Big global investors are getting gloomier, according to the monthly BofA Merrill Lynch Survey of Fund Managers for June.
The survey was conducted as global shares fell 7.5% and revealed a distinct worsening in confidence and sentiment from the weakened levels that showed up in the May survey.
But while Europe is the cause of much of the angst, the survey does suggest that the sharp fall in confidence among big investors about the region has slowed, but big European investors have less confidence in their region than outsiders.
But the gloom has spread from Europe and only a net 24% of respondents now believe the world economy will strengthen in the next 12 months, down from 42% in May and 61% in April.
And global investors expressed similar concerns over the state of corporate profitability.
A net 28% of the panel now thinks that profits will improve in the coming 12 months, down sharply from the net 47% level in May and 67% in April.
The proportion of the panel expecting corporate operating margins to improve in the coming year has halved in the past two months to a net 19%.
Investors are also displaying greater concern about market liquidity conditions, as worries grow about the health and strength of European banks (especially in Spain).
Forty two per cent of the panel now describe liquidity as "poor", up from 22% in April.
But risk appetite among this big investors seems to be untouched and was roughly steady.
Average cash balances fell slightly to 4.1% of the portfolio from 4.3% in May.
Inflation fears are plunging, so 80% of respondents are now ruling out a Fed rate rise in 2010.
The survey also hints that investors can see buying opportunities beckoning with a net 38% of the panel saying equities are undervalued, the highest reading since March 2009.
But so far no one seems to act on this hint of bargains.
In commentary on the survey, Michael Hartnett, chief Global Equities strategist at BofA Merrill Lynch Global Research said, "Global growth expectations have ‘double-dipped’ and positioning is more defensive but investors show little sign of panic".
"Investors are starting to see the basis for Europe’s rehabilitation on the back of a more constructive outlook for the euro," according to Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.
Negative sentiment from global investors towards Europe, at its worst in the May survey, appears to have slowed.
So these big global investors are feeling more hopeful about the outlook for Europe’s stocks and for the euro.
June’s survey shows 19% of the global panel is predicting the euro to appreciate over the coming year, up from 7% in May.
And this has resulted in a loss of interest in whether the greenback is undervalued with global investors neutral about the dollar’s value, a month after a net 29% said it was undervalued.
A month ago a net 30% of the panel identified the eurozone as the region they would most like to underweight.
That figure has fallen sharply to just 12%.
The proportion of the panel pinpointing the eurozone as having the weakest outlook for corporate profits has fallen to 33% from 41% in May.
The proportion of global investors underweight eurozone equities has fallen to a net 27% from 34% a month ago.
But that improvement in confidence is coming from foreign investors.
Inside Europe it is a very different story with local investors at their gloomiest for more than a year.
The survey shows that only a net 7% of European fund managers expect the region’s economy to improve in the coming year, compared with a net 23% in May.
According to the regional survey, a net 20% of European portfolio managers predict an improvement in earnings over the coming 12 months, down sharply from the 74% level hit in what was a very bullish survey in April.
But it’s not just Europe; confidence in China is now at its lowest level since January 2009 with a net 27% of fund managers expecting China’s economy to weaken in the coming 12 months.
That’s a big turnaround from April when a net 21% expected the economy to improve.
Commodities, which closely track China’s growth, have suffered and only a net 4% of global investors remain overweight in the asset class, down from 17% in May.
The fall in oil prices and BP’s Gulf of Mexico oil spill has sparked an exit from energy stocks, with the survey saying investors sold down energy stocks "in record numbers amid news of the continuing oil spill in the Gulf of Mexico".
Just a net 7% of global asset allocators retain an overweight position in energy, down from a net 37% in May, the biggest monthly swing in energy the survey has recorded.
Investors have tightened their defensive approach towards equities, moving out of cyclical sectors. Asset allocators are now underweight Materials, holding their lowest allocations since March 2009.
"Secure-dividend sectors such as Staples (retailers and food companies) are benefiting," the survey found.
"A net 15% of the panel is overweight Staples, up from 4% in May and at its highest since March 2009.
"Staples have replaced Energy as the second most-favored sector after technology. Allocations towards Utilities and Pharmaceuticals have also risen."
A total of 207 fund managers, managing a total of $US606 billion, participated in t
