Institutional investor optimism is on the rise to start 2014, reports BofA Merrill Lynch in its latest fund manager survey.

The firm says that its January survey found that fund managers have a rosier view of global growth prospects, particularly for the U.S., but increasingly for Europe, too. It reports that the proportion of investors who believe the global economy will strengthen this year has risen to a net 75% from 71% in December.

It notes that this optimism is reflected in rising expectations for corporate profits, with a net 48% expecting profits to improve, up from 41% in December. By region, a net 29% of investors choose both the U.S. and Japan as having the most favourable prospects for profits. Expectations for Europe have improved too, with a net 8% seeing profits improving, up from 4% expecting deterioration last month.

Merrill reports that investors’ preference for global equities also remains strong. A net 55% say they’re overweight equities, it says, despite the fact that a net 7% say they believe equity markets are overvalued, which is the highest reading since 2000. Merrill says that the overvaluation call is driven predominantly by investors’ views on U.S. equities where a net 72% say stocks are overvalued.

The higher global growth expectations is also translating into increased risk appetites, it notes, with a net 4% of investors reporting that they are taking on a higher than normal level of risk in their portfolios. This is reflected in sector allocation, Merrill says, as 42% of respondents are overweight tech stocks, and 32% are underweight staples.

However, emerging markets remain out of favour with investors, the survey found. It says that a net 61% expect a sharp deterioration in profits in EM equities, up from net 32% in December. And, it notes that investors believe the biggest “tail risk” to the global outlook is a hard landing for Chiona and a commodity collapse.

As for Europe, the survey found that a net 22% believe equities in the region are under-valued, up from 15% last month.

The survey also found that investors increasingly believe companies should be using their rising profits to grow their businesses. It says that a net 67% believe companies are under-investing. “Until corporations reduce high cash levels, investors will run high cash levels and equity corrections will be extremely limited,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.

A total of 234 panelists with US$653 billion of assets under management participated in the survey from January 10 to 16.