Almost 70 per cent of fund managers believe the global economy has gone into recession, up from 44 per cent last month, the most cynical view of the financial markets recorded, according to a fund manager survey released by Merrill Lynch.

Europe has become the least popular destination for equity investment. Forty one per cent of global asset allocators are underweight Euro-zone equities. Investors are fleeing the industrial goods and services sector and European sector allocation shifts are showing that investors are moving to growth sectors that are less exposed to the credit crisis, such as media and technology.

Fund managers in the US are also more likely to expect a deep and long US recession.

However, a growing number of fund managers believe equities are undervalued and a low risk investor appetite could lead to a rally in the market. Forty three per cent of respondents believe that equities are undervalued, a 10-year high.

Gary Baker, head of Europe, Middle East and Africa equity strategies at Merrill Lynch, said: “Fund managers are waiting for the triggers that will give them the confidence to buy. What 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.”