A majority of investors expects the Federal Reserve to hold off from raising interest rates until the second half of 2010, according to the BofA Merrill Lynch Survey of Fund Managers for November, which was released on Wednesday. Commodities are the most popular in four years as demand for inflation protection grows.

Asked when they think the Fed will first increase rates, more than three quarters of the panel of fund managers predict the second half of 2010 or beyond. One in six respondents believes the Fed will not act before 2011.

While inflation has become a nagging worry for investors, they have expressed no conviction that they expect more than a minor increase from the current low level. A net 47 percent of respondents expect global core inflation to be higher in 12 months, up from a net 39 percent in October. At the same time two thirds of the panel believe that existing monetary policy is"about right."

Demand for assets that protect against inflation, such as gold, oil and emerging market equities, has increased. Commodities are at their most popular with the panel since the survey first asked about the asset class in 2005.

A net 25 percent of the panel is overweight commodities, up from 11 percent in October. A net 53 percent of the panel is overweight emerging market equities, up from a net 46 percent in October. Assets that protect against deflation, such as fixed income and utilities, are less popular.

"Investors see inflation as a greater risk than deflation and are hedging that risk with overweight positions in emerging markets and commodities, and an underweight position in the US dollar," said Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research.

Concern over corporate balance sheets eases as risk appetite ticks up

Just two months ago, investors were sending a clear message that corporates should put debt reduction first and investment, or capital expenditure, second. Now they're less sure. Indeed recent trends suggest that next month they could be willing CFOs to put capex (capital expenditure) first.

The number of respondents suggesting companies use cash for capital spending has risen to 32 percent this month from 25 percent in September. The proportion asking companies to put the balance sheet first has fallen to 36 percent this month from 50 percent in September. Demands for higher dividends are muted with 22 percent asking companies to prioritise returning cash to shareholders. This was down slightly from 23 percent in October. "The last time we saw a shift towards prioritising capex ahead of balance sheet repair was in 2003, and it served as a clear buy signal for equities. It could signal the transfer of risk from equity to credit," said Gary Baker, head of European equity strategy at BofA Merrill Lynch Global Research.

This shift reflects how risk appetite among investors is tip-toeing upward. The proportion of panelists taking lower than normal risk has shrunk to a net 1 percent, down from a net 16 percent in September.

Higher risk appetite is also evident in emerging markets. "We are seeing a vivid and extreme bent towards high-beta markets, such as Russia, and movement away from lower beta markets, such as Chile and Malaysia," said Michael Hartnett.

Europeans swing out of cyclicals back to defensive stocks

While a net 22 percent of global asset allocators view Europe as the most undervalued global market, investors within Europe are wary of their region's equities. European survey respondents made substantial moves out of cyclical stocks and into defensive sectors over the past month.

More than a quarter of Europeans surveyed increased their positions in Healthcare/Pharma. A net 16 percent are overweight the sector in November, compared to a net 10 percent underweight in October. Over the same period Europeans swung to a net 5 percent underweight Technology from a net 23 overweight in October. These changes came despite more panelists predicting stronger economic growth in Europe over the coming year.

One notable factor weighing against European equities, however, is currency. A net 49 percent of the global panel view the euro as overvalued and a net 36 percent view the dollar as undervalued.

Survey

A total of 218 fund managers, managing a total of US$534 billion, participated in the global survey from 6 November to 12 November. A total of 177 managers, managing US$361 billion, participated in the regional surveys. The survey was conducted by BofA Merrill Lynch Global Research with the help of market research company TNS.

Emerging markets are still favoured by most fund managers, according to Gary Baker from BofA Merrill Lynch Global Research. Baker discusses the findings from the latest fund managers' survey on CNBC: