Investors enter 2014 optimistic about the global economy and outlook for Japanese and European equities, according to the BofA Merrill Lynch Fund Manager Survey for December.

The proportion of investors believing the global economy will strengthen in the year ahead has risen to a net 71% from a net 67% in November. Conviction in the global economy is far stronger than 12 months ago when a net 40% of the panel predicted it would strengthen.

Similarly, the outlook for profits has ticked upwards month-on-month and is far stronger than the end of 2012. A net 41% believes global profits will improve over the coming year, compared with a net 11% taking that view a year ago. Fifty-five percent of investors say that they want corporations to prioritize capital expenditure over other uses of cash-flow. That represents a survey high and an increase from 53% in November and 45% 12 months ago.

Preference for equities over bonds remains at historically high levels. The spread between equity overweights and bond underweights stood at 118 percentage points in December, compared with 76 points one year ago and just 19 points in July 2012.

Investors demonstrated a strong preference for Europe and Japan. Global investors have increased overweight positions in Japanese and eurozone equities in the past month and indicated appetite for more, while domestic investors in each region have become more optimistic.

“Weakness in the U.S. dollar next year is the biggest threat to positioning given a consensus to go long Japanese and European cyclicals,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research. “Belief in the European recovery has reached a stretched level, leaving markets vulnerable to profit taking as portfolio managers seek uncrowded alternatives,” said John Bilton, European investment strategist.

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