Global fund houses have become far more optimistic on the outlook for equities and bonds in signs of a marked turnaround in risk appetite, with hopes highest for Asia and emerging markets.

Some 44% of respondents to the quarterly HSBC Fund Managers’ Survey – designed to identify global liquidity flows and asset allocation dynamics – are now overweight bonds, compared with 22% in the fourth quarter last year.

Further, 50% are neutral on equities and 20% underweight, from 20% neutral and 50% underweight in the previous three months. At the same time only 22% are overweight cash, compared with 44% in the fourth quarter.

In terms of asset allocation strategy, the sharpest upgrades in expectations is towards equities in emerging markets (where 55% are now overweight, from 27% in Q4); in Asia-Pacific ex-Japan (40% overweight, from 20% in Q4); and in Greater China (56% overweight, from 44% in Q4).

Even sentiment towards Europe (including UK) appears to be improving, with 18% of managers holding an overweight view compared with 9% in Q4, although it also saw a mirrored decline to 36% underweight, from 27%.

On the bond side, the clear standout is Asian bonds, with 88% now overweight and just 13% neutral, compared with 63% and 38% respectively for the previous three months.

“In the spirit of this being Year of the Dragon, the outlook for Q1 based on our survey is more optimistic than it was in the fourth quarter last year, so relatively speaking this is a risk-on environment,” says Malik Sarwar, head of wealth development within HSBC’s retail banking and wealth management group.

“Moreover bonds continue to be in favour as people search for safety and yield. A big part of this is the expected draw-down in cash that had been built up.”

Asked about the key drivers for increasing appeal of emerging markets, Asia and Greater China in particular, he says: “Simply because price-earnings ratios and fundamentals are more attractive than alternative options in developed markets. Credit quality in the fixed income market is also driving behaviour.”

In terms of asset flows, the survey finds the FUM of surveyed managers increased by $137 billion (3.7%) between the third and fourth quarters last year, of which money-market funds represented the biggest chunk (36%), followed by equity funds (34%) and bond funds (16.4%).

The biggest contributors to FUM growth in the fourth quarter were North American equities (8.3%) and high-yield and emerging market bonds (7.9%), followed by US bonds (5.7%).

In terms of market performance from quarter-to-quarter, North American equities came top having risen +11.1%, followed by greater China equities (+8.1%), global equities (+7.3%) and high yield/EM bonds (+5.2%).

Nevertheless, equity funds continued to see net outflows in the fourth quarter with investor sentiment dampened by fears over the European debt crisis.

Global equity funds saw the highest retrenchment at -6.1%, followed by Greater China equity funds at -5.5%. US bond products (+4.6%) and Japan equities (+3.1%) saw the strongest inflows.

HSBC surveyed 13 major fund houses for this survey with a combined AUM of $3.81 trillion as at the end of last year.