Portfolio positions worldwide are being rearranged as fund managers have raised their expectations for economic recovery, according to a recent Merrill Lynch survey.

There has been a large shift in the interest rate outlook, which is being fueled by the sell off of bonds and the 25-basis point cut in late June. According to the Merrill data, 47% of the 293 fund managers polled between July 3 and July 10 believe that short-term interest rates will be higher one year from now. Only 17% believed they would be lower. This is significantly different from the numbers in June, which held 35% on both sides of the question.

The collapse in credit spreads has prompted many managers to expect companies to invest in capital expenditures rather than just improve their balance sheets, David Bowers, Merrill Lynch's chief investment strategist, said.

The survey also indicated that fund managers expect corporate earnings to grow 9% over the next 12 months, compared with their expectations of 7.8% in June. This growth is foreseen to come not from cost cutting, but rather from top-line growth.

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