Investors have responded positively to the 25 percent fall in the oil price by shaking off their aversion to risk and putting their cash to work, a survey of global fund managers said on Tuesday.

High oil prices had fuelled fears of higher inflation and interest rate rises. But with crude oil prices falling steadily since August, investors have regained confidence that inflation will stay under control, according to the survey by Merrill Lynch, the world's biggest investment bank.

Cash levels have fallen to 3.8 percent of assets from 4.4 percent in August and only 19 percent of asset allocators believe the U.S. Federal Reserve should be more concerned about the risk of higher inflation than about lower economic growth, down from 27 percent in August.

At the same time, a net 23 percent believe it "unlikely" stocks will fall over the next six months, versus 10 percent who took this view in August.

"The market perception is that the oil price is a good proxy for inflation expectations," said David Bowers, independent consultant to Merrill Lynch. "In recent months this survey showed that investors were looking for a catalyst to put liquidity back into the market. Now they have it."

Global banks and insurers have benefited most from reduced risks of higher interest rates. A net 21 percent of respondents said they had an overweight position in bank stocks, up from 15 percent in September and 10 percent in August.

Despite the enthusiasm for financial stocks, investors remain less confident about the prospects for the global economy as a whole. More than two-thirds still expect the global economy to slow further in the coming 12 months.

Also, a significant minority worries about the direction of corporate earnings and wants companies to focus on reining in their expenditure as well as paying out greater dividends and share buybacks.

"With equities at a five-year high, it is paradoxical that so many investors now cite cost-cutting as the number one driver of earnings growth and want companies to return cash to shareholders, " said Bowers.

Lower prices for oil and other commodities spell bad news for global emerging markets, and investors are starting to turn away. For the first time in five years, asset allocators have taken a net underweight position in emerging market equities.

A net 6 percent of respondents say that they are now underweight in the asset class, compared with more than 30 percent who held a net overweight position at the start of the year. Because counter-cyclical industries often thrive when emerging markets stumble, it is no surprise that global pharmaceutical stocks are back in vogue.

"The bull market in global emerging market equities has paused for breath, and underperformance relative to developed markets is likely until global lead indicators trough in the first half of 2007," said Michael Hartnett, chief global emerging market equities strategist at Merrill Lynch in New York.

Source: Xinhua