The monthly Merrill Lynch fund manager survey is showing a turnaround in investor sentiment. For the first time since December 2007, the majority of fund managers surveyed are overweight equities within a global portfolio, resulting in a net 9% overweight in the asset class. That's a marked improvement from last month's net 6% underweight in equities.

Whether this will translate to further gains in stock markets worldwide remains to be seen, however, as significant improvements in the survey results in past months have not necessarily resulted in market gains.

The survey was conducted by Banc of America Securities-Merrill Lynch Research with the help of market research company TNS, which takes the balance between the bullish and bearish views for each survey question. This particular survey was conducted between June 5 and June 11, with a total of 226 fund managers responding, representing $620 billion in combined assets under management.

The fund managers surveyed have expressed confidence in a global economic recovery and, broadly, in the equity markets.

A net 62% of respondents believe that the world economy will improve in the next 12 months, an increase of 5 percentage points since May. A mere 7% of respondents believe that the world will go through recession in the coming year, down sharply from a net 38% in May and a net 70% in April.

"Investors are currently ruling out the prospect of the much-feared double-dip recession, and have shrugged off the weakness in bonds," says Michael Hartnett, New York-based global equity strategist at Banc of America Securities-Merrill Lynch.

Gary Baker, London-based head of European equity strategy at Banc of America Securities-Merrill Lynch, notes that while investors are finally overweight equities, risk appetite remains relatively constrained.

"Investors seem happy to underweight defensives at this point, but overweight conviction is tightly concentrated on just two sectors; energy and technology," Baker says.

Despite the concern that China's equity market may have already gone too far ahead of fundamentals, with valuations now widely seen to be stretched at the least, many fund managers continue to favour the market within a global emerging markets and Asian portfolio.

Investors are rewriting the rules for positioning their portfolios at the start of a new investment cycle, according to the survey. Rather than focus on moving from defensive to early cyclical stocks, such as consumer discretionary, they are basing their strategy around optimism over Chinese growth and emerging market performance.

A net 62% of the respondents say that China's economy will improve in the next 12 months. That's up 1 percentage point and is a new all-time high following the record reading of net 61% in May. Investors are turning to commodities as their asset class of choice when it comes to China. A net 19% of asset allocators are overweight commodities, up from a net 7% in May.

Reflecting this trend, energy is the sector attracting the biggest positive sectoral swing in allocations this month. A net 30% of respondents are overweight energy stocks, up from a net 18% in May and a net 8% in April.

Global emerging markets remain the most sought-after market globally for equity allocations. A net 37% of respondents are overweight in global emerging markets. There are hints, however, that the euphoria surrounding emerging markets might have peaked because, in May, a net 40% were overweight in global emerging markets. Plus, a net 10% of respondents now believe that global emerging markets could be overvalued.

The US is the next favoured market when it comes to asset allocation globally, with a net 13% overweight in that market. A net 23%, 20% and 20% are underweight in Japan, Europe and the UK.

Fund managers in Europe are on the opposite side of the fence when it comes to investor sentiment. European respondents do not see an end to recession, with a net 70% predicting a further economic downturn in the next 12 months.

Meanwhile, the number of fund managers overweight in cash has fallen to a net 12% from a net 20% in May. This supports recent rallies in stock markets worldwide, with more fund managers letting go of cash and buying shares selectively in various markets.

Confidence in corporate profitability is also on the rise. A net 49% of respondents believe that the outlook for corporate profits will improve over the coming year, up from a net 18% in May. As recently as April, a net 12% said the outlook would deteriorate.