Institutional investors are feeling better about the global economy, and stocks, too, according to the latest BofA Merrill Lynch fund manager survey.

The survey reports that a net 55% of asset allocators say that they are overweight global equities, the highest reading since July 2007. This is a significant increase from December when 40% were overweight the asset class. At the same time, bond allocations fell, leaving 54% underweight bonds, up from 47% a month ago.

This growing confidence in stocks is being driven by increased confidence in the global economy and corporate profits, it reports, as 55% of investors expect the world’s economy to strengthen in 2011 with 39% predicting ‘above trend’ growth in the coming 12 months. And, 57% believe that corporate profits will rise 10% or more this year, up from 45% in December.

At the same time, a growing majority expects global inflation to increase this year, now at 72% in January, up from 48% two months ago. But higher inflation is not seen necessarily as a threat, it says.

“The combination of growth optimism and a benign view towards higher inflation provide a potent case for equity investment,” said Gary Baker, head of European equities strategy at BofA Merrill Lynch Global Research.

“Investors believe monetary easing is working; in the absence of either tighter policy or weaker data, equity enthusiasm looks contagious,” said Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research.

The survey also found sentiment improving towards the U.S. and Japan, but declining for emerging markets. A net 27% of the global panel is now overweight U.S. equities, the highest reading since November 2008. And, a net 15% of the panel would like to overweight U.S. equities more than any other region, up from a net 7% in December. Additionally, global investors have moved overweight Japanese equities for the first time since May 2010.

Global emerging market support remains high but has continued to decline, the survey found. A net 43% of asset allocators are still overweight GEM equities, but this is lower than the net 56% two months ago. The weakening confidence in emerging markets come as belief in China’s economic prospects has eroded, the survey found. And this has also undermined confidence in commodities, with 16% now overweight the asset class, down from 22% a month ago.

A total of 199 fund managers, managing a total of US$562 billion, participated in the global survey from January 7 to 13.

IE