Investors are more positive about equities than they have been since July 2007 and have turned more bearish on bonds, expecting major central banks to keep rates very low despite stronger economic growth, a survey showed.
The monthly global fund managers' survey from Bank of America-Merrill Lynch showed on Tuesday a net 55 percent of respondents were overweight equities in January, compared with a net 40 percent in December.
This month's reading means the difference between overweights and underweights is 55 percentage points.
The poll, which surveyed 199 participants who manage total assets of $562 billion, also showed bond underweight positions rose to a net 54 percent, levels not seen since August 2007, from a net 47 percent last month.
Cash underweight positions fell to a net 5 percent, compared with 6 percent last month.
A net 72 percent of respondents expect higher inflation in the next 12 months, the highest in almost six years, but have pushed back expectations for the Federal Reserve's first rise in interest rates from ultra-low levels until well into 2012.
"Investors essentially stopped trying to fight the Fed, accepting that inflation will be higher but there's no need to fear rate rises. They are left with almost no choice but to buy equities and cut cash and bonds," said Gary Baker, head of European equity strategy at BofA Merrill Lynch.
"Traditionally alarm bells will go off but there's nothing to suggest in the survey that investors are over-exuberant."
Investors also expected euro zone and Japanese monetary policies to remain accommodative.
Average cash holdings rose slightly to 3.7 percent, but remained below the five-year average of 4.2 percent.
Emerging markets remained the most favored region, although investors have trimmed risks. A net 43 percent of investors were overweight the asset class, down from a November peak of 56 percent.
Hedge funds reduced their gearing levels. The ratio of gross assets held by hedge funds relative to their capital fell to 1.26 this month from 1.48 in December.
Their net exposure to equity markets — measured as long minus short as a percentage of capital — fell to 31 percent from 35 last month.
Regionally, investors turned most optimistic on U.S. equities since late 2008 with a net 27 percent overweight position. Japan's allocation shifted to a net 5 percent overweight from 13 percent underweight in December.
Investors boosted their net underweight positions on Europe to a six-month high of 9 percent from December's 4 percent.
"Investors are becoming more positive on the U.S. and Japan is also benefiting from not being Europe," Baker said.
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