Fund managers with global portfolios are extremely pessimistic about the outlook of equities markets in general, but Merrill Lynch sees this as a plus instead of a minus.

The latest Merrill Lynch survey of global fund managers shows that a net 42% of the respondents are overweight on cash, the highest level since the poll was launched in 2001. Within equities, fund managers are neutral on the US and Europe, underweight on Japan and the UK, and overweight only on emerging markets. Sector-wise, the global fund managers favour pharmaceuticals, telecommunications and energy at the expense of financials and consumer discretionary.

The survey also shows record low levels of fund managers who are overweight on global equities, of sentiment for Chinese growth expectations, and of overall risk appetite.

Merrill Lynch says all the negativity as a signal to buy, however. Excess pessimism plus excess policy stimulus equals bullish trading combo, the firm says.

There is a continuing perception that global equities are undervalued. Three months ago, a net 13% of the fund managers surveyed believed stocks were cheap; by March the figure has almost doubled to 25%. Merrill Lynch, which conducts the survey through research group Taylor Nelson Sofres, measures net responses by taking the balance between the bullish and bearish views for each survey question.

ôA growing number of investors see bonds as overvalued as concern about inflation starts to rise. The survey suggests that investors still believe there is inherent value in equities û both in absolute terms and relative to fixed-income assets,ö Merrill Lynch says.

However, sentiment of fund managers surveyed by Merrill Lynch has been extremely weak for two months now, with the equity markets remaining highly volatile and share prices showing no sign of bottoming out.

Fund managers that invest in global emerging markets û as opposed to those who invest in both developed and emerging markets û are also the most pessimistic they have been since they were surveyed independently in 2007. A net 77% of the global emerging markets fund managers say they expect corporate profits to slip over the next 12 months.

For the second straight month, Asia is the least preferred emerging market among these fund managers. February was the first time Asia fell out of favour among global emerging market fund managers surveyed by Merrill Lynch. Latin America remains their most favoured emerging market.

Global emerging market fund managers are most bullish on Brazil, Russia, and Thailand and most bearish on South Africa, Chile, India, Indonesia, and Malaysia. They are most overweight on staples, energy, and telecommunications; and most underweight on utilities, technology, and industrials.