Fund managers’ confidence that the global economy would strengthen over the next 12 months plummeted to its lowest level in two years in October, according to a Bank of America Merrill Lynch survey released Tuesday.

Just 32% of respondents expected a stronger global economy over the next year, down by 20 percentage points from September.

Inflation and earnings expectations have slumped, with 77% agreeing that the world would experience both below-trend inflation and below-trend growth.

The survey found that investors’ confidence was undermined by concerns over the approaching end of quantitative easing in the U.S.

In the new survey, only a net 18% of fund managers viewed monetary policy as too stimulative, down 14 percentage points to the lowest level since August 2012, just before the last QE initiative in the U.S. began.

Perceptions of monetary risk have also risen, along with emerging market risk, the survey found.

Investors have responded by reducing riskier exposures. Cash balances have grown to 4.9%, while investment horizons have shortened and equity overweights have fallen a net 13 percentage points month on month.

As well, underweights in commodities have risen, while sectors sensitive to the asset class such as energy and materials have experienced large moves to net underweight positions.

Survey respondents indicated that their current positioning and intentions for emerging markets and European equities had turned negative or neutral. Instead, they have regained faith in the U.S. market and increased their preference for Japan.

“Cash balances are high, but investors are retreating to benchmark positions rather than staging an exodus from markets,” Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research, said in a statement.

With the European Central Bank’s ‘hope trade’ having disappeared, performance in European equities is reverting to fundamentals, according to Manish Kabra, European equity and quantitative strategist.

“As our view remains downbeat, we continue to favor defensive dividend yield stocks and expect any rallies in cyclical stocks to be short-lived,” Kabra said.

A total of 220 panelists with $640 billion of assets under management participated in the global survey conducted by BofA Merrill Lynch Global Research with the help of market research company TNS from Oct. 3 to 9.

Europe and Japan

Following ambiguous remarks by the European Central Bank at the beginning of October, respondents were uncertain over policy in Europe. Twenty-six percent of the global panel did not expect the ECB to initiate a program of quantitative easing, up from 19% in September.

Expectations over Europe’s growth have plunged, the survey found. A net 16% of regional fund managers expected the continent’s economy to strengthen over the next year, compared with a net 45% in September. This pessimism dramatically affected the outlook for corporate profitability. After a month-on-month decline of nearly 30 percentage points, a net 52% of fund managers did not expect double-digit earnings growth in the region, while an even higher proportion deemed earnings-per-share estimates for European companies as too high.

Against this background, positioning in European equities has fallen, with a net 4% of global investors reporting overweighting the region, down 14 percentage points from September.

Moreover, only a net 3% of investors considered the market their top pick for overweighting in the next 12 months.

In contrast, a net 14% of asset allocators said they would most like to overweight Japan’s equities over the next year—a reading that was 10 percentage points more bullish than that for any other major market, according to the survey.

Unlike in other regions, Japanese fund managers’ inflation expectations are growing. A net 46% expected consumer price to climb in the next year, up from a net 18% in the September survey.

Investors’ increasingly negative outlook for the yen contributed to these assessments, according to the survey. Global fund managers are now equally bearish on the yen and the euro — a striking shift from last month, when the differential between the two was more than 20 percentage points.

In a final note, BofA Merrill Lynch said respondents were also concerned about fiscal policy, more than they had been in over a year.

In the October survey, a net 19% of global fund managers regarded fiscal policy as too restrictive, a 12 percentage point rise in the past two months.

Check out PIMCO’s New CIO Gives Global Outlook, Sees U.S. Energy as Key Tool on ThinkAdvisor.