Investors becoming fearful of stagflation

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Investment bank Merrill Lynch said its monthly poll of 204 fund managers across the world showed some of the most negative stances on equities it has seen in 10 years.

The main shift, the bank said, was in a view that global growth and profit expectations were falling just as expectations of higher interest rates were rising because of inflation.

"About 87 percent (of respondents) believe we are in a world of above-trend inflation and below-trend growth," said David Bowers, Merrill's poll consultant.

"People now believe we are in a world that is not only slowing but where short rates are rising," he said.

The poll was taken during a period in which both the U.S. Federal Reserve and European Central Bank warned about inflation and hinted that interest rates were likely to stay unchanged or be raised despite slowing economies.

Specifically, 75 percent of fund managers in Merrill's June poll said they believed the world economy would slow over the next 12 months, compared with 61 percent in May.

The same percentage said corporate profits would deteriorate, a small increase from May, while 59 percent said global inflation would be higher compared with 53 percent in May and just 44 percent in June.

This mood translated into a highly cautious approach to investments.

Those saying they were overweight in cash, for example, jumped to 51 percent from 42 percent a month earlier. Cash is often the first port of call for worried investors.

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