Globally, 6% of investors are overweight European equities, a 14 percentage point swing from the previous month, according to the latest Merrill Lynch European Fund Manager Survey.
A net 13% stated the eurozone was the region they would most likely underweight in the coming year in May, a reading that has now fallen to a net 1%.
Equity allocation in the region increased across 13 of the 19 sectors, with the biggest swings seen in telecoms, financial services, banks and chemicals. A net 18% of respondents are now overweight banks, after the market was net neutral a month ago.
While the eurozone has become increasingly desirable among investors, sentiment towards emerging markets has dropped and allocations have fallen to their lowest levels since December 2008.
A total 9% of asset allocators are now underweight emerging market equities, the first underweight reading since 2009 and a decline of 12 percentage points from the 3% overweight reported last month.
A China hard landing is identified as the greatest tail risk, with 31% of investors stating the economy will weaken over the next 12 months, compared to 8% in May.
A quarter of investors now state they want to underweight emerging markets in the next 12 months.
Michael Hartnett, chief investment strategist at BofA Merrill Lynch, said: “The biggest contrarian play in the market today is assets linked to China. The lows in emerging market equity and commodity allocations suggest the market has over-positioned itself for a shock from China,”