Funds regain risk appetite, boost stocks, cut cash-Merrill

LONDON, May 14 (Reuters) - Investors regained risk appetite in May, reducing cash and buying stocks for the second consecutive month, while inflation overtook slowing growth as their biggest fear, a survey showed on Wednesday.

The report by investment bank Merrill Lynch also found more fund managers thought the euro was overvalued, while the dollar was considered cheap and gold and oil too expensive.

The monthly poll of 191 fund managers managing a total of $615 billion in assets showed the average cash balance fell to 4.1 percent in May from 4.2 percent. Thirty percent of managers were overweight equities, up from 28 percent in April.

Those who thought the global economy will experience recession over the next twelve months fell to 28 percent of the respondents this month from 40 percent a month ago.

However, inflation concerns are on the rise, with 53 percent of the respondents saying global core inflation will be higher over the next 12 months, up from 44 percent a month ago.

"Fear of recession has begun to lift slightly. But the picture is far from settled," said David Bowers, independent consultant to Merrill's poll.

"The growing consensus is that we are in a stagflationary environment. We are worried about below trend growth and above trend inflation. Inflation is back on the radar screen and inflation trades are back on."

The survey came as growing expectations that the worst of the credit crisis is over pushed the MSCI world equity index to a four-month peak last week.

Forty-two percent of the respondents were overweight in cash, compared with 47 percent. Bonds remained out of favour, although fund managers lightened their underweight positions. Some 49 percent of them were underweight bonds, down from 52 percent in April.

INFLATION TRADES

Given an environment of rising prices, more than two thirds of the respondents thought global monetary policy is about right, up from 56 percent a month earlier, while those who thought it was too restrictive more than halved to 11 percent.

"People are almost thinking that central banks have done easing," Bowers said.

Fund managers favoured inflation-sensitive sectors such energy and basic materials. More than one in three were overweight the energy sector, while one in four liked basic materials.

Eighteen percent of the fund managers were overweight commodities, up from 17 percent in April. However, almost half of them said gold was overvalued while two in three thought oil was expensive.

U.S. crude oil hit all-time highs near $127 a barrel on Tuesday.

For currencies, 78 percent of fund managers thought the euro was overvalued, up from 74 percent last month. After hitting a record high above $1.60 in April, the euro has lost more than three percent against the dollar.

Almost two thirds thought the dollar was cheap, while a third of the respondents thought the yen was fairly valued. One in two thought sterling was overvalued.

(Reporting by Natsuko Waki)

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