In addition, a key indicator tracking risk and liquidity conditions returned to an almost neutral reading, indicating an improvement in sentiment, according to Merrill Lynch.
The survey also revealed a sharp drop in investors' appetite for U.S. and Japanese equities, but a recovery in demand for Eurozone equities.
"The spotlight of investor pessimism has shifted away from China and Europe to Japan and the U.S. Investors clearly remain cautious, so better news on U.S. growth and fiscal policy would be a pleasant surprise," said Michael Hartnett, chief global-equities strategist at BofA Merrill Lynch Global Research in a press release.
The survey of more than 150 fund managers found that 5% believe the global economy may improve next year, which is lower than the 12% percent predicting the world economy would deteriorate in July.
The percent expecting below-trend growth and inflation remains unchanged at 73% in August. Still, 78% of respondents think a double-dip recession is unlikely.
In addition, 55% believe there probably won't be any interest-rate hike in the United States before the third quarter of 2011.
"Investor sentiment on Europe has staged a remarkable recovery in the past few months, underpinned by greater optimism about Europe's banks. Economic data now has to continue to support this shift," said Gary Baker, head of European-equities strategy at BofA Merrill Lynch Global Research in a statement.
Fund managers have recently reduced their cash holdings, the survey found. About 7% are overweight cash in August vs. 13% in July and 19% in June. Plus, there was an uptick in allocation to equities, though the bond allocation dropped: 23% are underweight bonds vs. 15% in July.
Roughly 14% of asset allocators are underweight U.S. equities compared to 7% in July, and 27% percent are underweight Japanese equities in August vs. 7% in June.
In contrast, a net 11% are overweight eurozone equities in August -- the most positive reading since October 2009. Last month, 10% were underweight eurozone equities. As for U.K. equities, the fund managers are the most optimistic they have been since May 2007.
Bearish Sentiment on China Recedes
Global emerging markets have grown in popularity: 38% of global asset allocators are overweight GEM equities, up from 34% in July and 31% in June.
Bearish sentiment towards the Chinese economy is easing, with 19% of respondents expecting the Chinese economy to weaken over the next year vs. 39% last month.
The survey also found that asset allocators think the U.S. dollar looks undervalued and that the Japanese yen is overvalued.