he concluded.

Indeed, after recovering some momentum and becoming overweight again in last month's survey, banks were now underweight by 32%, with the technology sector almost as badly affected and construction following at a distant third.

Despite the downturn in the popularity of banks, 53% of respondents still expected to achieve more than 10% growth over the next 12 months, marking the most positive response since the question was first asked over three years ago. (See earlier IPE article: One in three fund managers predict double-digit growth)

Baker went on to voice surprise at the choice of investments in Europe, with defensive asset allocation only being implemented in the region. "At the very point you think European investors have grasped the nettle and are investing in risk assets, lo and behold, the month after, they retreat and scurry back into foxholes."

The situation with Europe becomes even more complicated once it is taken into consideration that while asset allocators remained overweight on Europe, they were unsure if the next 12 months should see an overweight European or US market on the back of a higher opinion of the dollar, despite almost 20% of respondents saying the US was overvalued. Baker concluded that investors had become 'dollar bulls'.

"I think that is holding them back, or confusing the issue as to how positive you can be on Europe versus the US," he said, adding that many had "given up on Japan" as a place to invest.

Asset allocators also remained cautious about investing in the UK, with the country still seen as underweight by 10%, and Baker noting that faith in the UK banking system was still among the lowest in the world.

November's survey also asked when respondents expected to see the European Central Bank (ECB) increase its interest rates again. It is worth noting that the survey was conducted before last week's announcement that the euro-zone had exited the recession, but over a quarter of those asked expected the ECB only to increase its rates again in the fourth quarter of 2010 or later.

Despite the mixed news for Europe, Baker seemed optimistic about the continent's outlook, arguing that the market was viewed positively outside of the euro-zone.

"If you go to the US, people see Europe as a very attractive region in terms of fundamental valuation. It's only once you actually sit in the region that you get infiltrated."
 

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