Seven out of 10 money managers surveyed believe the world economy will improve within the next 12 months, and already, they are putting their money back to work in the stock market, as they are bullish on corporate profits, according to the Merrill Lynch survey of fund managers for May.

Average cash holdings have fallen to 4.3%, down from 4.9% in April. Although equities are still underweight in most fund managers’ portfolios, they are edging back into them, especially cyclical sectors that are expected to perform best in a recovery. And, for the first time since August, professional investors are net underweight in bonds.

Among equities, the most popular sector is emerging markets, with China leading the way.

“Investors are finally opening their wallets and reducing cash balances to mid-cycle levels to buy equities, cyclical stocks and risky assets,” said Michael Harnett, co-head of international investment strategy at Bank of America Securities-Merrill Lynch. “However, this rush to take on risk, especially in emerging markets, is reminiscent of bubble-like behavior. A record net 40% of fund managers are looking to overweight the region in the next 12 months.”

Gary Baker, the other co-head of international investment strategy for the bank, added, “Having addressed their most urgent priority by returning to financial stocks, investors have added exposure to cyclical, real economy stocks and further purged defensive overweight positions.”

The outlook is much improved from last October, when 60% forecasted a worsening outlook. Eighteen percent expect global profits to improve within the next 12 months, a big swing from April, when 12% were bearish about profits. Investors have also reduced holdings in staples, telecoms and utilities in favor of energy, materials, industrials and banks.

The survey was conducted among 402 managers with combined assets under management of $972 billion.

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