"Investors are currently ruling out the prospect of the much-feared double-dip recession, and have shrugged off the weakness in bonds," said Michael Hartnett, Banc of America Securities-Merrill Lynch chief global equity strategist.
"While investors are finally overweight equities, risk appetite remains relatively constrained. Investors seem happy to underweight defensives at this point, but overweight conviction is tightly concentrated on just two sectors; energy and technology," said Gary Baker, Banc of America Securities-Merrill Lynch head of European equity strategy.
Follow China: the new rule for allocating assets in a recovery
Investors are rewriting the rules for positioning their portfolios at the start of a new investment cycle. Rather than focus on moving from defensive to early cyclical stocks, such as consumer discretionary, they are basing their strategy around optimism over Chinese growth and emerging markets performance.
A net 62 percent of respondents say that China's economy will improve in the next 12 months - up 1 percent and a new all-time high following the record reading of 61 percent in May. Recognizing the need to feed China's appetite, investors are turning to commodities as their asset class of choice. A net 19 percent of asset allocators are overweight commodities, up from 7 percent in May.
Reflecting this trend, energy is the sector attracting the biggest positive sectoral swing in allocations this month. A net 30 percent of the panel is overweight energy stocks, up from a net 18 percent in May and 8 percent in April. Global emerging markets (GEM) remains by far the most popular destination globally for equity allocations. A net 37 percent of the panel picked out GEM as their preferred region to overweight, well ahead of the U.S., the second-favorite location.
However there are small signs that the euphoria surrounding emerging markets might have peaked. The figure of 37 percent was down on May's number of 40 percent. Furthermore, a net 10 percent of the panel identified GEM as overvalued.
Europe remains depressed while rest of world puts cash to work
Global optimism has not spread everywhere, however. European respondents do not see an end to recession with 70 percent of the regional panel predicting a further downturn in the next 12 months. Global investors view Europe as their least preferred destination, with a net 23 percent picking the eurozone as the region they would most like to underweight.
The number of investors overweight cash has fallen to a net 12 percent in June from a net 20 percent in May. Belief in corporate profitability is growing. A net 49 percent of respondents believe that the outlook for corporate profits will improve over the coming year. As recently as April, a net 12 percent said the outlook would deteriorate.
The return of inflation, a possible cause of the bond market sell-off, is something the panel has recognized. A net 19 percent of global investors believe that inflation will be higher in 12 months' time, compared with only 1 percent predicting lower inflation a month ago. A net 20 percent of the panel believed that monetary policy across the globe is too stimulative.
