The results of this monthÆs survey of global fund managers by Merrill Lynch are among the most pessimistic in the poll's history, and yet they could also signal that investors may be ready to come back to the markets.

Institutional fund managers surveyed by Merrill Lynch believe that the world is already in recession, that monetary policy is still too restrictive, and that companies should use whatever cash flow they have to rebuild balance sheets. Over the past month, fund managers have lost faith in global growth, commodities, ChinaÆs economy and emerging markets.

By historical standards, however, it appears that a lot of bad news has been factored in to share prices. Based on the survey results, three factors are coming together that have been associated with market rallies: risk appetite is extremely pessimistic; cash levels are extremely high; and for the first time in this crisis, there has been a sharp increase in the number of managers believing that equities are undervalued (a net 43%, the highest reading in more than a decade).

ôAll that is missing is a catalyst to put this cash back to work,ö says Merrill Lynch.

Investors are waiting for the right conditions to return to equity markets and the catalyst may come with a shift in perceptions of monetary conditions.

The survey shows that almost seven out of 10 respondents (69%) believe that the global economy has entered recession, up sharply from 44% who made that conclusion one month ago. The proportion of investors who believe that monetary policy is too restrictive has reached a net 59%, representing a new high for the survey.

ôFund managers are waiting for the triggers that will give them the confidence to buy,ö says Gary Baker, head of Europe, Middle East and Africa equity strategy at Merrill Lynch. ôWhat they are looking for is a loosening of monetary conditions and for third-quarter earnings to clarify where problems and opportunities lie across equity markets.ö

The third-quarter earnings season will be a vital input to investorsÆ portfolio decision making and to gauging how the financial crisis has impacted the real economy, Merrill Lynch says. Respondents appear to be placing little or no credibility in consensus earnings estimates for the year ahead.

Fund managers that invest in global emerging markets are most bullish over Turkey, Indonesia, and China and most bearish on Chile, Taiwan and Poland. In terms of sectors, they are most overweight in staples, consumer discretionaries, and healthcare, while most underweight in materials, technology and utilities.

Asia-Pacific ex-Japan fund managers are most bullish on China, Hong Kong and Indonesia and most bearish on New Zealand, Australia and South Korea. Sector-wise, they are most overweight in staples, telecommunications and industrials and most underweight in autos, technology and retail.

A total of 172 fund managers participated in the global survey, which was conducted from October 3 to 9. Combined, these fund managers have around $531 billion in assets under management. A total of 150 managers participated in the regional surveys, managing a combined $335 billion. The survey was conducted with the help of market research company Taylor Nelson Sofres (TNS). The survey measures net responses by taking the balance between the bullish and bearish views for each survey question.