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Global fund managers are slowly returning to world equity markets, according to Bank of America Merrill Lynch's benchmark survey published Tuesday, with a preference for U.S. stocks as investors favor deflation-protected investments amid a broader economic slowdown. 

Fund managers' global stock allocations improved by 5 percentage points to a net overweight of 1%, the October BAML survey of 175 investors controlling around $207 billion in assets revealed, with cash allocations rising 0.3 percentage points to a net overweight of 5%, just above the ten-year average of 4.6%. Global earnings are likely to deteriorate as well, the survey indicated, although that view has improved modestly from last month to a net 35% of respondents seeing weakness in the coming year.

Recession risk remains a key concern, however, with nearly a third of respondents expecting two consecutive quarters of negative economic growth over the next year, with trade remaining the largest overall worry, although the survey was conducted prior to last week's detente between the U.S. and China.

"Investors remain bearish but we are seeing signs of green shoots," said BAML chief investment strategist Michael Hartnett. "If concerns about the trade war and Brexit are unrealized, sentiment is likely to improve, validating our bullish tactical views."

Global investors are still favoring U.S. equity markets, with a 15% net overweight, although positions have taken a more "deflation v inflation" tone with the strongest move into consumer staples since 2013, and the largest underweight for materials in more than three years.

"This month investors rotated into defensive equities like healthcare and consumer discretionary and out of cyclicals like materials and banks," BAML said.

The tame inflation expectations could partially explain why Treasuries remain the survey's "most crowded trade, according to 41% of the survey respondents, just ahead of long tech growth stocks (24%) and long positions in investment grade corporate bonds (15%).