Funds regain risk appetite

By Natsuko Waki

LONDON (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.