The latest survey of fund managers from Merrill Lynch finds that cash levels have reached a new high, and risk appetites are close to record lows, yet fund managers continue to see value in equities.

Cash positions rose to a record high in March with 42% of fund managers reporting that they were overweight cash, up from February’s record of 41%. The survey’s composite indicator for risk and liquidity stayed unchanged from the prior month.

Nevertheless, respondents reiterated their belief that equities are attractive, Merrill reported. It said that 25% take the view that equities are undervalued on absolute terms and relative to bonds. While this combination does not guarantee a rally, Merrill says that it has, in the past, been a prerequisite for a comeback.

“While many raw ingredients for a bear squeeze have come together, what’s missing is the catalyst,” said David Bowers, independent consultant to Merrill Lynch. “With growing fears of both recession and inflation, it is harder to identify what that catalyst is going to be — and when it will appear.”

Not only is the risk of recession rising, but the survey also found an increasing majority of investors are also braced for stagflation. More than three quarters (77%) of the panel believe that the global economy is entering a year when growth is below trend while inflation is above trend. Two thirds of investors took that view in February.

Many more fund managers believe that recession either has begun, or will do so soon. The net percentage of fund managers who believe the global economy is already in recession has almost tripled this year, rising to 22% in March from 8% in January. More than one third of respondents expect a global recession in the coming 12 months, compared with 19% who took that view in January.

Also, fund managers specializing in Asia and emerging markets have highlighted China as a growing concern. The share of respondents who expect the Chinese economy to weaken has more than doubled this year, to 64% in March from 29% in January.

Eurozone investors are turning to commodity-based stocks as stagflation fears take hold, according to the regional survey. An overwhelming 87% of managers expect eurozone growth to slow, and over half see inflation in the eurozone rising. However, a similar majority also fears that the European Central Bank’s monetary policy is too restrictive and risks impeding growth at a time when the U.S. Federal Reserve is encouraging growth through rate cuts.

“Eurozone fund managers are playing safe by punishing sectors that indulged in the credit binge and seeking refuge elsewhere,” said Karen Olney, chief European equities strategist at Merrill Lynch. “Fund managers are shifting to the few sectors that could profit from stagflation.” Investors in the region are overweight oil & gas, utilities and basic resources. The biggest underweight positions are in retail, automobiles and banks.

The global survey shows 25% of respondents are overweight energy stocks, up from 19% in February. The big question for investors is how long they can depend on commodities and commodity-linked stocks to deliver attractive returns, Merrill notes. “While commodities enjoy a good short-term outlook, inflation poses a medium-term risk to the asset class,” said Francisco Blanch, head of global commodities research at Merrill Lynch. “Inflationary pressures are already evident in emerging market economies that import commodities with currency pegs contributing to the effect. Furthermore U.S.-led efforts to revive the financial system are adding to the inflationary mix in emerging markets.”

A total of 193 fund managers participated in the global survey from March 7 to 13.