Investor optimism over the global economic recovery and corporate profits has been dented as the tail risk associated with the U.S. economy has escalated, though sentiment towards Europe has improved, according to the BofA Merrill Lynch Fund Manager Survey for October. The survey taken from October 4 to October 10 showed that the number of investors believing the global economy will strengthen had fallen to a net 54 percent from a net 69 percent in September, albeit still at historically strong levels. A net 71 percent expect the economic growth to remain “below trend” in the coming 12 months, up from a net 61 percent a month ago. Concern about U.S. fiscal tightening is now the number one tail risk for 24 percent of the panel, up from only 6 percent in September. Expectations for a recovery in corporate profits have also fallen. Last month, a net 41 percent said they expected corporate profits worldwide would improve in the following 12 months – that figure has tumbled to a net 28 percent in October. A net 18 percent believes that corporate profit margins will decrease in the coming year, up from a net 11 percent a month ago. Asset allocators have scaled back their equity holdings. A net 49 percent of global asset allocators are overweight equities, down from a net 60 percent in September. Over the past month, investors have reduced their positions in eight out of the 11 sectors monitored by the survey. Last month, a net 9 percent of the panel remained overweight U.S. equities, and this month, that measure has dropped to zero percent. At the same time, investors have shifted back towards fixed income, scaling back their underweight positions in bonds and portfolio cash levels rose. “Events in Washington clearly caused investors to shift back towards their benchmarks, but asset price gains can still be driven by high cash levels,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research. “Strong flows into Europe would call for a touch of near-term caution, but solid macro momentum in the region suggests that any dips in EU equity markets would be enthusiastically bought,” said John Bilton, European investment strategist.