The latest edition of Merrill Lynch’s Survey of Fund Managers shows that money managers are piling into cash as they prepare to withstand an economic slowdown.

“Investors are offering the clearest signal yet that the global economic slowdown is forcing them to overhaul their asset allocation,” according to the survey for July. It notes that the credit crunch is leading to polarised investment allocations and is taking survey readings into uncharted territory, setting four records: 53% of asset allocators are overweight cash, 40% are underweight equities, 32% are underweight eurozone equities, and 40% are underweight U.K. equities.

Risk appetite is close to record lows last seen in March, it added. And, despite the sell off in equities, only 16% of respondents find equities cheap. The survey also demonstrates that investors have an increasingly skeptical view of earnings forecasts, with 83% saying consensus corporate earnings are ‘too high’.

European fund managers are beginning to reassess inflation risks in light of increasing awareness that slower economic growth will put the brakes on inflation, Merrill noted. “Responses in the regional survey suggest that inflation may be less of a threat than previously feared,” it said.

Indeed, 96% of investors believe Europe’s economy will weaken over the next 12 months, a ten percentage point rise from June. Fears over the economic outlook coupled with disillusionment with emerging markets have catapulted investors into healthcare stocks – a traditional safe harbour from wider economic trends, it observed.

“What investors are looking for right now is immunity from the ills of the market place and the healthcare sector provides that,” said Karen Olney, chief European equities strategist at Merrill Lynch. “Healthcare companies might have their own industry risks, but they do offer immunity from the three horrors that are bugging investors: a rising oil price, the slowing economic cycle and the credit crisis.”

July’s survey also found an abruptly more negative view of emerging market equities. Only four percent have a positive stance towards the asset class. Investors are increasingly concerned that rising inflation in emerging markets makes them more vulnerable to monetary tightening and slowing domestic demand, it explained.

“The best combination for emerging market equities is rising commodity prices and falling EM interest rates; the worst is falling commodity prices and rising EM interest rates. Weaker global growth and higher inflation in emerging markets is raising the risk of the latter, which is why asset allocators have become much more cautious on emerging markets,” said Michael Hartnett, chief global emerging markets equity strategist at Merrill Lynch.

Finally, it reported that global investors indicate that they would rather corporates use cash to improve balance sheets, than return money to shareholders. “Financial companies have taken steps to repair their balance sheets with an abundance of capital raising initiatives this year,” said Barnaby Martin, credit strategist at Merrill Lynch. “Two questions arise for the second half of the year. Will they be able to complete their recapitalizations within the timeframe investors expect and will non-financials have to take similar measures?”

A total of 191 fund managers participated in the global survey from July 3 to 11 July, managing a total of US$610 billion.