By Jeremy Gaunt, European Investment Correspondent
LONDON, Dec 17 (Reuters) - Pessimism among investors is levelling off and there are fewer fund managers expecting the global economy to get worse next year, a monthly Merrill Lynch survey showed on Wednesday.
The U.S. financial firm's December poll of 196 fund managers across the world also showed a widespread perception that equities are cheap after more than a year of steep declines, although few are prepared to jump back into stocks yet.
"Pessimism seems to be bottoming," said Karen Olney, a Merrill equity strategist.
The poll showed a shift in sentiment about the global economy, which is widely seen to be in a recession. Although most respondents -- 63 percent -- continue to expect more deterioration in 2009, the numbers are falling.
At 26 percent, more than a quarter now expected the world economy to improve over the next 12 months. That compares with 22 percent in November and 16 percent in October.
"(There's) a little bit of light at the end of the tunnel," said Gary Baker, Merrill's head of EMEA equity strategy. "There are tentative signs that the (survey) panel is seeing the pace of economic deterioration starting to moderate."
He said part of this could be put down to the growing belief among fund managers that monetary policy globally is about right for the economic conditions.
This was particularly the case regarding the United States, which slashed rates to juts 0.25 percent on Tuesday after the polling, and Britain. Policy in the euro zone and Japan are still considered too restrictive, Baker said.
"The debate has moved on to fiscal policy," he said.
NOT STOCKS YET
The poll showed fund managers consider stocks to be cheap, with 86 percent saying equities are fairly valued or undervalued.
But there was no rush to buy yet. Cash and bonds remain in favour.
Specifically, 56 percent of respondents were underweight equities while 51 percent are overweight in cash and 47 percent overweight in bonds.
Within stocks, only U.S. equities were favoured.
Baker said all this -- including the heavy cash positions -- pointed to investors adding to recent small gains on stock markets.
"We see all the ingredients in place for the current rally we are seeing to be sustained into the new year," he said. (Editing by Toby Chopra)