Global investors have regained a strongly bullish stance on the outlook for equity markets in the second half of 2014, according to the BofA Merrill Lynch Fund Manager Survey for July. A net 61 percent of global asset allocators are now overweight equities. This ranks as the survey’s highest reading on this measure since early 2011 and represents the panel’s second-strongest response ever. This aggressive positioning for recovery in H2 reflects a significant increase in investors’ inflation expectations. A net 71 percent expect global core CPI to be higher in 12 months, up 13 percentage points since last month. This marks a cyclical high for the survey. Exposure to commodities, an asset class especially sensitive to inflation, has risen to its strongest in more than a year. A growing number of investors now see inflation moving above trend levels while global growth remains below-trend. Confidence in macroeconomic performance still remains fairly high, though. A net 69 percent forecast that the world economy will strengthen over the next year. Neither valuation nor tail risks deter fund managers from their optimism. A net 21 percent regard stock markets as overvalued – the survey’s highest reading since 2000. Concerns over potential Chinese debt defaults, “asset manias” and eurozone deflation have all faded since last month. The prospect of geopolitical crises now stands out as the greatest tail risk and threat to financial market stability. “Improving investor sentiment on global growth, inflation, equities and risk-taking are all testament to a potential macro normalization in the second half. This could eventually feed into a normalization of rates. If growth does pick up, volatility will rise too,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Research. “As Europe's recovery falters the region is becoming a global passenger as investors pin their hopes on growth elsewhere,” said Obe Ejikeme, European equity and quantitative strategist.