"The majority of the institutional investors on our panel believe that global economic growth will weaken in 2007 -- as will corporate profits growth," said David Bowers, independent consultant to Merrill Lynch. "Yet investors are convinced that the risk of a global economic recession is very low," he added.

Although 63 per cent of the respondents see the global economy weakening a little over the next 12 months, only 8 per cent believe a global recession is either likely or very likely over that time frame.

Furthermore, they expect the global slowdown will bring economic activity back in line with the long-term trend, which will reduce the risk of inflation. Accordingly, they see global monetary policy as neither too stimulative nor restrictive. Nearly two-thirds think that short-term interest rates will either be unchanged or lower a year from now.

But long-term rates remain a concern. "Fund managers are suggesting that if there is a cloud on 2007's horizon it could take the form of higher bond yields," Mr. Bowers said. "It will be interesting to see how the U.S. housing market will handle an upward move in long-term rates," he added.

Fund managers also expect that worldwide profit growth will ease over the next 12 months. Fifty-seven per cent anticipate the outlook for profits will deteriorate slightly. Sixty-three per cent felt that way three months ago. And the majority of respondents think that corporate balance sheets are underleveraged.

But investors were divided on what companies should be doing with their
cash flow.

Forty-four per cent felt they should return cash to shareholders through share buybacks or dividends, for example, while 41 per cent believe they should increase capital spending.

Not surprisingly, given the benign economic outlook and the fact that fewer than four in 10 believe that world stock markets will be lower in six months' time, asset allocators continue to favour equities over bonds. Only 9 per cent are overweight bonds, while 63 per cent are overweight stocks.

The survey also found that a significant proportion of the fund managers continue to be overweight cash relative to their benchmark. A third said they were in that position, while only 17 per cent were underweight cash.

And they are not as risk-tolerant as one might think, given that the Chicago Board Options Exchange market volatility index (VIX) is at 10-year lows. The lower the volatility, the more complacent or less nervous investors are believed to be. The survey did show that appetite for risk has improved, but it is only back to the average of the last five years.

A total of 210 managers who oversee $713-billion (U.S.) in assets, participated in the global survey which was conducted between Dec. 8 and 14. Another 162 who manage $383-billion in assets, took part in the regional surveys.

When it comes to countries they prefer, more than a third felt the outlook for corporate profits was most favourable in the euro zone and least favourable in the United States. As for sectors, the fund managers are most likely to be carrying an overweight in banks, insurance, energy and pharmaceuticals/health care, and most likely underweight in utilities, consumer discretionary and
basic materials.