Global fund managers are increasingly optimistic about the outlook for the global economy, and willing to take on more risk as a result, according the latest BofA Merrill Lynch Fund Manager Survey.

Merrill’s fund manager survey for November finds that a net 47% of the global panel expects the economy to strengthen in the year ahead, up from 33% in October. And, a net 42% say that global corporate profits will improve in the coming year, up from 27% last month.

This increased optimism is, in turn, translating into a greater willingness to take on more investment risk. As a result, asset allocators have shifted out of cash and increased their allocations to equities, it says. The proportion overweight equities has risen by 12 percentage points to a net 46%, it says; and, a net 13% are overweight cash, down from 27% in October. Merrill says that hedge funds have also increased their net allocations to equities, with 43% now net long equities, up from 35% last month. It also notes that last month, a net 16% of investors said they were taking lower than normal levels of risk. This month, a net 2% are taking above-normal risk, it reports.

By region, investors are most bullish on Japan, it suggests; and, investors are sending mixed signals about appetite towards Europe. The survey found that Japanese equities have seen a big pick up in allocations for the second consecutive month, and the trend is likely to continue. It says that a net 45% of global asset allocators are overweight Japan, up from a net 32% in October and 23% in September.

Moreover, it says that Japan is also the most favoured region for the coming year. A net 27% of the investor panel says that Japan is the region they are most likely to overweight in the next 12 months. This represents a nine-year high, it says.

The optimism about Japan appears to be underpinned by a belief in the profit outlook and a view that the country’s stocks are undervalued, Merrill notes. It says that a net 26% of respondents identified Japan as having the most favourable profit outlook for the year ahead, which is a rise of 10 percentage points from last month. And, a net 17% say that Japanese equities are the most undervalued in the world.

Conversely, Merrill says that investors appear unsure how to treat European equities. It reports that global asset allocators increased their moderate overweight positions slightly this month, with a net 8% now overweight the region. But, investors have also indicated that they would like to underweight the region in the coming 12 months, it says.

In terms of risk to the outlook, investors cite deflation as the biggest threat to the market’s upward trajectory, Merrill says. It reports that 29% of the global panel said that eurozone deflation is the biggest “tail risk,” ahead of geopolitical crisis (21%). Yet, investors don’t see deflation as the most likely outcome. It says a net 35% of investors have said that they expect global core inflation to pick up over the year ahead.

“Deflation might be in the back of investors’ minds, but taking on risk, especially in equities, in Japan and in the dollar is at the forefront of their thinking,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Research.

An overall total of 214 panelists with US$569 billion of assets under management participated in the survey from November 7 to 13.