Global investors are increasingly optimistic that corporate profits will improve this year but they want to see proof before piling further into equities, a Bank of America/Merrill Lynch survey showed on Tuesday.
A net 39 percent of fund managers forecast that profits worldwide will improve in the next 12 months, up from 29 percent in January and the highest reading in two years.
Despite that, allocation to stocks remained unchanged from January with a net 51 percent of investors overweight.
Allocation moves within the sector showed risk appetite easing with defensive sector pharmaceuticals returning to top spot, while the biggest month-on-month faller was technology.
"We've had consolidation of the level of optimism, but when we look into that, folks are still quite circumspect," said John Bilton, the bank's European investment strategist.
"Investors want to see proof of earnings coming through and they want to see proof that firms are beginning to consider re-deploying their cash to capex before we really see that net surge higher in terms of positioning to match the sentiment".
Investors cut their overweight to European equity to 15 percent from 8 percent last month, close to a 10 year average of 10 percent.
They maintained their overweight on European banks while overweight to European cars picked up to 22 percent, a sign for Bank of America/Merrill Lynch of continuing interest in European stocks despite a strong euro.
"Provided the euro-dollar level remains below $1.45 we would expect the impact on Europe generally to be contained," Bilton said. "Clearly at the margins we'd expect some export sectors, notably the autos, to come under a bit of pressure. But so far the evidence isn't there within the survey."
Investors are continuing to grow gradually more favorable to Japan, with a net 7 percent overweight Japanese equities, from 20 percent underweight in December.
Global investors slightly trimmed their bond underweight and cut cash further, while allocation to alternatives and real estate rose close to 5-year highs.
Risk assets are vulnerable to bad news after a 7-month rally, Bank of America/Merrill Lynch said in the survey.
"The continued level of optimism is a concern and markets may be vulnerable to bad news, but valuations suggests any correction should be short and shallow and our core 'Great rotation' theme remains in place," said chief investment strategist Michael Hartnett.
The poll of 251 fund managers was conducted Feb 1-7.
(Reporting by Ingrid Melander; Additional reporting by Stephen Eisenhammer; Editing by Ruth Pitchford)