Institutional investors are continuing to express confidence in the global economic recovery, and in stocks, according to the BofA Merrill Lynch Fund Manager Survey for February.

The latest edition of the survey finds that a net 59% of investors believe the global economy will strengthen in the year ahead, which is in line with the January survey. Additionally, the outlook for profits has improved with a net 39% of the panel saying that profits worldwide will improve in the coming 12 months, up from a net 29% in January. And, 48% of investors say that higher capital expenditure is the best use of corporate cash, which is the highest reading since April 2011.

Investors are also still seeing value in equities, it notes, with a net 13% saying that equities are still under-valued. Yet, the survey found that allocations to equities have held at the highs reached in January; and, a net 51% of asset allocators remain overweight global equities, it says. At the same time, a net 82% say bonds are overvalued, which Merrill says is the second-highest level recorded by the survey.

Within equities, it says sectoral allocations highlight a bias towards a measured easing of risk appetite with a shift towards defensive assets. Pharmaceuticals, a traditional defensive sector, is again the number one pick for global investors, with the proportion of investors overweight the sector rising to 27% from 11% in January.

Cyclical sectors become less popular. The biggest drop was in technology, which saw a 12 percentage point swing in the number of investors overweight the sector. Materials also suffered a double-digit fall in the percentage of overweights.

Risk appetite has remained steady too, the firm says. It reports that average cash balances remain at 3.8%, though the net percentage of investors overweight cash has fallen to 2% this month from 85 in January, which is the lowest reading since February 2011.

‘The continued high level of optimism is a concern and markets may be vulnerable to bad news, but valuation support suggests any correction should be short and shallow,’ said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.

‘Investors are striking a balance between the optimism over growth and caution over investment decisions. Investors have so far resisted taking an exuberant stance,’ added John Bilton, European investment strategist.

An overall total of 251 panelists with US$691 billion of assets under management participated in the survey from February 1 to 7.