The signs point to swelling investor optimism in this month’s Bank of America Merrill Lynch (BAML) monthly fund manager survey.

Equity exposure is up month-on-month, particularly in Japan; cash levels are their lowest for two-and-a-half years; and 85% of investors believe bonds are overvalued, the highest proportion ever recorded in this poll.

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Just 3% say bond yields will be lower in the next 12 months, while 82% say they will rise. As a result, fund managers are positioning for higher yields, rotating over the past month into banks and Japan stocks (assets that benefit from rising interest rates and inflation) and out of utilities, emerging markets, healthcare and bonds.

Overall, a net 45% of managers said they were overweight equities this month, up from 34% in September, amid the continued rally in global stocks.

Moreover, for the first time in six years, a record high 48% of investors expect above-trend growth and below-trend inflation (see figure below)—what the survey calls the “Goldilocks” scenario trumping secular stagnation.

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The number of fund managers expecting below-trend growth and below-trend inflation fell 11 percentage points from last month to 34% in October

Overall growth expectations ticked higher this month, with a net 41% of investors expecting a stronger global economy in the coming year, up from a net 25% last month. But that is still well below the high of net 62% in January this year.

Japan and eurozone in favour

A net 23% of managers said they were overweight Japan equities this month, up from 12% in September.

One factor behind this may be that investors said the biggest tail risk was a “policy mistake by the US Federal Reserve or European Central Bank” this month. They chose North Korea in September.

However, Europe is the most popular equity allocation, with a net 58% overweight eurozone stocks this month—the highest in five months and up from 54% in September.

The eurozone this month regained top spot from global emerging markets as the region that investors would most like to overweight (see figure below). The US and Brexit-beleaguered UK are by far the most popular picks for regions to underweight.  

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Ronan Carr, European equity strategist at BAML, said: “Europe is in vogue according to global investors, with the overweight in eurozone equities back near record highs and earnings-per-share expectations accelerating. European investors remain positive on the macro outlook and are looking for a global re-acceleration.”

Note: BAML's October Global Fund Manager Survey was conducted between October 6 and 12. 207 panellists with $585 billion in AUM participated in total. 179 participants with $516 billion in AUM responded to the global survey questions and 87 participants with $182 billion in AUM responded to the regional survey questions.