The survey revealed that a net 67 per cent of respondents now expect the world’s economy to strengthen over the next 12 months – up a notable 13 percentage points from October, the bank said in its monthly survey.  

In a new question, as part of the survey, investors were asked when the US Federal Reserve will begin “tapering” its bond purchases – a signal that the central bank views economic conditions as robust enough to turn off the printing presses. The survey said 48 per cent see this happening next March, while 18 per cent expect it in the second quarter of 2014.  

A second new question in the survey asked investors about the likeliest catalyst for the global economy reaching “escape velocity” (a virtuous cycle of growth) in 2014. The most common answer was growth in bank lending in the G7 economies (31 per cent), followed by acceleration in the Chinese and Asian economies (26 per cent).

Investors increased equity allocations slightly during the month to a net 52 per cent overweight, while also upping their underweight in bonds. Their biggest shift was into global emerging markets equities, where they returned to a net overweight, while strong overweights in eurozone and Japanese stocks were moderated slightly, the firm said.

“Investors remain reluctant bulls. Who would have thought all-time highs in U.S. stock prices would coincide with high cash levels?” said Michael Hartnett, chief investment strategist at BoA Merrill Lynch global research. “Conviction is still low in Europe. More portfolio managers expect EPS to grow, but fewer see it reaching double-digit levels,” added John Bilton, European investment strategist.

European value revealed

The survey showed that a net 59 per cent of European fund managers expect the region’s companies to increase earnings in the next year. This is up from a net 49 per cent in October. However, last month’s expectation that this hike could reach double-digit levels has evaporated. A net 9 per cent now doubt that a 10 per cent or better rise will be achieved.

Nonetheless, while October’s exuberance towards eurozone equities has normalized somewhat, fund managers still discern value in the market. The survey shows a net 18 per cent viewing the region’s stocks as undervalued even after recent strong performance. 

Korea trumps China

Global emerging markets fund managers showed a significant rise in their confidence over corporate earnings this month. A net 44 per cent expect emerging markets companies to improve profits over the next year. This compares to a net 11 per cent in October and September’s net 8 per cent expecting earnings to decline.                   

Over the month, fund managers also shifted their preferences strongly between global emerging markets. Reflecting the restoration of a potential hard landing in China as the greatest "tail risk" globally, emerging markets specialists scaled back their overweight in the country to a net 11 per cent, down 45 percentage points. Meanwhile, China replaced Russia as investors’ top pick among the BRIC markets on a 12-month basis, however.                                                    

Much of the shift out of Chinese equities appears to have been directed into Korea. Global emerging markets fund managers ramped up their overweight on the country to a net 56 per cent, up 34 percentage points.

New appetite

Investors signalled a new appetite for small-cap stocks during the month. The net percentage of fund managers who expect large-caps to outperform their smaller peers fell to 7. This represented a month-on-month fall of 10 percentage points and took the reading to its lowest since the survey began asking this question, the firm said.

An overall total of 222 panellists with $599 billion of assets under management participated in the survey from 1 November to 7 November 2013. A total of 174 managers, managing $444 billion, participated in the global survey. A total of 111 managers, managing $280 billion, participated in the regional surveys. The survey was conducted by BoA Merrill Lynch Research with the help of market research company TNS.