Merrill Lynch’s latest fund manager survey finds a significant portion of money managers expecting an economic slowdown and lower corporate profits.

There has been a sharp change in fund managers’ perception of the global economic cycle over the past two months, according to Merrill Lynch’s Survey of Fund Managers for May. This month, 52% of respondents describe the economy as being in a late-cycle phase. A net 32% of managers expect economic growth to slow over the next year — the most negative views expressed in the survey since the end of 2001.

Managers are also more concerned about the outlook for corporate profits. A net 34% believe profits will deteriorate over the next year.. One in five fund managers now foresee zero or negative earnings growth. As well, 40% expect operating margins to deteriorate over the next year.

As for inflation, 45% of mangers still expect core global inflation to rise over the next year, This represents a significant drop since April, when 62% took this view.

Meanwhile, the seemingly cast-iron consensus on rising interest rates has started to weaken. A net 80% of managers now expect short-term interest rates to rise over the next year, down from 94% in March.

Managers continue to prefer equities to bonds. A net 37% of asset allocators say they are overweight equities and 51% say they are underweight bonds. A net 61% of asset allocators think government bonds will perform better than corporate securities over the next year.

About 18% of fund managers expect China’s economy to weaken over the next year, versus last month’s poll in which expectations for the country’s economy were evenly balanced.

Managers are also fretting over the possibility that France could vote against the European constitution. A net 71% of the 61 European specialists are concerned a “No” vote might damage the euro, and a third of respondents worry a “No” vote could damage European equities.

“European equity investors are more anxious about the French referendum’s impact on financial assets,” said David Bowers, chief global investment strategist at Merrill Lynch. “These worries have not affected global asset allocations, which remain skewed towards Eurozone equities. But sentiment could change, especially as the euro has now overtaken the dollar as the currency investors expect to depreciate the most.”

A total of 339 fund managers participated in the global and regional surveys from May 6 to 12. These institutional investors manage a total of U.S. $1.06 trillion.