Institutional investors remain very cautious on policymakers’ efforts to bailout financial markets, according to a fund manager survey published Wednesday by Merrill Lynch.

The firm found that investors “remain unconvinced that a spate of policy measures from governments and central banks can combat global recession, and are retaining defensive positions”, it said in a release

The survey shows that four out of five investors believe that the world will continue to experience recession over the coming year, 40% still believe that monetary policy is “too restrictive”, and asset allocators remain overweight cash and bonds relative to equities.

“Investors remain embedded in a defensive asset allocation mindset. Many acknowledge the global policy response seen in recent weeks, but fear of deflation may be keeping them on the sideline,” said Gary Baker, head of EMEA equity strategy at Merrill Lynch. “This could start to look risky as the determination of government fiscal responses allied to further monetary easing starts to play through into sector preferences.”

Global equity markets continue to struggle with high levels of risk aversion and currency market volatility, Merrill said. The November survey also showed investors believed the Japanese yen was “overvalued” for the first time in over five years.

“The yen is a global barometer of risk appetite. Its strength is a sign investors remain very risk averse,” said Michael Hartnett, chief emerging markets equity strategist.

Equity investors are turning to U.S. equities, where the outlook for corporate profits is the “most favourable”: as 36% of asset allocators are overweight U.S. equities, it said, adding that this is the largest exposure to U.S. stocks in more than a decade. In contrast, asset allocators are underweight European and Asian equity markets.

Concern at the macro economic outlook of China was evident, Merrill also found. It noted that 85% of those who focus on Asia or emerging markets expect the Chinese economy to weaken in the next 12 months. At the same time, Asian and emerging market investors favour China over any other country in their universe and have been moving into the market in force. “China is currently seen as the sole Asian beneficiary of policy stimulus and falling oil prices,” said Hartnett.

In Europe, action by the European Central Bank and the Bank of England to cut interest rates has failed to lift either the sense of pessimism about Europe’s economy or prospects for the region’s equities. The eurozone is at the bottom of the list of regions that investors would most like to overweight, it said.

In spite of policy measures, 89% of investors expect Europe’s economy to be in recession in the next 12 months, up from 23% in June. Furthermore, 58% still say that Europe’s monetary policy is too restrictive, suggesting a focus on rapidly slowing growth, rather than inflation. In June, more than half believed that inflation would be higher over a 12 month period. However, in November’s survey, 92% of panelists expect inflation to be lower 12 months from now.

“Amid a determined search for growth, investors are apparently turning a blind eye to the risk of inflation,” said Karen Olney, lead European equities strategist at Merrill Lynch. “In just five months investors have performed a U-turn on the issue. At some point, the scale of monetary, credit and fiscal stimulus injected globally could put this view at risk.”

A total of 180 fund managers participated in the global survey from November 7 to 13 November, managing a total of U.S.$536 billion.

IE