GLOBAL GROWTH expectations have hit their highest level since July 2011, according to a survey of fund managers.

A net 11 per cent of investors in the Bank of America Merrill Lynch survey of fund managers said the world economy would strengthen in 2012. This marks a large improvement in sentiment compared with December, when a net 27 per cent forecast a weakening global economy.

The renewed optimism has manifested itself in a jump in equity allocations since January 2011. A net 26 per cent of fund managers surveyed are now overweight equities, compared with 12 per cent last month.

“This is a normalisation of risk appetite,” said Gary Baker, head of European equity strategy at BofA Merrill Lynch Global Research, which conducted the survey. “This is not a “risk on” survey. The “risk off” trade is off, but the “risk on” trade hasn’t started.”

The survey also revealed an improvement in sentiment surrounding the euro zone, as investors expect Europe to be a net beneficiary of global growth. Only a net 5 per cent of investors put the euro zone as the region they would most like to be underweight, compared with 29 per cent in January.

The turnround was most marked among European banking stocks, which enjoyed a positive swing of 38 percentage points from January, as fund managers increased their exposure to the sector. A net 12 per cent of European investors are still underweight on European lenders, however.

“Selectively, banks are cheap,” said Mr Baker; “[fund managers] can’t afford to be underweight on them.”

Some bearish sentiment on Europe remained, however, as the number of fund managers expecting a country to announce its intention to leave the euro zone rose from 49 to 55 per cent, with 37 per cent expecting this to happen at some point in 2012.

Those nagging concerns about Europe helped equity allocation in emerging markets enjoy its second-largest jump in 12 years, as expectations of resilient Chinese growth improved sentiment.

Chinese growth expectations are at their highest level since November 2010. – (Copyright the Financial Times Limited 2012)