Investors are bracing themselves for a slowdown in China, with commodities allocations hitting a new four-year low, although some optimism is returning to the eurozone, while Japan remains the most desirable country to be overweight, according to Bank of America Merrill Lynch’s May fund manager survey.

One quarter of May’s respondents cited a “hard landing in China and a commodity collapse” as their number one risk, with a net 8% of fund managers in Japan, the Asia-Pacific rim and global emerging markets expecting China’s economy to weaken over the next 12 months.

And as investors expect the low inflation environment to continue, they have responded by reducing commodity and emerging market exposure and pumping more money into bonds. A net 29% of global asset allocators are underweight commodities, the BoA Merrill study finds, up from 11% in March and at the lowest level since December 2008. Asset allocators are avoiding energy stocks as well.

The survey “demonstrates a clear exit from China and assets connected to China in the shape of commodities and emerging markets equities”, says Michael Hartnett, chief investment strategist at BoA Merrill’s global research division. “But it’s worth noting that investors are keeping faith in global growth.”

John Bilton, European investment strategist, says the bank is seeing signs that Europe is the region investors are watching. “They are increasingly aware of cheap valuations in European stocks, and concerns over sovereign risk in the region are dissipating.”

Although European investors would like to see more policy action, there are “fledging signs of optimism towards Europe”, the study says. Global investors are starting to see the eurozone as less of a problem and more of an opportunity, with a net 24% of Europe fund managers saying the continent’s economy will strengthen this year, up from 19% in April.

Meanwhile, the recent surge towards Japanese equities remains strong, with allocations at their highest since May 2006. Some 31% of global asset allocators are now overweight Japanese equities, up from 20% in April.

After 20 years of struggling for the world’s third largest economy, Japan is the market that investors would most like to overweight in the next 12 months.