Global fund managers have shrugged off bear concerns and, for the first time since May 2002, believe that top line volume growth is now a more important driver of earnings growth than cost cutting.

Merrill Lynch Global Securities in its latest survey of global fund managers says, "Despite a sharp rally in world equities between September 2002 and August 2003, investors still believe that equities are fairly valued."

"What is striking this month is just how fund managers' investment time horizons have improved, and how much their risk appetite has increased. This month saw the longest time horizon and the second greatest appetite for risk since we began asking both questions back in December 2001," the survey noted.

Further, the survey adds the hopes of economic recovery have driven up inflationary expectations too. Interest rates -- both long and short -- are now assumed to be higher --rather than lower -- a year from now.

"In a new question this month, we probed participants' views on the United States Federal Reserve. Seventy six per cent of the respondents think the next move in Fed Funds is going to be up; 11 per cent think it will be down. Of those who expect a tightening, most expect it to be nine months hence (that is, in June 2004). Of the minority who expect an easing, most expect it just over six months from now," the survey adds.

The bulk of fund managers are overweight on general industrials and basic materials, while the biggest underweights are utilities and consumer staples.

Although 57 per cent admit to being neutral/overweight on technology, a net 61 per cent believe the sector to be the most overvalued.

The global sectors that are seen as being most undervalued include energy and pharmaceuticals.

Interestingly, these happen also to be two of the top three sectors that investors believe have the best pricing power.

"However, the 192 fund managers on our panel took us most by surprise," the survey notes, adding that a record 51 per cent were net overweight of equities, and a record net 49 per cent were underweight on bonds.

This aggressive position is consistent with the record underweight stance on global utility stocks, the survey adds. It is not entirely consistent with their country preferences.

This month saw a record overweight of emerging market equities, the most widespread overweighting of Japanese equities since the bubble, and a relatively widespread underweighting of the United Kingdom stocks. Against this backdrop, a neutral stance on US equities seems most unusual.

As for regional preferences this month, Japan is the big winner. The Japanese stock market is now the second most preferred equity market after emerging markets.

The survey confirms that the more confident investors are about global recovery and more plentiful corporate earnings, the more they will seek out lower quality, higher risk cyclical assets (for instance Japan and emerging markets) at the expense of bonds and higher quality, more defensive, equity markets such as in the US and UK.

"It backs up our view that little has happened in Japan thus far that can't be explained by cyclical rather than secular dynamics. The real puzzle is why investors are not more negative/underweight on US equities amid this cyclical euphoria," the survey notes.