Institutional investors' optimism about the global economy has soared to its highest level in nearly six years, and portfolio managers are putting spare cash back into the stock market, according to the Merrill Lynch Fund Manager Survey.

Seventy-five percent of the 381 managers overseeing a combined $924 billion in assets said they believe the world economy will strengthen in the coming 12 months. It was the highest reading since November 2003 and up from 63% in July. In addition, 70% expect corporate profits to rise in the coming year, up fro 51% who thought so last month.

Their average cash balances have fallen to 3.5% from 4.7% in July. This is the lowest level for cash since July 2007. Equity allocations are up sharply, with 34% of respondents saying they are overweight stocks, up from only 7% in July.

“Strong optimism in August represents a big turnaround from the apocalyptic bearishness of March,” said Michael Hartnett, chief global equities strategist at Bank of America Securities-Merrill Lynch Research.

However, despite the improved outlook, 80% said growth will be tempered, below trend in the next year. “A nagging lack of conviction about the durability of the recovery remains,” Hartnett added. “The equity rally has been narrowly led by China and tech stocks. We have yet to see investors fully embrace cyclical regions, such as Japan or Europe, or Western bank stocks.”

Most portfolio managers are optimistic about emerging markets and technology, with 33% and 28% overweight these sectors, respectively, a majority underweight the U.S., Europe and Japan.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.