A mere 10% of fund managers expect global financial conditions to improve over the next 12 months, according to the May Bank of America Merrill Lynch survey. Last month, BofAML said more than a quarter of fund managers surveyed felt the world economy would strengthen and about 58% were optimistic in February. Also as prospects for growth become more challenging and inflation fears recede, nearly 75% of asset allocators now expect the Federal Reserve to raise rates in 2012, according to the survey. In April, 69% of respondents expected the central bank to raise its federal funds rate this year. BofAML, in conjunction with market research firm TNS Global, recently surveyed 284 market participants, including 204 fund managers, and found "risk appetite has fallen only modestly." Fund managers have added to cash and bond holdings while lowering exposure to commodities and equities of late, according to the survey. "A triple dip in growth expectations is reshaping investors' stance on risk," said Michael Hartnett, chief global equity strategist at BofAML. Some 8% of respondents indicated they see the economy in Europe weakening over the next year, while nearly a third expected a strengthening to occur when surveyed two months ago. BofAML analysts said the level of investors indicating the sovereign debt crisis in the eurozone as "the largest tail risk globally" rose to 36% in the latest survey, up from 21% in April. Still, Gary Baker, head of European equities strategy at BofAML, wonders if these fears are misguided. "A risk for investors is that pessimism on Europe now looks to be overdone, particularly in light of strong recent GDP data," Baker said. Fund managers boosted positions in emerging market equities and now 29% hold an overweight position in this market, according to the survey data. BofAML analysts attributed this to strong earnings outlooks and growing optimism on domestic demand in emerging markets. Almost half of respondents now view the U.S. dollar as undervalued, which is up from 36% who felt that way in April. Some 60% think the euro is currently overvalued, which is up from 40% a month ago and at the highest level since the end of 2009. The survey showed 64% of market participants believe the yen is overvalued, which is little changed from other 2011 surveys by BofAML. Write to Jason Philyaw.