GLOBAL - More investors currently see the euro as overvalued than undervalued, according to Merrill Lynch.
But the euro is still their favourite currency and they expect further appreciation over the next 12 months.
Some 300 fund managers were polled representing a total of US$732bn for the latest in a series of surveys.
The survey suggests that healthy first quarter earnings may have been as influential as the end of the Iraq war in boosting world stock markets.
But the US dollar has not benefited from upbeat company results because fund managers remain concerned about the size of its twin deficits.
Even at current exchange rate levels, a third of fund managers intend to go short on the dollar and long on the euro, with nearly 50% of respondents able to hedge their US dollar exposure having done so.
Strong first quarter earnings on the part of US companies played a greater role in the recent equities rally than we thought, said David Bowers, chief investment strategist at Merrill Lynch.
The downside is that three quarters of fund managers believe that the prime driver of corporate earnings growth remains cost-cutting, not top-line sales growth and capital spending is on hold until debt has been reduced.
But the recovery of US corporate earnings is also having two beneficial global effects. Firstly, fund managers have upgraded their earnings per share (EPS) forecast for global companies from 6% to 8%. Furthermore, investors now believe the volatility of global corporate earnings will decline.
If this is the case it's going to be constructive for valuations, added Bowers.
Most funds allocated an average 51% to equities, favoured corporate bonds to government securities, were overweight in emerging markets and stayed underweight in Japanese equities.
Sectorwise, allocators were overweight in global pharmaceuticals and underweight in global utilities, consumer goods and staples.
In the longer term, equity markets are still seen as offering better value than bonds. Cash levels also rose to nearly 5% of portfolios, reflecting recent equity rallies.
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