As confidence in the world’s economic outlook reaches its most positive level since April 2010, “global investment bullishness has massively surged”, according to theBank of America Merrill Lynch fund manager survey for January.

A net 59 per cent of investors (a rise of 19 per cent month-on-month) expect the global economy to strengthen this year. Less positively, an increasing share of respondents expects inflation to pick up as well.

The new year sees asset allocators assigning more funds to equities than at any time since February 2011, and investors’ appetite for risk in their portfolios is now at its highest in nine years, while an increasing number judge equities as undervalued - particularly in Europe, the survey shows.

“While the survey reveals pockets of exuberance, undemanding valuations in Europe should underpin equities unless earnings growth fails to materialise,” said John Bilton, European investment strategist, BoA Merrill Lynch.

Findings indicate investors have cut cash holdings to 3.8 per cent of all holdings from 4.2 per cent in last month’s findings, marking the most positive reading of this measure of willingness to hold riskier investment assets since April 2011.

Although the US “fiscal cliff” remains to be investors’ largest concern, worry has calmed down, by nearly 20 percentage points in two months. Meanwhile attitudes to China remain positive, with a net 63 per cent anticipating a stronger economy this year. However, 14 per cent of investors view a Chinese “hard landing” as their biggest risk.

An overall total of 254 panellists with $754 billion of assets under management participated in the survey from 4 January to 10 January. A total of 190 managers, managing $586 billion, participated in the global surveys. The survey was conducted by BoA Merrill Lynch with the help of market research company TNS.

The European story

The perception of Italy as a potential “tail risk” for Europe has declined sharply, with only 17 per cent of respondents viewing the country as the biggest threat to the “European story”, compared to 26 per cent in December. Investor risk perception of France and Spain has worsened from last month, up to 34 per cent and 29 per cent, respectively.

Although global growth expectations saw a jump this month, European expectations did not follow suit. While a net 8 per cent of panellists expect a stronger European economy this year, almost half (48 per cent) still see the risk of recession as a serious threat.

Rotation toward Japan

With the election of the new Japanese government, the more expansionary policy of the government encouraged fund managers to take a more bullish view of the country. A net 3 per cent of respondents are now overweight Japanese equities - a turnaround from last month’s net 20 per cent who were underweight.

Tread carefully

“There’s a little bit of dislocation creeping in between the global and regional surveys this month around,” John Bilton told journalists at a media briefing about the findings.

Amidst global growth enthusiasm, the survey found that emerging market investors “were reluctant to make big bets at the start of the new year”, with fund managers overweight in only three sectors: consumer discretionary, tech, and financials.

However, Russia, China and Turkey split a three-way tie amongst investors, as the favourite market to start 2013. India also enjoyed an overweight for the first time since 2010.

Meanwhile Brazil fell out of favour, at -21 per cent, and allocations to the country declined to the lowest level on record within the emerging market fund management survey.