For the first time since January 2006, investors are taking above-average risk, relative to their benchmark, the survey of 209 fund managers, managing a total of $539 billion, showed.

A net 2 per cent is taking “higher than normal” risk, compared with a net 7 per cent taking “below normal risk” in December.

Average cash balances have fallen to 3.4 per cent, the lowest reading since mid 2007, down from 4.0 per cent in December last year. A net 52 per cent of asset allocators are overweight equities, up sharply from a net 37 per cent in December. (The “net” figure balances those respondents who are overweight of an asset class against those who are underweight to give an overall balance).

In another indication of rising risk appetite, the survey found that a net 55 per cent have no protection against a fall in the next three months, compared with a net 48 per cent in December. Investors have been moving into cyclical stocks, are positive about profits and are urging management teams to invest in growth.

"This survey is one of the more bullish we have seen and suggests that investors buy into the idea that this recovery has legs," said Gary Baker, head of European equities strategy at BofA Merrill Lynch Global Research. "We are, however, seeing early signs that might alert contrarians looking for a selling opportunity – namely low cash allocations and possible complacency against a sell off in stocks," said Michael Hartnett, chief global equities strategist in the same firm. 

Investors responding to the BoA Merrill Lynch survey of fund managers are urging companies to invest more in growth and less in balance sheet repair. For the first time since mid-2006, capital investment heads the list of investors’ priorities – ahead of reducing debt and returning cash to shareholders.

Four out of ten respondents say that capital spending is what they most want to see corporates use their cash for. Improving the balance sheet, which has been investors’ priority for the past year and a half, is now in second place.

Japan is back in favour. A net 63 per cent of the regional panel expects a stronger Japanese economy in 2010, up from 30 per cent in November. A net 87 per cent expect improved earnings, up from 59 per cent in November.

The global panel has identified Japanese equities as the most undervalued in the world and over the past two months Japanese equities have become more popular than eurozone equities. Japan is the region that 20 percent of the panel would most like to overweight in the coming year, versus 10 percent opting for Europe.

The survey was carried out between 8 and 14 January this year. The survey was carried out by the US bank in conjunction with TNS, the market research firm.