US earnings were perceived as being second in terms of quality, behind Britain. Japan and the euro zone had the worst profit outlook.

Merrill Lynch was compiling its monthly fund manager survey just over a year ago, when terrorists crashed two aircraft into the World Trade Centre.

The survey data from that month, which offer a snapshot of fund managers' sentiment moments before the attack, have just been released.

Not surprisingly, sentiment towards the US has changed significantly in the past 12 months. It has been affected by corporate scandals such as WorldCom and Enron.

Now, half as many global fund managers have an overweight position in US equities as they did in September last year.

This month's survey of 300 fund managers shows that, compared with September last year, 28 per cent fewer managers believe the US has the best profit outlook and the best quality of earnings. About 20 per cent fewer managers said the US would be their top market choice to overweight in 2003.

Since September 11th last year, global equities have fallen 15 per cent, the Dow Jones Industrial Average is down 12 per cent and the US dollar has retreated 4 per cent.

Optimism on global markets and the economy, however, has held up well in that time and 4 per cent more managers saw the global equities market as undervalued this month than in September last year.

Cash balances are within 1 per cent of where they were a year ago and investors are slightly more optimistic about the corporate profit outlook.

Mr David Bowers, Merrill's chief global investment strategist, said this month's survey suggested fund managers were questioning whether or not they had been too hasty in becoming pessimistic about a recovery.

Half of the managers surveyed expected stronger economic growth this month, compared with 43 per cent in August.

While few institutional investors predicted markets would get a lot stronger, most expected improvement next year.

Global fund managers were eyeing US equities again after earlier declaring the US the most overvalued equities market with the worst quality of corporate earnings, he said. The survey found the US was looking more attractive, and the outlook was worsening for Japan.

The outlook for US profits was increasingly favourable, and second only to emerging markets.

Two-thirds of those surveyed said equities would be higher a year from now, and 27 per cent were looking for double-digit returns.

About 50 per cent thought it was unlikely that bonds would do better than equities in the next 12 months.

- (Financial Times Service)