Risk aversion has reached a new high due to expectations of a global economic recession, according to the results of the latest Merrill Lynch survey of fund managers for September. Sentiment is likely to become much worse because although the survey was conducted after the US Federal ReserveÆs takeover of Fannie Mae and Freddie Mac, it was done before the tumultuous weekend that saw Lehman Brothers file for bankruptcy.

Fund managers globally have adopted more defensive strategies and shortened their investment time horizons. Liquidity conditions (depth of market and ease of trade) have worsened, with a net 39% of respondents who rate conditions as negative compared with half of this amount in August. Highlighting the flight to safety, the survey has found investors to be overweight bonds within a global asset allocation for the first time in more than a decade and the first time since the survey was launched.

ôInvestors care little about inflation with recession on their doorstep and the banking system under pressure,ö says Karen Olney, lead European equities strategist at Merrill Lynch.

The majority of the fund managers surveyed believe the world is either in recession or likely to fall into recession over the next 12 months. Of those polled this month, a net 44% believe the world is already in recession û a dramatic increase on last monthÆs 24%. A net 61% think the world is likely to see recession in the coming year.

Fund managers that invest in global emerging markets û as opposed to those who invest in both developed and emerging markets û appear to have zero risk tolerance. They have an average cash balance of 4.8%, which is close to the highest level since 2003.

Global emerging market fund managers favour Turkey, Russia and Brazil the most, and are most bearish about India, Taiwan and Korea.

Among Pacific ex-Japan fund managers, a net 86% are overweight in cash, sharply higher than a net 36% last month. Within equities market, they are most overweight in China, India and Hong Kong, while they are most underweight in Malaysia, Australia and Korea. Sector-wise, they are most overweight in staples, energy, and industrials while most underweight in technology, media and utilities.

A total of 186 fund managers participated in the global survey, managing a total of $641 billion. A total of 162 managers participated in the regional surveys, managing $416 billion. The survey was conducted with the help of market research company Taylor Nelson Sofres. The survey measures net responses by taking the balance between the bullish and bearish views for each survey question.