According to Bank of America Merrill Lynch's (BAML) December global fund manager survey, released Tuesday morning, investors are as bullish as they've been in years. The share of 173 respondents expecting global inflation over the next year reached a net 84%, the second-highest level – behind last month's 85% – since June 2004. The share expecting global growth, meanwhile, surged from a net 35% in November to a net 57%. (For more sentiment, check out the Investopedia Anxiety Index.)

The sentiment around corporate profits saw an even more dramatic improvement, with a net 56% of respondents seeing growth over the next year, versus just 29% last month. According to BAML's research team, led by chief investment strategist Michael Hartnett, fund managers are at their "most optimistic about corporate profit expectations in 6.5 years." (See also, Beyond Dow 20,000: More Gains Ahead.)

Expectations of higher corporate profits likely owe something to the growing conviction that companies are under-investing. A record proportion of investors – net 74% – thought so between December 2 and 8, when the survey was conducted; 59% said they'd like to see companies increase capital expenditure, an 18-month high.

The respondents appear to be leading by example, reducing their cash holdings to 4.8% from 5.0% in November. In October the level was 5.8%, a high that has only been matched in November 2001 (post-9/11) and July 2016 (post-Brexit). BAML's team points out that cash's average portfolio weighting has only fallen so sharply on two occasions, in 2001 and 2002, and in both instances the risk rally – high cash holdings indicate a cautious approach – stalled.

BAML takes a contrarian view based on cash holdings. When the average balance exceeds 4.5%, equities are attractive; a balance below 3.5% represents a sell signal. In a sign that the market has not hit "peak greed," cash holdings are high relative to bonds (97th percentile) and equities (64th percentile), based on historical averages. 

Contrarians would look askance at banks, according to BAML, where long positions are over two standard deviations above the norm; they might consider buying the pound instead, where short positions are proliferating to a similar degree.

Longs and shorts, relative to fund manager survey history

All images courtesy Bank of America Merrill Lynch.

Despite signs of renewed confidence, fund managers aren't entirely gung-ho. BAML points out that expectations for inflation and "above-trend" growth are at five-year highs, but that's relative: just 6% of respondents expect to see both over the next 12 months (not a net 6%, subtracting the share responding "no" from that responding "yes" – 6% total). A sizeable, if shrinking, majority expect "below-trend" growth.

How do you see the global economy trend in the next 12 months?

Fears center on Europe, with the collapse of the EU or European bank defaults topping the list of "tail risks" at 29%. "Stagflationary bond crash" is close behind at 26%, followed by a devaluation of the yuan or an implosion of the Chinese property bubble at 19%. (See also, The European Banking Crisis Explained.)

What do you consider the biggest "tail risk"?