According to the bank’s Global Fund Manager Survey, the proportion of asset allocators taking higher-than-normal risk reached its highest level since January 2004 at the start of the new year.
Furthermore, the number of fund managers taking out market protection dropped to its lowest point since the first quarter of 2008. Cash levels also fell for the sixth month running, moving from a high of 5.3% in June 2012 to their present 3.8%.
A net 51% of asset allocators are now overweight equities – the most bullish stance seen since February 2011. The underweight to banks that has persisted since February 2007 also ended as investors moved overweight on the sector.
Within equities, managers have shifted towards cyclicals, with technology and industrials becoming the favourite sectors, and away from defensives. The weighting to telecoms, for example, has fallen to its lowest since December 2005.
Allocations to bonds dropped to their lowest since May 2011, with a net 53% of managers underweight when it comes to fixed income. In further evidence that a great rotation is in its early stages, 49% of investors now expect to sell government bonds to purchase higher-beta equities.
Investor confidence has improved markedly in recent months. The US fiscal cliff remains the leading tail risk among fund managers, cited by 37% of respondents. But this is down from 47% in December and 54% in November.
Meanwhile, a net 59% expect the global economy to strengthen over the coming year – up from a net 40% one month ago. China is a particular bright spot, with a 63% of allocators expecting the world’s second largest economy to secure a stronger recovery this year.
Michael Hartnett, chief investment strategist at BofA ML Global Research, said: “Following the resolution of the US fiscal cliff, sentiment has surged.
“Half of investors now tell us that they would sell government bonds to buy higher-beta stocks, which is consistent with increasing growth and inflation expectations and with our call for a ‘great rotation’ to start in 2013.”