Expectations of global inflation are at the second highest level in over 12 years, at a net 84 per cent, marginally down from last month’s 85 per cent. Adding to the cheery mood, fund managers are the most optimistic about corporate profit expectations in six and a half years. Meanwhile, allocation to banks has risen to a record net 31 per cent overweight from net 25 per cent last month. This is far above its long-term average, BofA Merrill Lynch noted.

“Fund managers have pushed pause on a risk rally, with cash balances falling sharply over the past two months,” said Michael Hartnett, chief investment strategist. “With expectations of growth, inflation and corporate profits at multi-year highs, Wall Street is sending a strong signal that it is bullish.”

Geographically, the US fares well, with one-third of investors naming Long US Dollar as the most crowded trade. Allocation to US equities has improved to a 2-year high of net 15 per cent overweight, versus net 4 per cent overweight in November.

The disintegration of the European Union and a bond crash were the two most commonly cited tail risks, reflected in light EU and bond positioning. Indeed, investors are underweight Eurozone equities for the first time in five months, at net 1 per cent underweight in December from net 4 per cent overweight last month.

“Despite the improved outlook on European economic growth and inflation, global investors continue to shun European stocks amid concerns of further EU disintegration or bank defaults,” said Manish Kabra, European equity quantitative strategist at Merrill Lynch.

The biggest month-over-month jump was seen in allocation to Japanese equities, which increased to a 10-month high, from net 5 per cent underweight to net 21 per cent overweight.

The survey was conducted between 2-8 December, polling 173 clients with $473 billion in assets under management.