Wealth management professionals are pessimistic about the global economic outlook but are more positive on Japan's chances of economic recovery, a major monthly poll showed.

Wealth management professionals are pessimistic about the prospects for growth in the global economy and in corporate profits over the next 12 months. But they are becoming more upbeat about Japan’s chances for economic recovery after the recent spate of disasters there, according to Bank of America Merrill Lynch.

In its latest monthly survey of fund managers, spanning 284 panellists with $814 billion of assets between 6 May and 12 May, the bank found that only a net 10 per cent of respondents felt the global economy would grow over the next year, down from 27 per cent last month, and only a net 9 per cent expect corporate profits to increase in the same period.

The eurozone sovereign debt crisis was identified as the single biggest risk to the global economy, chosen by 36 per cent of respondents, and the outlook for the European economy was particularly bad – a net 8 per cent of respondents expect the region’s economy to weaken in the coming year, compared with a net 32 per cent expecting it to strengthen just two months ago. The euro came under fire as well, with 60 per cent of respondents viewing it as overvalued, versus 40 per cent in April’s survey.

“A risk for investors is that pessimism on Europe now looks to be overdone, particularly in the light of strong recent GDP data,” says Gary Baker, head of European equities strategy at BoA Merrill Lynch Global Research.

In a generally gloomy global picture, Japan offered a glimmer of optimism; a net 59 per cent of respondents expect the country’s economy to grow over the next 12 months, compared with a net zero per cent last month, and a net 38 per cent expect to see corporate profits in the trauma-hit nation increase over the year. Investment in Japanese equities also increased, though slightly, with 17 per cent of respondents underweight, compared with 18 per cent last month. However, the Japanese currency did not fare so well - 64 per cent of those surveyed consider the yen to be overvalued.

There was little change in asset allocation since the previous survey: bonds increased by 10 per cent from 58 per cent underweight last month to 48 per cent in May. Meanwhile, commodities dropped from 24 per cent overweight to 12 per cent, and equities also fell, from 50 per cent overweight to 41 per cent. Despite high inflation and low interest rates, cash allocations increased slightly, from 3.7 to 3.9 per cent.

May's most popular equity sector was technology. With a net overweight of nearly 35 per cent, the sector has retaken pole position from energy, the investors' favourite in April. Financials were the least popular, with a net global underweight of more than 25 per cent.

The popularity of emerging markets continued to climb, with 29 per cent of the panel overweight in EM equities, despite the fact that a net 28 per cent of fund managers expect China’s economy to weaken in the next 12 months and reduced confidence in the other BRIC nations. Emerging markets displaced the US – last month’s most favoured equity market.

In the US, the majority of respondents expect interest rates to rise later than they had anticipated a month ago; 73 per cent believe the Federal Reserve will postpone hiking interest rates until 2012, compared with 69 per cent who expected interest rates to increase by the end of 2011 in April’s survey. The dollar was considered to be undervalued by a net 48 per cent of those surveyed, one of the highest readings since 2002. And there was more positive news for the US: respondents selected the country as the regional equity market they most favour for overweight positions in the next year, because of optimism about US corporate profits.

Appetite for risk has fallen only slightly, indicated by slightly lower exposure to equities and commodities, and the corresponding increase in exposure to bonds and cash. But wariness of risk can perhaps be seen more clearly in a move away from more volatile and growth dependent sectors such as energy and materials towards defensive areas such as consumer staples and pharmaceuticals.

“A triple dip in growth expectations is reshaping investors’ stance on risk,” says Michael Hartnett, chief global equity strategist at BoA Merrill Lynch Gobal Research.