As economies battle with record-high inflation, investors fear that major central banks could further raise interest rates to tackle it, potentially setting off a recession.
The pan-European STOXX 600 is down 14.16% so far this year, while the FTSE 100 index has fallen 0.4%.
HSBC upgraded Spain to "overweight" from "underweight" given emerging signs of renewed investor interest in the market and downgraded Germany to "neutral" from "overweight" amid falling price momentum and a deteriorating consensus outlook.
Equity markets in the United States and Europe sold off sharply this month as inflation data came in higher than expected in both the economies. The brokerage termed the sell-off as "a watershed moment for investor sentiment."
HSBC said the European Central Bank's (ECB) approach to curb inflation is "more gradual and measured" monetary tightening compared to the U.S. Federal Reserve's, and in turn is leading to a rise in fears that the ECB is still behind the curve in tackling inflation.
Among sectors, HSBC upgraded consumer staples and consumer discretionary and downgraded basic materials and real estate.
(Reporting by Siddarth S in Bengaluru; Editing by Maju Samuel)