Global investor risk appetite is at a four-year high as cash reserves are being put to work across the equity markets, according to the BofA Merrill Lynch Survey of Fund Managers for January. The survey found that Japanese equities are the most undervalued in the world.

For the first time since January 2006 the survey shows investors are taking above average risk, relative to their benchmark. A net 2 per cent is taking "higher than normal" risk, compared with a net 7 per cent taking "below normal risk" in December. These figures follow several months of investors displaying optimism about the economy but maintaining a more cautious risk and investment profile.

Average cash balances have fallen to 3.4 per cent, the lowest reading since mid 2007 and down significantly from 4.0 per cent in December. Appetite for equities is strong. A net 52 per cent of asset allocators are overweight equities, up sharply from a net 37 per cent in December.

Fewer investors are protecting themselves against a fall in equities. A net 55 per cent have no protection against a fall in the next three months, compared with a net 48 per cent in December. Investors have been moving into cyclical stocks, are positive about profits and are urging management teams to invest in growth.

"This survey is one of the more bullish we have seen and suggests that investors buy into the idea that this recovery has legs,"said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research. "We are, however, seeing early signs that might alert contrarians looking for a selling opportunity - namely low cash allocations and possible complacency against a sell off in stocks," said Michael Hartnett, chief Global Equities strategist at BofA Merrill Lynch Global Research.

Capex more important than debt reduction, investors tell corporates

Investors responding to the BofA Merrill Lynch Survey of Fund Managers are urging companies to invest more in growth and less in balance sheet repair. For the first time since mid 2006, capital investment heads the list of investors' priorities - - ahead of reducing debt and returning cash to shareholders.

Four out of ten respondents say that capital spending is what they most want to see corporates use their cash for. Improving the balance sheet, which has been investors' priority for the past year and a half, is now in second place.

A net 55 per cent of the panel say that companies are currently under investing, up from a net 48 per cent in December. They are also happy to see companies take on more debt. A net 15 per cent of respondents take the view that corporate balance sheets are "under leveraged," up from a net 9 per cent a month ago.

The desire to see greater investment in growth reflects how optimism about corporate earnings has pushed higher. A net 63 per cent of global investors expect corporate earnings to increase by at least 10 per cent over the next 12 months. This represents a significant month on month increase from a net 46 per cent in December. Almost a third of the panel says the 10 per cent rise is "very likely". The outlook for margins is also positive, with a net 40 per cent of investors predicting that operating margins will improve.

Japanese stocks are the most undervalued in the world, according to the Bank of America-Merrill Lynch Fund Manager Survey, which says investors are finding Japanese stocks more attractive than euro zone equities. Gary Baker from BoA-ML spoke to CNBC about the findings: