Global investor sentiment hit a nine-year high, as almost half of investors surveyed at the start of the month expected the economy to strengthen in the year ahead, up from 33 percent in October.
Asset allocators shrugged off the volatility seen in October, shifting out of cash in favor of equities. Some 13 percent of the 214 panelists, with $569 billion under management, polled are now overweight cash, down from 27 percent in October.
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Hedge funds have also increased their allocations to equities, with 43 percent of hedge funds long equities, up from 35 percent one month ago.
Investors now see deflation as a much greater risk than inflation, with euro zone inflation the biggest tail risk for the year ahead, the bank said.
"Deflation might be in the back of investors' minds, but taking on risk, especially in equities, in Japan and in the dollar is at the forefront of their thinking," said chief investment strategist at BofA Merrill Lynch Research, Michael Hartnett.
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In Japan, optimism for stocks hit its highest level since November 2005 as the country witnessed a second big pick-up in allocations this month.
Japan is also the most favored region for the coming year. Nearly a third of the investors panelled said Japan is the region they are most likely to overweight in the next 12 months. This represents a nine-year high and a rise from 14 percent in October.
The survey was conducted before Japanese Prime Minister Shinzo Abe called a snap election Tuesday, and announced a delay in the second sales tax hike by 18 months a day after latest figures showed the country had fallen into recession.
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"Conviction over Japan appears to be underpinned by a belief in the profit outlook and a view that the country's stocks are undervalued. As they assess Japan's outlook, investors are weighing up the prospect of the yen suffering more depreciation in the coming year than the euro or dollar. A net 57 percent of the global panel expects the yen to fall in value on a trade-weighted basis," Harnett said.