Could it be that investors do not think it could get much worse? A press release of the results of Merrill’s survey said that for the first time in more than three years, investors do not predict lower global economic growth over the next 12 months. Merrill attributed that to renewed optimism about China’s economy.

While pessimism has dropped, the banking crisis is keeping risk appetite at a low as well. “March’s survey shows signs that investors want to believe in an economic recovery. However, caution on banks is firmly capping risk appetite,” said Gary Baker, Banc of America Securities-Merrill Lynch co-head of international investment strategy, in the release.

Manager Holdings

A net 48% of asset allocators said they are underweight banks this month, up from a net 39% in February, according to the survey. A total of 22% said they are aggressively underweight banks, versus 17% in February.

Risk appetite in equities took a clear downward turn in March despite the improved economic outlook. Respondents said they have reduced their equity exposure in the past month while increasing cash holdings and fixed-income investments, Merrill said.

A net 41% of respondents are underweight equities, up from a net 34% in February. World equities fell by 15.5 percent during the days the survey took place. Investors appeared to have flooded into bonds with a net 26% of the panel overweight the assets class, up sharply from a net 7% the previous month. Average cash balances rose to 5.2% from 4.9% in February.

Merrill noted there are some signs of recovery. A net 42% of the panel believe equities are undervalued, up from a net 24% percent in February. Investors seem to be moving away from the most defensive stocks, such as in Pharmaceuticals–where a net 30% are now overweight the sector, down from a net 37% last month—toward Technology, a much more cyclical industry. A net 28% of respondents are overweight Technology, up from a net 15% in February.

“How investors resolve this anomaly between growth optimism and risk reluctance will determine the fate of equity markets this spring,” said Michael Hartnett, Banc of America Securities-Merrill Lynch co-head of international investment strategy, in the release.

On the international front, investors have become more bullish about emerging markets, especially China, the survey found. A net 4% are overweight the emerging markets sector compared with net 4% being underweight in February. At the same time, commodities have made further gains with the number of investors underweight the asset class falling to a net 6%, down from a net 25% in January.

Meanwhile investors are underweight in eurozone and Japanese equities (a net 40% and 39%, respectively).

A total of 213 fund managers, managing a total of US$533 billion participated in the global survey from March 6 to March 12. A total of 183 managers, managing US$365 billion, participated in the regional surveys. The survey was conducted by Banc of America Securities—Merrill Lynch Research with the help of market research company TNS.