GLOBAL – Investor confidence in Europe dipped this month revealing a slightly pessimistic outlook for economic growth in the region, according to the latest Merrill Lynch Regional Fund Manager Survey.

However, economic optimism still remains fairly high and equities are still regarded as “cheap”, said the report.

“Apart from Asia, Europe is one of the few regions where equities are viewed as significantly undervalued by regional specialists.”

Meanwhile, world equities fell by 1% between January and February.

The survey “reveals a renewed uncertainty over monetary policy”, especially in light of the appointment new US Federal Reserve chairman Ben Bernanke.

Merrill Lynch chief European and global equity strategist David Bowers stated that investors are less “gung-ho” and have a much more cautious tone.

“Fund managers have become more risk averse and are reigning in time investment horizons,” he said.

Another key theme for the year ahead involves increasing investor pressure on companies to grow organically. According to Bowers, Japan is among the key areas where this could occur, but he did not rule out possibilities in Europe.

If investors put the squeeze on companies to grow, subsequent changes in interest rates (due to increased borrowing) and investment in bonds could have serious implications for pension funds.

“What will be interesting in the second half of 2006 will be whether companies respond to a shifting investor agenda,” Bowers said.

The Merrill Lynch fund manager survey also covered non-traditional assets for the first time. Roughly half the survey respondents could give an opinion: a net 31% are overweight commodities and 26% are overweight alternative investments. Only 7% are overweight real estate investments.

According to Bower there is “growing investor interest in these assets”.

The increasing interest in commodities is also a key reason driving higher gold prices, according to the majority of asset allocators (38%) in the survey. Merrill Lynch precious metals analyst Michael Jalonen stated that the price could go as low as $475 before finishing at between $575 and $600 over the next 12 months.

“Investment demand has really picked up this year,” he said.

The survey – conducted between 3 February and 9 February – involved 221 fund managers managing $629bn (€529.6bn). A further 140 managers took part in the regional surveys, managing $314bn.

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