Institutional investor sentiment has rebounded, and fund managers have increased allocations to equities, real estate, and commodities, according to the latest BofA Merrill Lynch Survey of Fund Managers. Merrill notes that the improved attitude is being driven by expectations for more central bank support, rather than fundamental optimism.

Merrill’s investor survey for August finds a significant swing in investor sentiment to the upside, with a net 15% of respondents now believing that the world economy will get stronger in the coming 12 months. This represents a 28 percentage point shift, it reports, which represents the largest leap in confidence since May 2009, when the world emerged from the credit crunch.

At the same time, the survey found that fears about the outlook for corporate profits have receded since July. A net 21% of the panel expects profits to deteriorate in the coming year, down from a net 38% a month ago.

Merrill says that this fresh optimism comes amid growing expectations of intervention by the European Central Bank (ECB), with 38% now expecting the ECB to act during the third quarter, up from 29% in July. Another source of optimism is the evolving view on China’s economy, with a net 14% of the regional panel saying China’s economy will improve.

“August’s surge in confidence seems to be more a triumph of policy projection and potential than positive economic data. As indicated by the survey, the risk is now that inaction by policy makers would lead to a negative reaction in global markets,” said Gary Baker, head of European equities strategy at BofA Merrill Lynch Global Research.

In terms of asset allocation, investors are becoming far less bearish on Europe, Merrill notes. A net 5% of investors want to underweight eurozone equities, down from 18% in July, it reports. And, a net 9% now wants to underweight the U.S., compared with a net 6% looking to overweight U.S. equities in July. Fewer investors are worried about the risk posed by European sovereign debt woes, instead, more are nervous about the U.S. ‘fiscal cliff’. And, actual allocations to Europe have risen too, it reports.

Additionally, allocations to real estate have moved into overweight territory for only the second time since 2007 and have reached their highest level since January 2007, Merrill reports. And, a net 12% of asset allocators are overweight equities compared with a net 3% underweight last month. At the same time, fund managers have reduced cash positions slightly to an average of 4.7% of portfolios, down by 0.2 percent.

“Investor positioning does not indicate a major inflection point in the investment cycle. Bond allocations remain high and investors are shunning the most cyclical equity sectors,” said Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research.

An overall total of 232 panelists with US$640 billion of assets under management participated in the survey from August 3 to 9.