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Fund managers have named bearish bets in European equities as the “most crowded” trade in Bank of America Merrill Lynch’s survey for the first time in its history, suggesting sentiment for one of the world’s most shunned markets may rise from here.

Investors have pulled cash from European stocks over the past year, betting the market would be weaker compared with the United States and other regions as euro zone economic growth slows and Britain’s chaotic exit from the European Union raises concerns about disruption to its economy.

Short European equities replaced long emerging markets, which held the title for just one month.

The shift in investor views reflects broader uncertainty about the direction of financial markets as the Federal Reserve and ECB keep interest rates on hold amid signs that growth is slowing.

The results also suggest that fund managers believe the gloom that has seen US$30-billion leave European equities this year may have been overdone.

In a note on Sunday, Morgan Stanley chief European equity strategist Graham Secker said he believes Europe is set to surprise on the upside as issues that weighed on growth in the second half of last year start to fade.

The pan-European STOXX 600 rose 0.7 per cent on Tuesday to its highest since Oct. 3 and was on track for its longest winning streak in six months.

Auto stocks led the gains after the bank’s auto analysts recommended contrarian investors buy select car makers after the survey showed investors grew more bearish on the sector.

Tentative improvements in consumer and wage data – and the improving German car sector – are a good omen, Mr. Secker said, noting that China, whose slowdown has been behind much of Europe’s malaise, is finally showing a turnaround in new export orders PMIs.

China slowdown

Still, BAML’s March survey – conducted between March 8 and March 14, among 239 panelists managing US$664-billion in total – also indicated that investor risk appetite had continued to fall, with global equity allocations remaining at September, 2016, lows.

"The pain trade for stocks is still up," said Michael Hartnett, BAML's chief investment strategist.

"Despite rising profit expectations, lower rate expectations and falling cash levels, stock allocations continue to drop. There is simply no greed to sell in equities."

A slowdown in China, the world's No. 2 economy, topped the list of biggest tail risks, ousting the trade war, which had been investors' main concern for the previous nine months, according to the survey.

Third on this month's list was a corporate credit crunch.

The slight improvement in investor outlook toward the protracted trade war that has rattled markets for the past year comes as Washington and Beijing make progress in talks to agree a truce.

But reflecting the broad spectrum of views on interest rate policy, about 55 per cent of those surveyed say they think the Fed will continue to hike, while 38 per cent believe the hiking cycle is done.