Fund managers expect global recession-Merrill poll

LONDON Oct 15 (Reuters) - Investors hit new levels of pessimism in early October, believing the world to be heading for recession, monetary policy to be too tight and cash to be the best place to put money, Merrill Lynch said on Wednesday.

The investment bank's monthly poll of fund managers -- compiled as equities were tumbling across the world, but before the latest government bailout moves -- also showed a decided reluctance to hold stocks despite their being considered cheap.

Gary Baker, Merrill's head of Europe, Middle East and Africa equity strategy, said the poll was the most pessimistic the company had conducted on the survey's 10-year history.

"No debate. It's incredibly gloomy," he said. "Everybody is a macro bear."

Underlining this, the poll showed a huge jump in respondents believing the world economy is set to get worse and will likely fall into recession.

More than three quarters, or 76 percent, said the global economy will weaken over the next 12 months, compared with 62 percent in September. Most notably, 43 percent expected it to get "a lot weaker" compared with just 16 percent previously.

An overwhelming majority -- 84 percent -- are now expecting the global economy to experience recession over the next 12 months, up from 61 percent in September and 48 percent in August.

Some 65 percent also said that global monetary policy is too restrictive for the circumstances, although most of the polling period had passed by October 8 when central banks across the world made coordinated rate cuts.

Part of the reason of this, the poll showed, is that investors have stopped worrying about inflation on top of slow growth.

"The fear of stagflation has gone," Baker said.

CASH IS STILL KING

Not surprisingly, especially given the 16 percent dive in MSCI's main global stocks market index .MIWD00000PUS during the polling period, this gloom has made for highly cautious investing.

"(There are) hyper levels of risk aversion as far as fund manages are concerned," Baker said.

On a net basis, the fund managers were more underweight equities and more overweight bonds than at any time since Merrill began publishing its survey on 1998.

They were the most cash overweight since 2003, when investors were worried about the U.S.-led invasion of Iraq.

Specifically, 62 percent were overweight cash and 46 percent were overweight in bonds.

In equities, 62 percent were underweight compared with 17 percent overweight.

Baker said that one note of optimism in the survey was that most fund managers now believe equities to be undervalued.