Cautious funds tip-toe back to euro stocks - Reuters poll

LONDON (Reuters) - Global investors staged a tentative return to euro zone stocks and bonds this month following the European Central Bank's bond-buying rescue plan and credit easing from the U.S. and Japanese central banks, a Reuters poll showed on Thursday.

Yet even though synchronised central bank interventions saw cash holdings cut to their lowest since April, the survey of 61 funds in the United States, continental Europe, Britain and Japan showed only a selective return to risky assets.

The poll, taken before euro tensions ratcheted up again this week in Spain and Greece, saw global equity holdings trimmed back during September - led by a retreat from Japan.

Total bond holdings were boosted to the highest in over three years.

In line with a stabilisation of the euro picture, some 62 percent of the funds that responded said they planned further cuts to safe-haven German Bund holdings as a result of the ECB plans to support distressed government bond markets.

Euro bond holdings jumped back close to July levels while euro share allocations jumped to their highest since April.

But asset managers remained uneasy about a series of risks from the still-slowing world economy - from rising profit warnings ahead of the third-quarter corporate earnings season to

the danger of fresh euro strife, the U.S. election and "fiscal cliff" and China's once-in-a-decade leadership handover.

The level of central bank policy support across the major economies may be unprecedented and powerful in the short term, but few investors are confident yet of long-term success.

"The realist in us has to ask 'what if' the medicine in this great financial experiment doesn't work," said Thomas Becket, Chief Investment Officer at Psigma Investment Management.

"'What if' this doesn't change the tepid growth rate current that the world endures and in fact finally spurs the stagflationary environment we have feared."

NAGGING DOUBTS

For all that some of the worst systemic fears have abated, nagging doubts about the state of the world economy were shared in all regions and underscored the reluctance to add to global equity positions.

Japanese funds, for example, slashed domestic and international equity allocations to their lowest since 1998.

"Slowing demand overseas, a flagging recovery for corporate earnings at home and the unresolved euro zone debt crisis is still weighing on stocks," said Yuichi Kodama, chief economist at Meiji Yasuda Life.

"There are doubts whether policy shifts can continue to beat market expectations," Kodama added.

Many funds pointed out the net 10 percent gains in global equities .MIWD00000PUS over the third quarter was in part already anticipating the policy action that hit this month.

"Speculation over a third quantitative easing played a substantial part in driving the (U.S.) market up, and third-quarter earnings results may provide some disappointment with likely repercussions on other stock markets, "said Giordano Lombardo, Group CIO at Italy-based Pioneer Investments.

Global holdings of U.S. equities nudged back up slightly against the backdrop of the Fed's third round of QE and open-ended mortgage bond buying.

Investors were split 50/50 on whether a victory for incumbent Democrat Barack Obama or Republican challenger Mitt Romney in November'spresidential elections would be positive for world markets.

About three quarters of U.S. funds said a Romney win would be a plus, while a similar proportion of European funds said the opposite.

EURO RETURNS

But the return to euro assets after the ECB bond-buying plan calmed markets after another torrid summer and was central to many allocation switches over September - particularly among euro-based funds.

Many cited a reduction of extreme risk aversion and gaping relative value with other regions as the reason for the return. But few were unamabiguously positive about the outlook.

"Many investors were calling for a buyer of last resort. Now that the ECB has stepped in, risk aversion has decreased even if at this point it is not clear whether this will be enough to solve the euro zone debt crisis," said Andrea Conti, head of macro research of Eurizon Capital, Italy's biggest asset management firm.

Most managers remained wary of further turbulence before any lasting solution emerges.

"I don't think that in the short term anyone will take the risk to play against the ECB, but if we get very bad economic news or (bailout) negotiations that do not go well we could fall back once again in a stress scenario," said Nadege Dufosse, senior asset manager at Dexia Asset Management.

British funds, which were keenest on world equities during the month, similarly braced for further euro disruptions ahead.

"We should be alert to the possibility of spikes in market volatility led by further euro-member issues between now and the year end," said Mark Robinson, Chief Investment Officer of Berry Asset Management.

While holdings of top-quality corporate bonds within fixed income portfolios fell more than a point this month in favour of higher yielding governments and junk bonds, more than 70 percent of funds polled said they still saw value in investment-grade credit despite a sharp drop in yield premia already this year.

What's more, aggregate holdings of alternative investments that include everything from private equity and hedge funds to emerging market bonds and infrastructure funds rose half a point to 6.2 points - their highest since June.

(Additional reporting by Chris Vellacott and Ingrid Melander in London, Maria Pia Quaglia in Milan, Sam Forgione in New York, Sophie Knight in Tokyo and Bangalore Polling Unit; Graphic by Scott Barber; Editing by John Stonestreet)