Fund mangers are optimistic about an overall economic turnaround, but companies still have a long way to go to regain investor confidence and strong balance sheets, according to November’s Merrill Lynch Fund Manager Survey. “Managers are looking for only 7% earnings growth globally over the next year, and only 3% nominal GDP growth over the next year,” says Merrill Strategy Analyst Sarah Franks. “We had to triple check that because we were so surprised that it was so low.” Last month, Franks says, the survey signaled a “bottom in poor sentiment.” So this month she was surprised to learn that “investors are willing to dip their toes back into the market, but they are very worried about the turn of the economy.”

The second surprise in the survey came from the question of what managers want to see companies do with free cash flow. Nearly 60% of the 286 international fund managers questioned between October 31 and November 1 say companies should rebuild their balance sheets by paying off their debt, and only 12% want companies to use their cash flow for expenditures, Franks reports. “Essentially the message from investors is that they want companies to be run for cash, not for growth,” she says. “And that is something that clearly needs to be done.”

According to the report, investors also “still see the market as undervalued, and many still consider themselves overweight in cash–which means that there is some liquidity waiting in the wings,” although much less than a year ago. Managers continue to be concerned about long-term issues, says Franks. As a result, “they are adding a little bit of cyclical exposure but remain very defensive.”

In their allocations, fund mangers indicated the most widespread underweight is now found in the global utilities sector, while the most widespread overweight is in healthcare and pharmaceuticals. Allocation remains low in technology, but has been dramatically reduced since last month with managers citing it as the most overvalued sector. Managers also consider consumer staples as highly overvalued.

The full fund manager report can be found at http://ml.com/researchmarketing/bin/ml_rsch_mkt.asp.