A “severely deteriorating outlook for profits” has caused investor confidence to weaken further, according to the Bank of America Merrill Lynch Survey of Fund Managers for July.

The survey findings illustrate that 38 per cent of investors believe corporate profits will deteriorate in the coming 12 months, compared with 19 per cent one month ago. Meanwhile the bank’s Growth Expectations Composite has tumbled to 37 in July from 43 in June and 54 in May.

“Rising equity prices have failed to lift investor gloom and we still see a quarter of investors expecting a global recession while hopes for further policy easing have been delayed,” said Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research.

Confidence that corporates can grow profits by at least 10 per cent is at its lowest level since April 2009, with 69 per cent of the panel forecasting a growth rate of less than 10 per cent in the coming year.

However, the broader macro-economic outlook and risk appetite have stabilized after two months of sharp deterioration. For example, 13 per cent of the panel anticipate that the world economy will weaken in the coming year - a modest drop of two percentage points following a 26-point decline from May to June.

Meanwhile the composite indicator for risk and liquidity rose slightly month-on-month as investors reduced average cash holdings in portfolios to under 5 per cent. While most investors expect further quantitative easing, the bank notes that few expect this to happen in the third quarter.

“July’s survey highlights that corporate profit expectations have to catch up with the downgrade in the economic outlook we have seen the past two months,” explained Gary Baker, head of European equities strategy at BofA Merrill Lynch Global Research.

Anxiety shifts from eurozone periphery to core economies

The proportion of respondents who envisage the risk of a negative shock around Germany’s economy has more than tripled to 32 per cent - up from 10 per cent in June, the survey found.

Furthermore, concern about France has risen, with 55 per cent of investors believing that the French economy could present a “negative surprise this year”.

By contrast, fears that Spain or Portugal could “spring a negative surprise” have fallen, while expectation of good news from Ireland is growing – 32 per cent of investors hope for a positive surprise from Ireland this year, up from 16 per cent in June.

Confidence in Greece has dwindled; the proportion of respondents saying the country will avoid exiting the euro has fallen to 37 per cent from 44 per cent.

“European investors see an increasing risk of recession and also concur with rising worldwide concerns about corporate profits,” BofA said.

The information technology bubble

While technology has been a favorite sector for global investors over the past three years, US investors have signaled a “possible bursting of the IT bubble,” according to the survey.

Overall, 22 per cent of US respondents to the regional survey are overweight technology – a sharp fall from 41 per cent a month ago. Moreover, a higher proportion are underweight IT, up from 9 per cent in June. The same can also be said of global investors, with just 32 per cent overweight technology this month, down from 41 per cent in June.

At the same time, US equities have declined in popularity as global asset allocators have “cast their net around the world,” highlighted by the decline in respondents overweight US equities (14 per cent in July compared to 31 per cent in June). Allocators have also reduced their underweight positions in eurozone, UK and Japanese equities.

Meanwhile, despite the decline in sentiment towards commodities, investors consider gold as “fairly valued” and oil as “undervalued”.

A total of 261 panelists with $708 billion of assets under management participated in the survey from 6-12 July, while 190 managers managing $567 billion participated in the global survey, and 145 managers managing $323 billion participated in the regional surveys.