Institutional investors have grown increasingly bullish on European equities, as attitudes to emerging markets have cooled, according to the BofA Merrill Lynch Fund Manager Survey for September.

The firm reports that allocations to European equities have reached their highest level since May 2007 in the latest survey. A net 36% of global asset allocators are now overweight the region, it says, which is more than double the 17% recorded in August.

At the same time, allocations to emerging market equities remain low, with a net 18% of the panel underweight on the segment, it says.

Additionally, the firm says that investors are signalling their intent to maintain flows into Europe, with a net 27% of investors saying that the eurozone is the region they would most like to overweight in the coming 12 months. And, it sees greater confidence in Europe’s economy.

Yet, despite the return of optimism in Europe, Merrill also says that cash levels have risen to an average of 4.6% of portfolios, and the proportion of asset allocators that are overweight cash has risen too.

This is accompanied by a generally dim view of the global economy, with eight of 10 investors saying they expect the global economy will continue to grow at below trend rate in the coming 12 months.

“Investor cash levels remain high because the fear of bond markets is greater than the appetite in equity markets,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch global research.

That said, the survey also finds growing optimism towards China, which, it says, hints at a brighter outlook for emerging markets generally.

Indeed, it says that negative sentiment towards global emerging markets has stabilized, with the number of investors saying that emerging markets is the region they most want to underweight falling to a net 21% in September from 29% in August. And, it says that investors are indicating that they see the best value in emerging markets in almost a decade.

An overall total of 236 panelists with US$689 billion of assets under management participated in the survey from September 6 to 12.