Seemingly defying much of the continued grim economic news, investors are at their most optimistic about the global economy since December 2005, according to the Merrill Lynch survey of fund managers for March, but that bullishness has not yet led to a major move from cash to stocks.

For the first time in more than three years, investors do not predict lower global economic growth over the next 12 months, according to the survey of 213 fund managers, managing a total of $533 billion,
Merrill Lynch said in its monthly poll of investment houses around the world.

At the heart of the cheerier mood towards the economy is renewed optimism about

China, the survey found. Some two months ago, a net 70 per cent of respondents thought

China’s economy would worsen in the year ahead. That figure fell to a net 1 per cent in March.

But against this, risk appetite is low; investor pessimism towards banks is at a record high. A net 48 per cent of asset allocators said they are underweight banks, up from a net 39 per cent taking that stance in February. A total of 22 per cent of fund managers said they are aggressively underweight banks, versus 17 per cent in February. Respondents are noticeably bearish about Japanese and eurozone equities.

Fieldwork for the survey was carried out between 6 and 12 March, a period that has seen a number of banks, such as Standard Chartered, Barclays, Citi, Deutsche Bank and Bank of America say their earnings are recovering.

“March’s survey shows signs that investors want to believe in an economic recovery. However, caution on banks is firmly capping risk appetite,” said Gary Baker, Banc of America Securities-Merrill Lynch co-head of international investment strategy.

Meanwhile, a net 41 per cent of respondents are underweight equities, up from a net 34 per cent in February. World equities fell by 15.5 per cent during the days the survey took place. Investors appeared to have flooded into bonds with a net 26 per cent of the panel overweight the assets class, up sharply from a net 7 per cent the previous month. Average cash balances rose to 5.2 per cent from 4.9 per cent in February.

Respondents have taken a net overweight position in emerging markets equities for the first time since August 2008. A net 4 per cent are overweight the sector compared with net 4 per cent being underweight in February. At the same time, commodities have made further gains with the number of investors underweight the asset class falling to a net 6 per cent, down from a net 25 per cent in January.