Fund managers have increased exposure to emerging market equities on the back of a sharply improved outlook for global growth and inflation.

Global asset allocators made the biggest month-on-month revision to growth expectations for three years, with eight of 10 investors expecting the European Central Bank to launch QE3 before the end of this year, finds the latest Bank of America-Merrill Lynch fund manager survey.

A net 15% of the 173 panellists in the global survey believe the world economy will get stronger in the next 12 months, from a net 13% in July who said it would weaken – a swing of 28 points.

The percentage of global managers who reported overweight allocations to EM equities rose to 23% in August, from 19% the month before. Emerging markets is now the largest regional overweight.

But a summer rally caused only a modest re-allocation among global managers from cash and bonds to equities, with equity allocations now at a three-month high (net 12% overweight), but still well below a 10-year average of net 25% overweight.

They increased their underweight to bonds to a net 27% (from 23%) and scaled back their underweight to commodities to a net -2%. A combination of yield and US real estate recovery saw exposure to Reits (net 5% overweight) rise to the highest level since January 2007.

At the same time managers scaled back their underweight to eurozone equities to a net 13% (from 26%) on hopes of policy stimulus – the highest allocation to the zone since May 2011.

But in Europe, more investors say they are likely to underweight US equities than eurozone equities on a 12-month view – the first time this has been seen in the survey for two years.

However, while fears of a global recession may have eased, high cash levels, cautious equity allocations and disdain for banks indicate global investors would prefer to bet on a short-term bounce rather than an inflection point in the investment cycle, the report finds.

“Investor positioning does not indicate a major inflection point,” says Michael Hartnett, chief global equity strategist at BoA-Merrill global research. “Bond allocations remain high and investors are shunning the most cyclical equity sectors.”

Growth expectations for China continued to be strong, although Asia-Pacific investors scaled back their overweight in the country to a net 19%, the lowest reading since October last year. Nevertheless, China remains the largest overweight in Asia, followed by Hong Kong (12%).

Allocation among Asia-Pac investors to the Philippines tumbled in August to -12% underweight, while investors cut their big underweight in Australia (now net -15%) for the second straight month.

Emerging market investors continue to favour Asian markets: Thailand (+42%), Korea (+33%) and China (+17%) were the most loved. But managers reduced exposure to Latin America, with Mexico and Brazil both slipping to net underweight (-17%), with a further trim for Chile (-42%).

By sector, pharmaceuticals, technology and staples remain the three largest overweights among global managers, although tech dropped to its lowest level since February 2009 (net 23% overweight). Investors continue to shun cyclical equities, banks and materials.

But global allocations to energy recovered sharply in August, with oil having gained 12.9% over the last month and valuations having sunk to record levels. EM Energy trades at 6.1x forward earnings, a 28% discount to its five-year average.

Global investors are now a net 12% overweight, from neutral in July, while GEM investors increased their exposure to energy to a net 17% overweight. But the latter cut allocations to both materials and insurance (-62% underweight); media is most underweight for Asia-Pac investors.

BoA-Merrill carries out monthly surveys of fund managers from three regions: global, Europe, and emerging markets and Asia-Pacific. Overall 232 panellists with $640 billion of AUM took part.