Fund managers surveyed by Bank of America Merrill Lynch (BAC) believe Europe will slide into a recession in the coming months. Roughly 68% of survey respondents now view the euro zone debt crisis among the largest of risks to global investments. The recession, BofAML finds, will likely be spearheaded by bank and sovereign risks, further dragged by a poor continental housing sector. Sentiment toward European banks is at its lowest since the survey began asking about it in January 2003. Liquidity conditions in the region also hit negative levels for the first time since May 2009 (see chart). As liquidity dries, the cost of lending will increase, and banks will more and more struggle to find financing in the capital markets, according to Société Générale credit analyst Jean-David Cirotteau. “U.K. banks have already significantly increased their margins in lending,” he said. “As a result, the real estate market should be impacted less from here as it has already adjusted to higher rates. This is not the case for real estate in continental Europe.” “The state of the real estate market remains very contrasted: prices are recovering in prime properties/locations — particularly Central London, Paris CBD and a few other locations,” Cirotteau adds. “However, prices remain depleted in the rest of the market for non core, second quality properties and below, and no improvement is expected at this stage.” Things are somewhat rosier for U.S. investments. Roughly 9% of U.S. fund managers now expect the economy to weaken in the next year. Global investors also restored an overweight position in U.S. equities. An overall total of 286 panelists with $831 billion of assets under management participated in the BofAML survey. Write to Jacob Gaffney. Follow him on Twitter @jacobgaffney.

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