Investors are holding more cash in their portfolios than at any time since the period after the September 11 terrorist attacks partly as a "war chest" to meet redemption requests, according to Merrill Lynch's latest monthly survey of global fund managers. However, improving sentiment could drive a New Year rally in equities.

Gary Baker, head of equity strategy for Europe, the Middle East and Africa at Merrill Lynch, said cash is "still needed as a war chest to meet redemptions", but "market sentiment, high cash levels and the prospect of US fiscal stimulus in January point to a possible New Year rally in equities".