Institutional investors have lost faith in the global recovery, saying their expectations for growth, profits and prices are now lower, according to the latest Merrill Lynch Fund Manager Survey.

Last month, fund managers still believed that a recovery could deliver 10% growth in global earnings per share. This month, fund managers have turned more cautious, saying that global EPS growth could be more like 7%. “Institutional managers are closing their cyclical positions,” said David Bowers, Merrill Lynch’s chief global investment strategist and author of the study. “They’ve lost confidence in the recovery and now see cost-cutting as the prime driver for earnings growth. But they are still hoping that we are close to a bottom for equity markets, and continue to see value in world stocks.”

The Merrill Lynch Stock Market Conditions Indicator took a turn for the worse this month, Bowers said. The indicator fell from 15.6 in July to 14.9 in August, reflecting that fund managers have lower expectations for corporate profits.

Fund managers are becoming more cautious, saying that they have become slightly more reluctant to “buy on the dips,” according the survey. If the market should fall 10% in the next three months, only 69% would buy, compared to 79% last month. However, despite the more negative fundamental outlook, a net 62% of the panel believe that world stock markets will be higher a year from now, and a third of the panel is still anticipating double-digit returns from equities over the next 12 months. “Fund managers remain surprisingly hopeful despite the equity sell-off of the past three months,” Bowers said.

The opinions come from a survey of 292 institutional investors, who manage more than US$706 billion in funds worldwide, which was conducted from August 1 to 8.