Investor confidence has declined, but concerns over the European economy appears to have declined.

Only 24% of respondents think the world economy will strengthen in the next 12 months, down from 42% in May and 61% in April, according to a monthly survey of fund managers by Bank of America Merrill Lynch that was released Tuesday.  

The survey, which was conducted as global equities declined 7.5%, indicated that 28% of fund manager think global profits will improve in the next 12 months, compared with 47% in May and 67% two months ago.

The proportion of the panel expecting corporate operating margins to improve in the next year has halved in the past two months to a net 19%.

Investors are worried about market liquidity conditions with 42% of the panel describing liquidity as “poor”, up from 22% in April.

Despite the negativity, risk appetite remains steady. Average cash balances fell slightly to 4.1% of the portfolio from 4.3% a month earlier.

Inflation fears are plummeting and as a result, 80% have ruled out a Fed rate rise this year. Thirty-eight percent think equities are undervalued, the highest reading since March 2009.

“Global growth expectations have ‘double-dipped’ and positioning is more defensive but investors show little sign of panic,” said Michael Hartnett, chief global equities strategist at BofA Merrill Lynch Global Research. “Investors are starting to see the basis for Europe’s rehabilitation on the back of a more constructive outlook for the euro,” said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.

Negative sentiment from global investors towards Europe, at its worst in May, have delicned. Global investors are feeling more hopeful about the outlook for Europe’s stocks and for the euro. June’s survey indicated that 19% of the panel is predicting the euro to appreciate over the coming year, up from 7% a month earlier.

European investors remain gloomy. Only 7% of European fund managers surveyed expect the region’s economy to improve in the coming year, compared with a 23% in May. Twenty percent of European portfolio managers predict an improvement in earnings over the next 12 months, down from 74% in April.

Due to the oil spill in the Gulf of Mexico, investors have sold down energy stocks in record numbers. According to the survey, 7% of global asset allocators retain an overweight position on the sector, down from 37% in May, the biggest monthly swing in energy the survey has recorded.

The survey, conducted from June 4 to June 10, polled 207 fund managers that collectively manage $606 billion in assets.