Euro-zone fund managers are more bearish about economic growth and corporate profits but more than 50 per cent consider that euro-zone equities are "undervalued", according to a survey.

In the Merrill Lynch Fund Manager Survey, carried out between October 4th and 11th, some 52 per cent of fund managers considered euro-zone equities undervalued, up from 36 per cent in the September survey, 32 per cent in August and 28 per cent in July. Merrill said "big rallies" in stock prices followed the previous two surveys (April 2001 and October 1998), which found a high proportion of fund managers considered equities to be too cheap.

Other positive points for eurozone equity markets included the finding that 54 per cent of managers surveyed were overweight in cash while the mean cash balance in portfolios, at 7.8 per cent, was at the highest level since the question was introduced into the survey in January 2000.

But euro-zone fund managers have downgraded their corporate earnings growth expectations for the next 12 months.

They now expect average growth of 2.5 per cent in earnings per share on a 12-month rolling basis, down from an expected 4.3 per cent in September and 4.2 per cent in August.

Within the average, the range of earnings growth expectations was wide. Some 6 per cent of the managers polled expected no earnings growth, while 37 per cent expected growth of 5 per cent. While 14 per cent expected growth of 10 per cent, the percentage of managers forecasting growth of this level was down from 36 per cent in September.

On the negative side, 11 per cent of managers expected earnings to fall by 5 per cent, while 6 per cent expected a 10 per cent fall.

A marginally higher number (41 per cent compared with 40 per cent) of managers felt a "value" investment style would beat a "growth" approach. This was a change from 52 per cent in favour of the growth style in September. Some 71 per cent of fund managers preferred cyclical sectors compared with just 24 per cent who favoured defensive sectors.

Managers were bullish on general industrials and insurance but bearish on pharmaceuticals, utilities, food, drink and tobacco.

A majority of managers (59 per cent) considered the European Central Bank interest rate policy too restrictive, with just 38 per cent considering it "about right".