Fund managers were guarded about the economic outlook and expect growth to be sluggish at least for the rest of this year and possibly next year as well.

While most fund managers do not see a U.S. recession, Phillip Capital Management was of the view that the U.S. is already in a recession. However, it does not see a deep and protracted recession given the accommodative monetary policies by the U.S. Federal Reserve.

On the sub-prime saga, fund managers were generally of the view that the crisis is not completely over and its economic impact will be felt in the coming months.

Henderson Global Investors said that the sub-prime crisis may be largely behind us in terms of the risks of a serious seizure to the global financial system. However, it doubts that we've seen the full impact of the crisis on economic activity.

“Banks in the U.S. and Europe have tightened credit conditions aggressively and the lower credit availability will hold back economic activity,” said Henderson.

Aberdeen Asset Management was also of the view that the economic effects of the credit crisis have yet to be fully felt. It believes that the U.S. economic slowdown is firmly entrenched because of the housing and credit problems.

“House prices in the U.S. are likely to fall further, and we may see more write-downs from financial institutions on mortgage-backed securities that use owner-occupied homes as collateral,” said Aberdeen.

Prudential Asset Management (Singapore) Limited said that while the sub-prime issue could well have seen its worst, problems still lurk with other forms of securitized debts - that related to credit cards for example.

The credit crisis aside, some fund managers were also concerned about the impact that inflation would have on economic growth.

“A key determinant of future growth will revolve around the approach that major central banks will take to tackle the higher inflation rates,” said DBS Asset Management.

“The harder the line taken in terms of raising interest rates to combat the situation, the worse the final outcome for growth becomes,” added DBS.

Fund managers were concerned that earnings expectations may be too high and warned that earnings downgrades could weigh on equity markets.

Although earnings estimates have been progressively adjusted down in the last few months, DWS Investments warned that expectations remain excessive in most regions and in many sectors, as the full impact of inflation and reducing consumer demand has yet to be fully discounted.

Schroder Investment Management also warned that “the risk of earnings disappointments and downgrades are real” while Lion Global Investors was of the view that “downward revisions to earnings are likely to continue”.

Fund managers who were mostly positive on equities six months ago have now turned more cautious given the uncertain economic and earnings outlook.

Schroder Investment Management said that in light of the continued difficulties in the credit markets and deterioration in global economic activity, it is currently slightly underweight equities.

Allianz Global Investors favours short-term money market instruments and cash.

“At this juncture, equities are not expected to perform well given that downward earnings revisions are likely to take place,” said Allianz.

HSBC Global Asset Management said that it is broadly neutral with respect to asset classes as it does not expect bonds or equities to offer significant value in the short-term.

“Equity markets will be volatile as the uncertainty over the credit crunch and its effects on the wider economy have not been played out fully yet,” said HSBC.

Despite concerns about the general short-term outlook for equities, fund managers still saw opportunities in equity markets. UOB Asset Management for example was sanguine about selected commodity securities.

DWS Investments also favoured investments in commodities, both hard and soft; including gold and precious metals, which it reckons will do well in an inflationary environment.

Barclays Capital said that it is cautiously bullish about sectors like energy and basic resources which have positive industry fundamentals. It also felt that U.S. and European equities are inexpensively valued.

Lion Global Investors said that despite the current negative new flows it favours equities over bonds in the longer term as the former's valuations are relatively more attractive.

“We like investment themes in Asian infrastructure and large cap, high quality companies in Asia with a greater domestic focus, as we believe that the region's relative structural fundamental strengths remain intact,” said Lion.

UBS Global Asset Management said that among global equities, it finds better relative valuations in markets like the U.S., the U.K. and Switzerland. As for the Asian region, it positive on India and Indonesia because it believes these markets have high long term growth potential.

HSBC Global Asset Management said that among equity markets, its preference is for emerging markets which have robust fundamentals. On the other hand, it sees little growth in developed markets like the U.S. and Japan.

The fund poll also threw up a number of risk factors that investors ought to bear in mind.

BNP Paribas Asset Management thinks that the key risk factors that are likely to affect investments over the next 12 months are inflation, cost pressures, the volatility in commodity markets (especially oil) and further problems related to the sub-prime crisis (especially in the U.S.).

First State Investments also highlighted inflation as a key concern and said that central banks are under pressure to raise interest rates to dampen inflation, which will raise borrowing costs for companies. It said that in general, central banks in the Asia Pacific region have been slow to raise interest rates to rein in inflation, which will impact domestic consumption negatively.

While Aberdeen Asset Management remains positive on Asian equities and sees any sharp pullbacks as an opportunity to accumulate, it too warned that containing price spikes in food and energy, which form a large component of headline inflation in Asia, will be a key challenge for the region's central banks.

Looking further out, Schroders said that it sees the impact of the credit crunch as a considerable headwind on activity which should cause slower growth and higher unemployment going into 2009.

All in, fund managers have turned more guarded about the economic and investment outlook compared to six months ago.