Fund managers around the world are voicing signals ranging from bullish to bearish in their view of global markets and economies, according to the recent Merrill Lynch Fund Manager Survey.

Despite another difficult month for world equity markets, the survey’s Stock Market Conditions Indicator has reached its highest level since November 2001. It has risen from a grade of 13.9 in September to 15.8 in October, an improvement for the second successive month. The indicator looks at profit expectations, interest rate projections, equity valuations and investor sentiments.

“On paper, the fund manager survey looks like good news, but is it?” asked David Bowers, Merrill Lynch’s chief global investment strategist and author of the survey. “Institutional investors say that stock markets are undervalued and interest rates will come down, which are positive signs. However, we may be facing a weakening nominal sales environment that would make the market look negative.”

The prospects for corporate earnings have taken another turn for the worse, Bowers said. The survey polled 311 fund managers between October 3 to 11, this year . The net balance of respondents expecting a stronger global economy slipped from 48% in September to 37% in October. Two-thirds of institutional investors think the market is seriously oversold this month, up from 51% last month. But the fund managers surveyed said their worries about inflation have completely evaporated, Bowers said. They now have much higher expectations that interest rates will go down. Three months ago, a net 46% of those polled thought that core inflation would be higher by the year-end. This month, 8% thought that core inflation would be lower a year from now.

Half the panel now thinks global equities are undervalued. Of the panel, 29% thought the market was undervalued by 15% or more. One of the reasons why the market is seen to be cheap is because many investors are making surprising low equity risk premium assumptions.

Cash balances are experiencing strong growth, according to the survey. The net balance of fund managers overweight cash rose to its highest level in over a year. The mean cash balance rose from 4.8% in September to 5.2% in October.

“Cheap valuations and rising cash balance can make potent combinations especially when combined with lower interest rates,” Bowers said.

Institutional investors still prefer global emerging markets to equities in the U.S., according to the survey. Japan is most often cited as having “the worst” prospects for corporate profits. Equities in the UK continue to be perceived as having “the best” quality of earnings, while Japan is still seen as having “the worst.” And fund managers are split evenly as to whether cyclicals or defensives will outperform most.

Asset allocators continued to overweight ‘good’ balance-sheet sectors. Their three favourite overweights are consumer staples, pharmaceuticals-healthcare and resources (mainly energy). Their three least favourite sectors are technology, utilities and telecoms. The tech sector continues to be seen as “most overvalued” sector, while financials are seen as the “most undervalued” sector.