Investors are coming to believe that the global economic recovery is real and it is safe to invest in a Goldilocks climate of slow growth, low inflation and solid earnings, a monthly poll showed on Tuesday.

But Bank of America Merrill Lynch also said its April survey of fund managers suggested that a short-term equities correction could be in the offing.

The poll of 197 fund managers showed a net 61 percent expecting the real economy to strengthen over the next 12 months, with a net 32 percent even more bullish saying that growth will be above trend.

BofA-Merrill said this created a scenario in which was not too hot nor too cold for investors, what it dubbed the full Goldilocks.

This was reflected in a continued rotation away from bonds and into equities.

A net 52 percent of respondents were overweight equities versus a net 48 percent who were underweight bonds.

At the same time, investors were cutting their cash holdings, a sign BofA-Merrill said, of a potential correction.

Cash holdings dropped to 3.5 percent in the month. BofA-Merril calculates that in four of the past five occasions that that has happened equities declined 7 percent in the next 4-5 weeks.

We have an amber warning light flashing, said Patrik Schoewitz, European equity strategist, adding, however, It is a very short-term signal.

HIGHER PROFITS

Overall, BofA-Merrill's risk appetite indicator rose back to levels seen in January, roughly about where things stood in mid-2006,

Part of the asset allocation bullishness was based on corporate profit expectations.

The poll showed a net 71 percent of investors believe that global corporate earnings and operating margins will rise by more than 10 percent over the next 12 months.

The poll's foreign exchange section, meanwhile, showed investors continuing to view the U.S. dollar and emerging market currencies as undervalued, while the yen and euro are thought to be overvalued and sterling is roughly at fair value.

Both gold and oil were viewed as overvalued.

(Editing by Susan Fenton)

Inflation Climate