Fund managers overwhelmingly expect a Greek default, with almost three-quarters thinking it will happen by the first quarter of 2012, according to a survey by Bank of America Merrill Lynch.

But although investors continue to foresee weak global growth, market sentiment appears to have stabilised. The proportion of fund managers who expect a global recession in the next year retreated to a net 25 per cent, from a net 40 per cent in September.

“The rate of descent has bottomed out, both in terms of growth and risk”, said Gary Baker, head of European equities strategy at BofA Merrill Lynch Global Research.

“All you can say is that things have stopped getting worse.”

As in September’s survey, risk aversion drove asset allocation. Cash balances rose to 5 per cent from 4.9 per cent in the previous month, while for the first time since February 2009, both equities and commodities were underweight.

The eurozone debt crisis was again perceived to be the predominant “tail risk”, cited by more than 60 per cent of respondents. But twice as many managers than in September considered the Chinese real estate market as the biggest risk, while Chinese growth expectations were the lowest since January 2009.

Premature fiscal tightening was also a concern, though investors expect an easing of monetary policy in Europe, with 47 per cent of respondents expecting that European interest rates will be cut to 1 per cent by the end of 2011.

A net 65 per cent of respondents expected to see a European recession – up from 14 per cent just three months ago – but there are signs that the outlook for Europe is improving. A net 7 per cent of respondents said the eurozone is the region they would most like to underweight in the coming year, down from a net 40 per cent in September – and fewer than Japan.

Banking remains the least favoured sector globally but has seen marked improvements over the past month. Banks are 34 per cent underweight globally, compared with 47 per cent in September, while European banks, though lagging behind their peers, advanced to 41 per cent from 65 per cent underweight.

Large-cap growth sectors such as technology and pharmaceuticals are the most significantly overweight. Mr Baker warned that there will need to be a convergence between investors’ negative economic views and more sanguine investment positioning between cyclical and defensive sectors.

The survey was conducted between 7-13 October with 286 managers with $739bn of assets under management.

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