Fund managers have recovered their bullishness towards equity markets but are shifting their focus away from Europe and into the US and Japan, according to the BofA Merrill Lynch Survey of Fund Managers for March. However, European equity markets are seen as “cheap” by almost one-third of polled managers. When questioned by Bank of America Merrill Lynch for their March Fund Manager Survey, almost 30% of respondents said European equity was undervalued - - the first time in a year that so many took this view of Europe.

After weakened sentiment in February, investors have restored their faith in equities with a net 46 per cent of asset allocators saying they are overweight the asset class, up from 33 per cent the previous month. Cash positions have fallen with respondents at a net neutral cash allocation compared with a net 12 per cent underweight in February.

Asset allocators have retrenched from Europe, however. A net 21 per cent are underweight European equities this month, up sharply from a net 2 per cent overweight in January. The change in favour of US equities has been similar. A net 19 per cent of asset allocators are overweight US equities this month, up from just 1 per cent in January. Japan is also regaining popularity. A net 6 per cent of allocators are overweight Japanese equities, the most bullish reading since August 2007, and up from a net 10 per cent underweight in January.

Global investors believe that the corporate outlook is better away from Europe. A net 40 per cent of the panel says the outlook for Eurozone
 corporate profits is the least favourable of all regions.

"Investors' concerns about Greece are easing, but European country risk remains a key constraint to optimism over economic recovery," said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Research. "Investors are more willing to embrace corporate risk, via equities, than sovereign risk," said Michael Hartnett, chief Global Equities strategist at BofA Merrill Lynch Research.

Corporate outlook good, macroeconomic outlook bad

Against a backdrop of concerns over public sector deficits, investors are showing greater bearishness about the macroeconomic outlook, but greater bullishness about companies.

The net number of European fund managers predicting growth in their own economy over the coming 12 months has fallen to 45 per cent, down from 72 per cent in January, according to the Regional Fund Manager Survey. While European sentiment might have been expected to weaken, a similar fall in optimism is also evident among US investors. A net 43 per cent forecast growth in the American economy over the next 12 months, down from a net 76 per cent in January.

Investors in both regions have stronger belief in earnings growth. A net 60 per cent of European respondents predict improved earnings in the coming 12 months, an increase of 11 per cent on February. Their colleagues in the US are more positive with a net 72 per cent forecasting earnings growth, up from a net 52 per cent in February.

US and European investors have significantly scaled back their cash allocations. A net 9 per cent of the European panel is overweight cash this month, down from 26 per cent in February. The corresponding numbers for US investors are a net 8 per cent in March and 19 per cent in February.

European respondents have increased exposure to cyclical sectors, including Basic Resources and Construction. They have reduced their underweight position on banks. US investors have also increased exposure to cyclicals, such as Industrials and Materials, but have extended their underweight positions in Banks.

Investors are turning their attention back to stocks, but are moving their focus away from Europe and toward the US and Japan, according to the latest Fund Managers Survey from Bank of America Merrill Lynch. Gary Baker from BofA Merrill Lynch has more: