"There's been a big shift in the number of people who think the UK is too expensive," said Trevor Greetham, global strategist at Merrill Lynch.
The latest Merrill Lynch survey also reveals US fund managers have changed their minds about the direction of US interest rates. Half of all US fund managers surveyed expect the Fed to raise rates. Last month, two-thirds though the Fed would cut rates.
UK fund managers have an optimistic view of inflation, according to the survey, with only 20 per cent expecting domestic inflation to rise over the coming year. Mr Greetham believes this could be due to thestrong pound - which means cheaper imports that, in turn, can help stem inflation. "The extraordinary rise in the pound over the last 18 months is causing managers to lower their guard against inflation," he said.
Mr Greetham warned of the dangers of using exchange rates to forecast inflation rates, saying that exchange rates could reverse very quickly.
Mid-caps are becoming increasingly popular with UK managers. "On a year's view, there are almost as many bulls of mid-cap FTSE 250 stocks as larger FTSE 100 stocks," Merrills said, adding that, back in February, large company bulls outnumbered mid-cap bulls by almost five to one.
The Japanese Merrill Lynch survey reveals that Japanese fund managers are relatively optimistic about their own stock market, with bulls outnumbering bears by 42 per cent on a year's view.
However, fund managers elsewhere in the world take a far more negative view of Japan.
Mr Greetham said: "Fund managers the world over are beginning to question the level of equity market valuations. This does feel like a bubble, but as long as the Japanese economy remains weak and liquidity remains plentiful, it is likely to continue."Reuse content