Domestic fund managers continue to be bullish on equities and expect double-digit returns from the Sensex over the next 12 months.

Most fund managers expect the benchmark 30-scrip Bombay Stock Exchange index to be in the 3800-4500 range over the 12 months, according to a Merrill Lynch survey. Merrill polled eight fund managers, managing over Rs 4,100 crore (Rs 41 billion) assets, between July 1 and 12.

Further, the fund managers expect inflows to be positive. "The recent fund flow pattern into equity mutual funds has injected a feeling of confidence in our respondents as all fund managers polled expected domestic flows to be positive into equity. They also expect FII flows to stay positive," the survey adds.

Over one month, 50 per cent of the fund managers expect the Sensex between 3600 and 3699, while 25 per cent held a more bullish target of 3700-3799.

Despite the recent rise in equity markets, 25 per cent respondents said they will be buyers even if prices increased 10 per cent from these levels.

"It's no surprise that fund managers polled will be buyers if prices fell 10 per cent from these levels," the survey states.

"With historically low price-earning numbers, and a stable to encouraging growth expectation of 15 per cent-plus in earnings, the trigger for equity markets is believed to come from a change in valuations," the survey added.

Around 88 per cent of the fund managers believe that the markets are still undervalued. The survey said, "We noticed that the variance had increased and views were spread across the gamut, highlighting that they believe the markets are relatively more expensive than they have been in the recent past."

As proof, cash levels have been brought down, and 63 per cent of the respondents held anywhere between 0 per cent and 3 per cent cash in their portfolio against 28 per cent last month.

Further, fund managers are more bullish on cement and automobile stocks in addition to banking. Cement was the second-most preferred sector in July and not a single fund manager was underweight on the sector.

The fund managers, who expect high commercial vehicle companies to outperform the overall sector, however, remain bearish on two-wheeler firms.

Merrill Lynch expects headline profit growth from Sensex companies to be encouraging in April-June quarter of 2003-04.

The survey adds, "Our expectations on net profit growth stood at 22 per cent and earnings per share growth at 16.50 per cent and this is largely in line with the views of the fund managers."

Around 88 per cent of the fund managers expect a 15 per cent-plus growth in EPS over 12 months, while the rest expect a 20 per cent-plus growth.

Improving global and local fundamentals have worked towards moderating views on interest rates. Fifty per cent fund managers expect rates to remain stable over 12 months.

"On the shape of the curve, most expect it to hold its shape, with one-fourth of the respondents expecting it to be steeper," the survey states.