Worries about Europe continue to subside among institutional investors, only to be replaced by concerns about the U.S. fiscal situation, reports the BofA Merrill Lynch Fund Manager Survey for October. Yet, fund managers are increasingly optimistic.

The latest edition of the survey finds that 72% of global investors believe that the so-called U.S. “fiscal cliff” is not substantially priced into global equities and macroeconomic data. The U.S. fiscal situation is also identified as the number one tail risk by 42% of respondents, up from 35% in September and 26% in August.

At the same time, concerns about European sovereign debt funding are easing. The survey found that a net 27% of the panel sees it as their number one risk, down from a net 33% a month ago, and far lower than the reading of 65% in June.

Nonetheless, investors have become more positive, with a net 20% expecting the global economy will strengthen in the next 12 months, up three percentage points from last month. And, concerns about the outlook for corporate profits have eased too, it says.

Additionally, equity allocations rose significantly month-on-month, the survey found. It reports that a net 24% of asset allocators are overweight equities, up from a net 15% in September. And, fund managers increased allocations to seven of the 11 global sectors, including banks and industrials, it says. Allocations to the eurozone and global emerging markets increased, but allocations to Japan fell to a three-year low, it reports.

“While the U.S. fiscal cliff is a hurdle, growing belief in the global economy could spur a more ‘risk on’ stance from investors,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.

The latest survey finds that a net 10% is overweight in both the US and Europe, whereas in August a net 13% were underweight eurozone equities and 13% were overweight on the U.S. And, the outlook for the two regions is also identical, it notes.

However, investors have become more bearish on Japan, it says, “as concerns grow over a dispute with China over the Senaku Islands and its impact on trade.” Now, a net 38% of global asset allocators are underweight Japanese equities, which is the lowest reading since March 2009.

As well as increasing equity allocations, investors are shifting towards higher risk sectors, the survey notes. A net 7% of investors are now overweight industrials, a highly cyclical sector, compared with a net 8% underweight in September. Riskier sectors such as banks, insurance and materials also saw positive shifts, it adds.

In order to add riskier equities, investors are selling government bonds, using cash, and selling defensive equities.

A total of 269 panelists with US$734 billion of assets under management participated in the survey from October 5 to 11.