Investor sentiment over the world’s economic outlook has strengthened while confidence in Japanese equities has reached more normal levels, according to the Bank of America Merrill Lynch fund manager survey for February.

A net 59 per cent of investors (an identical reading to January), expect that the global economy will strengthen this year, while a net 39 per cent of the panel expect to see profits improve in the next 12 months - up from a net 29 per cent in January.

The survey shows that investors continue to see value in equities, as a net 13 per cent of global investors say that equities are undervalued. At the same time, a net 82 per cent say bonds are overvalued.

Meanwhile, investors’ appetite for risk in their portfolios has remained steady from the previous month. Average cash balances in portfolios remain at 3.8 per cent, though the net percentage of investors overweight cash has fallen to 2 per cent this month, from 8 per cent in January, the lowest reading since February 2011.

“The continued high level of optimism is a concern, and markets may be vulnerable to bad news, but valuation support suggests any correction should be short and shallow, and our core 'Great Rotation' theme remains in play,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.

An overall total of 251 panellists with $691 billion of assets under management participated in the survey from 1 February to 7 February. A total of 130 managers, managing $270 billion, participated in the regional surveys. The survey was conducted by BofA Merrill Lynch Research with the help of market research company TNS.

Equity allocations

A net 51 per cent of asset allocators remain overweight global equities. Within equities, “sectoral allocations highlight a bias towards a measured easing of risk appetite with a shift towards defensive assets,” the firm said.

Pharmaceuticals, a traditional defensive sector, has returned to the number one sectoral pick for global investors, having been third in the pecking order a month ago. The proportion of investors overweight the sector rose to 27 per cent, from 11 per cent in January.

Cyclical sectors become less popular, with the biggest month-on-month decline seen in technology, which saw a 12 per cent dip in the number of investors overweight the sector. Other declining sectors included materials, industrials and energy.

Japanese equities sentiment “normalizes”

The survey shows that Japanese equities continue to benefit from a positive shift in sentiment by global investors. A net 7 per cent of asset allocators say they are overweight Japanese equities this month, up from a net 3 per cent in January. Meanwhile, a net 29 per cent of Japanese investors say that they are underweight cash, up from a net 5 per cent one month ago. Automotives, technology and banks are the three most popular sectors domestically.

The survey shows that this confidence will continue, as a net 21 per cent of the panel believes the outlook for corporate profits in Japan is more favourable than anywhere else, up from a net 4 per cent in January. Accordingly, a net 9 per cent say that Japan is the region they would most like to overweight. Two months ago, a net 17 per cent said Japan was the region they most wanted to underweight.