Investors surveyed by Merrill Lynch have become more optimistic about the global economy, causing risk appetite to increase further. Optimism about global economic growth has reached its highest level since early 2004. A net 26% of respondents say the global economy will strengthen in the next 12 months, up sharply from negative 24% in January.

In contrast to March, investors are starting to act on the improving outlook and are unwinding entrenched bearish positions, according to Merrill Lynch.

The crucial difference is that investor pessimism on bank stocks has started to recede. The net percentage of respondents underweight banks swung significantly in April to a net 26% from 48% in March. The net percentage of investors overweight cash fell to 28% from 41% in March. Just 17% of respondents are underweight equities compared with 41% in March. Asset allocators are turning towards cyclical sectors, such as technology.

"Improving sentiment on financials has decisively removed the log jam on sector rotation," says Gary Baker, co-head of international investment strategy at Banc of America Securities-Merrill Lynch Research. "This is enabling broader optimism about growth to feed into greater risk appetite and prompting a march out of defensives into cyclicals."

Michael Hartnett, co-head of international investment strategy at Banc of America Securities-Merrill Lynch Research, says the consensus has shifted from "apocalyptically bearish to reluctantly bullish".

However, Hartnett notes that asset allocators are still underweight equities, indicating they have yet to fully embrace the idea of a new bull market.

China continues to be a "beacon of hope" for the global economy, according to Merrill Lynch.

Portfolio managers are more optimistic on Chinese growth than at any point since 2003. A net 26% of respondents believe Chinese economic growth will accelerate over the next 12 months. As recently as November, a net 85% expected it to decelerate.

"Investors looking to play the global recovery are using China and emerging markets, rather than Europe or Japan, to do so," says Hartnett.

Thanks largely to China's influence, global emerging markets have been the prime beneficiary of improving sentiment towards equities with a net 26% of asset allocators saying they are overweight the asset class, up from just a net 4% in March. Commodities, integral to emerging market growth, are increasing in popularity. A net 4% of asset allocators are overweight the asset class -- the first net overweight reading since August of last year.

After emerging markets, the US is the next favoured market by investors. A net 18% of respondents say that they would most like to overweight US equities with a 12-month view. Europe and Japan are the least favoured with a net 18% saying they would most like to underweight these equity markets.

April's survey shows strong evidence that investors have started to emerge from the recessionary rut that led them to take extreme asset allocations for protection. In addition to reducing underweight positions in banks, asset allocators have begun moving back towards traditional cyclical sectors.

Technology has become the most popular sector, with a net 27% of respondents overweight. Pharmaceuticals, the favourite in March and a classic bear market refuge, has seen a drop in popularity from 30% overweight to 21%. A net 17% are underweight industrials, down from a net 31% in March. Asset allocators are neutral on materials, compared with a net 10% who were underweight in March.

A total of 214 fund managers, managing a total of $561 billion, participated in the global survey from April 2 to April 8. A total of 181 managers, managing $356 billion, participated in the regional surveys. The survey was conducted by Banc of America Securities-Merrill Lynch Research with the help of market research company TNS, which measures the net responses of respondents.