Risk is returning while cash piles are raided as fears of a global double-dip recession begin to subside, according to October’s Banc of America Merrill Lynch Fund Manager Survey.

The proportion of respondents who think a global recession next year is unlikely now stands at 65 per cent, a marked improvement from September’s figure of 47 per cent. The survey's findings suggest that as macro-economic optimism begins to translate into profits cash is being put to work in the form of equity.

Cash balances fell to 3.7 per cent from 4.1 per cent in September and the proportion of investors overweight on cash dropped to a mere five per cent from 18 per cent last month. Meanwhile the proportion of participants overweight on equity has risen 11 per cent from September to 38 per cent.

A risk and liquidity index that combines respondent’s views on risk appetite, investor time horizon and cash weighting shows that risk appetite has risen to an index level of +44, surpassing the eight-year average of +40.

Regionally, Europe, whose recovery was seen to be lagging last month, is now making good on that expectation by pulling ahead of other developed regions in terms of asset allocations. A net 30 per cent of global portfolio managers see eurozone equities as undervalued relative to other regions. 

This contrasts with Japan, which 20 per cent of investors regard as the least attractive region going into the next 12 months. Japan, although superficially similar to Europe, is still suffering from a perceived weakness in its banking sector. A net 34 per cent of respondents believe the yen is overvalued, compared to just 21 per cent in September.

Meanwhile, among emerging BRIC markets, Brazil and China are still clearly separated from less attractive India and Russia, which has a differently shaped market in terms of emerging middle classes. Although Brazil benefited from a very slight cooling of China last month, a net 49 per cent of respondents believe China’s economy will strengthen in the next 12 months, compared to 35 per cent in September.

Worries over a US dollar crisis continue with some believing the dollar will not rally until it has dropped further. A net 20 per cent of investors see the dollar as undervalued compared to the 50 per cent in spring 2008. A strong euro and a weakening dollar could see dollar portfolios incorporate more euros, yet 44 per cent of asset allocators think the Euro is still overvalued; an increase on last month’s 39 per cent.

However, the outlook is generally very positive for Europe with 30 per cent of global portfolio managers regarding eurozone equities as undervalued relative to other regions. This is also the first time since June 2007 that investors are overweight on European banks. Improved balance sheets are helping confidence to rise over the short term while fears that regulatory changes would cramp the system in the long term are beginning to dissipate as banks learn how to price-in changes.