Investor confidence in emerging markets and Japan is waning as money flows back into Europe, according to the Bank of America Merrill Lynch Fund Manager Survey.

Investor confidence overall rose in June despite a volatile market and a 2.5% fall in world equities over the survey period. A majority (56%) of global investors believe the world economy will strengthen over the coming year, up from 48% in May. Forty-eight percent of asset allocators are overweight equities, compared with 41% in May.

But while allocations to the Euro zone and U.S. rose, investment in global emerging market equities fell to their lowest levels since December 2008. A net nine percent of asset allocators are now underweight emerging market equities – the first underweight reading since 2009 and down from a three percent overweight reading in May. Investors see a China hard landing as the greatest tail risk – more of a concern than Euro zone sovereigns or banks. Thirty-one percent of regional fund managers say that China’s economy will weaken in the coming 12 months, compared with a net 8% expressing that view in May.

“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,” says Michael Hartnett, Chief Investment Strategist at BofA Merrill Lynch Global Research. “Investors can now see a certain level of stability returning to Europe’s economy and positioning for a recovery has started,” adds John Bilton, European Investment Strategist.

Twenty-five percent of the global panel says that emerging markets is the region they would most like to underweight in the coming 12 months – the lowest ever reading. Allocations to commodities have also reached a record low with 32% of asset allocators holding underweight positions.

However European optimism seems to have raised the most. Forty-five percent of European respondents to the regional survey expect Europe’s economy to strengthen in the coming year, up from 24% last month. Expectations of European recession in the coming year have fallen sharply.

Equity allocations increased month-on-month across 13 of the 19 sectors assessed in Europe. The greatest positive movement came from telecoms, financial services, banks and chemicals. Three percent of European investors are now overweight Telecoms, compared with 24% underweight in May. A similar net underweight position was wiped out in financial services over the month. Eighteen percent of respondents are now overweight banks, after the market was net neutral a month ago.

Joel Kranc is Director of Kranc Communications, focusing on business communications, content delivery and marketing strategies. He has written and worked in the retirement and institutional investment space for 17 years covering North American markets, large institutional pensions and the adviser community. joel@kranccomm.com

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