* Emerging market ructions drive allocation shift
* Investors who quit euro zone periphery assets returning
* Improved euro zone growth outlook supports demand
* Spanish, Italian bonds main beneficiaries
LONDON, Feb 20 (Reuters) - A reversal in fortunes between southern Europe and once-booming developing economies has triggered a substantial allocation shift by global funds out of emerging assets and into the euro markets they fled two years ago.
Escalating violence in Ukraine and the suspension of Nigeria's central bank governor hit emerging market assets on Thursday, even as Spain, once seen as the focus of the euro zone debt crisis, saw its long-term borrowing costs tumble to their lowest since 2008.
"Probably towards the end of 2013 and the beginning of 2014 we've seen flows out of emerging markets and into the peripheral euro zone," said Peter Wilson, managing director of First International Advisors, a subsidiary of Wells Fargo.
Wilson's fund is overweight Spanish and Italian government bonds and recently added to longer-dated debt, convinced that yields are adequate to compensate for the risks.
The five countries on the euro zone's periphery - Spain, Italy, Greece, Portugal and Ireland - are expected to record economic growth this year, ending years of recession and capital flight triggered by fears over their huge debts.
Ireland, bailed out by international lenders in 2012, is expected to grow more than 2 percent this year, comparable to rates expected in Russia, Brazil or Turkey.
Changes in emerging markets (EM) are no less startling.
Growth is slowing, currencies have weakened, and bond yields have risen. In a key gauge of sentiment, some countries, including Russia and Romania, have been forced to cancel bond auctions or pay higher yields to lure investors.
Lines between emerging and developed markets blurred during the crises that hit first the United States and then the euro zone since 2008.
But many of the investors who shifted into emerging markets at the time have returned, and have lately beaten a path to peripheral euro zone markets. Many were northern European investors seeking the relative stability of euro zone markets.
Funds dedicated to bonds and stocks from Portugal, Ireland, Italy, Greece and Spain, have taken in over $12 billion in net terms since Jan 2013, according to data from consultancy EPFR Global, which is estimated to capture around 15 percent of global flows.
At least some of this will have come from emerging funds which according to EPFR, shed over $50 billion in this time.
Sandra Holdsworth, investment manager at Kames Capital, said she took advantage of the wobble triggered by the emerging markets sell-off to add to longer-dated Italian and Spanish debt. Her fund has been overweight Italian and Spanish bonds since the beginning of the year.
Data from Citi shows net demand for lower-rated euro zone bonds increased three-fold last month compared to preceding months, dominated by longterm investors such as pension funds.
"This is consistent with a flight to relative quality triggered by the EM crisis reinforcing the already strong yield-seeking dynamic within Europe," Citi strategists said in a note.
Pioneer Investments was overweight emerging stocks and bonds for three years but cut exposure last year. From late-2013, the asset manager loaded up on European stocks, including from Spain and Italy, said Monica Defend, Pioneer's head of asset allocation research.
Emerging stocks have fallen 5 percent this year while bond returns are flat to negative. Greek, Portuguese, Irish and Italian stocks on the other hand are up 5 to 10 percent this year though Spain's IBEX index has barely gained due to its big exposure to a slowing Latin America.
Returns on euro zone debt have been boosted by sharp falls in yields. Irish and Portuguese yields stand more than 10 percentage points below 2011 record highs. Spanish debt returns have sparkled, topping 5 percent this year.
Both Italy and Spain's borrowing costs are at their lowest in eight years, half levels hit at the height of the euro zone debt crisis in early 2012.
Investors see further gains, encouraged by an improved growth outlook in the currency bloc and due to expectations the European Central Bank will keep monetary policy ultra-easy for an extended period.
"Italian and Spanish government bond yields have admittedly declined sharply over the past year, but you still get a yield pick-up of 200 basis points relative to (German) Bunds," said Nikolaos Panigirtzoglou, a global market strategist at JPMorgan.
"Given how much demand by non-domestic investors has strengthened since last summer, it is reasonable to expect further tightening this year towards a spread of 150 basis points versus Bunds."