Merrill Lynch’s Survey of Fund Managers for November finds that global investors remain reluctant to change the essence of their strategy despite weakening macro-economic conditions, higher energy prices and deepening credit concerns.

In the past month, the price of crude oil rose 18% and credit spreads widened. But sector and country positions this month suggest that the majority of investors still favour equities, comfortable with the idea that the global economy can withstand a downturn in the US and believing that bad macro economic news has been priced in, Merrill reports.

With only 12% of respondents expecting a global recession in the next 12 months, bears can argue that complacency lingers. Bulls and bears do, however, agree that the business cycle is maturing, with 70% of the panel believing the global economy has entered a late-cycle phase, it notes.

“Investors are holding their nerve despite the gloomy outlook for growth and profit expectations,” says David Bowers, independent consultant to Merrill Lynch. “However signs have emerged that portfolio managers are taking a more conservative view on how they would like to see companies use their cashflow.”

While the markets appear to be fixated on short term credit issues, November’s survey highlights how investors are becoming more anxious about the long-term credit outlook. Already visible in widening corporate bond spreads, the survey highlights investor concern with respondents taking a less relaxed stance towards corporate debt levels in two years. The net balance of respondents that regard corporate balance sheets as “under-leveraged” fell to 36% in November, from 59% in May.

Investors are forecasting muted earnings in 2008 – 48% of respondents expect corporate earnings to fall in the next 12 months, up from 44% in October and 28% in August. Faced with an uncertain earnings outlook and tighter credit conditions respondents are also becoming more picky about how they want companies to allocate their cashflow. Almost 20% of the panel now wants companies to start strengthening their balance sheets compared to just 8% in June.

In Europe, with slower global growth and further sell-offs in financials, investors are looking to benefit from retained strength in domestic, Eurozone growth. This month they moved into sectors oriented towards demand in their home region such as Food & Beverages, Retail and Telecoms, Merrill reports. Of those listing a preference, 54% of respondents said they prefer stocks exposed to domestic, versus overseas, growth.

“We believe that the search for protection from the global economy, as it moves from mid to late cycle, combined with a spiralling euro and widening pockets of financial distress, will lead investors to the less-indebted and wealthier old Europe consumer,” says Karen Olney, chief European equity strategist at Merrill Lynch.

The rising euro is putting pressure on exporters, but it’s also helping fuel domestic demand. Three other factors boosting prospects for consumer exposure are a rise in disposable income, a healthy savings ratio, and a step-change in fiscal support a number of government deficits fall to below 1% of GDP.

Asset allocators are already making changes, Merrill reports. During October, the net percentage of European investors underweight Food & Beverages fell 21%; the net percentage underweight retail fell 25% and the net percentage overweight telecoms rose 9%. But renewed worries about sub-prime assets saw European investors moving aggressively away from banks, it notes. In November 40% of European investors said that they were underweight banks – up sharply from only 4% in October.

A total of 189 fund managers participated in the global survey from November 2 to 8, managing a total of US$683 billion.