Breaking finance and business news, tax information, jobs and more for finance directors and senior finance professionals.

In the broadest snapshot of global institutional investor sentiment since the sharp rises in credit spreads and equity market volatility, a net 11 percent still regard equities as undervalued. In contrast, a net 41 percent think bonds are overvalued.

Investors, polled at the height of recent volatility, have increased their cash levels one percentage point to 4.4 percent of their portfolio. They have trimmed their expectations of corporate profits and expect global growth to slow. But what is striking this month is how few investors (7 percent) think a recession is likely in the next 12 months. The survey suggests that investors have not rushed to reassess the prospects for equities.

"Investors seem to be viewing this turmoil as a potential buying opportunity for equities," said David Bowers, independent consultant to Merrill Lynch. "They appear unwilling to turn fundamentally bearish on equities so long as they believe the rest of the world can decouple from a vulnerable U.S. economy."

Emerging Markets Ride Out U.S. Turmoil
Respondents still appear to view wider credit spreads as a problem centred in the U.S. housing market, and believe that emerging markets are relatively appealing.

August's survey indicates a major shift in favour of global emerging market equities at the expense of U.S. stocks. A net 29 percent of respondents say that emerging markets offered the best corporate profit outlook of all regional sectors — overtaking the eurozone, which has been the favoured region throughout 2007. Secondly, investors believe quality of earnings in emerging markets, while a concern, is improving at a time that quality of earnings in the U.S. are deteriorating. Thirdly, valuations are seen as more attractive. Fewer respondents believe emerging market equities to be the most overvalued. Only a net 8 percent hold that view while a net 19 percent see the U.S. as the most overvalued region.

At the global sector level, investors still prefer stocks positioned to gain from cyclical trends, despite a more cautious outlook for growth. Globally, the number of surveyed funds overweight technology, for example, has risen by seven percentage points to 33 percent, from 26 percent in July. Other cyclical sectors gaining favour include materials, energy and industrials. Meanwhile credit turmoil has hit financials hard. A net 29 percent of respondents are underweight banks compared with 18 percent in July.

Europeans share the global sector view despite having reduced their positions in pro-cyclical stocks. "Investors in Europe maintain a pro-cyclical stance, though they have toned down their bet on the cycle," said Karen Olney, chief European equity strategist at Merrill Lynch. "In the past month, they have started to shuffle back into defensives, such as health care and food & beverages. This move was overdue, given how extreme the overweights in many of the industrials had become over the past few months."