Despite a persistently gloomy outlook for corporate earnings, global equities staged a comeback recently as a result of a renewed risk appetite among investors, according to Merrill Lynch's Survey of Fund Managers for April released Wednesday.

Global stock markets rallied 5 percent between the March and April surveys. Yet, while most fund managers are adamant the world economy will avoid recession, prospects for corporate profits are foundering.

A net 38 percent of respondents expect corporate profits to deteriorate over the next 12 months and a net 46 percent believe it unlikely that corporates will grow their profits by 10 percent or more over the same time frame.

Rather than be deterred by this poor outlook, however, investors continue to believe that equities are fairly-valued and that companies are under-leveraged.

"Pressure on companies to return cash to shareholders appears strong enough to justify a pro-equity stance," said David Bowers, an independent consultant to Merrill Lynch.

"This could come from re-leveraging company balance sheets via share buy-backs or company buy-outs. However, this strategy might struggle in the event of an unexpected rise in credit spreads and higher borrowing costs."

While asset allocators have renewed their love of equities, bonds remain unpopular, with a net 53 percent underweight in the asset class.

Pessimism towards fixed income and credit may reflect heightened concerns about higher inflation. A net 27 percent believe that global core inflation will rise over the next 12 months compared with just 11 percent in March and February.

The FMS Composite Indicator for Monetary Stance rose five points this month, showing that investors are becoming more concerned that the monetary policy may be too stimulative.

Statistics suggest Europe's surge is grounded in sound fundamentals. Eurozone equities have outperformed the U.S. market by 6 percent on a common currency basis in 2007.

European companies are revising their earnings upward more than any other region, while U.S. companies are revising their earnings downward far more than any other region. Furthermore some indices say Europe's market capitalization has overtaken the United States, thanks to stronger Turkish and Russian equity markets.

A total of 214 fund managers participated in the global survey from April 5 to 12, managing a total of 697 billion U.S. dollars. A total of 179 managers participated in the regional surveys, managing 421 billion dollars.