European funds raise euro zone bond holdings to one-year high on ECB hopes - Reuters poll

The European Central Bank (ECB) headquarters are pictured in Frankfurt, Germany, September 3, 2015. REUTERS/Ralph Orlowski

By Claire Milhench

LONDON (Reuters) - European investors raised their euro zone bond exposure to a one-year high in October, with a majority expecting the European Central Bank to extend its bond-buying programme beyond next March, a Reuters poll showed on Friday.

Within their global fixed income portfolios, European asset allocators increased their eurozone bond holdings by over 5 percentage points to 57 percent, the highest level since October 2015.

The poll of 16 fund managers and chief investment officers, was carried out between Oct. 14 and 26 and reflects the fact that at the European Central Bank's (ECB) Oct. 20 meeting President Mario Draghi shot down any talk of tapering the bank's 1.7 trillion euro asset-buying programme.

The programme is currently due to end in March, but Draghi said it would not end abruptly when the time comes, and would be gradually wound down.

As a result, 85 percent of poll respondents who answered a specific question on the ECB's policy, said they did not expect the bank to end its programme in March, suggesting it might be extended for three or six months.

Joost van Leenders, chief economist of multi-asset solutions at BNP Paribas Investment Partners, said he expected a six-month extension and the start of tapering in September 2016, whilst Raphael Gallardo, a strategist at Natixis Asset Management, envisaged tapering would start in March 2017 and last for a year.

The ramp up in euro zone bond exposure came despite a reduction in investors' overall bond holdings, which fell to 40.7 percent, the lowest since April 2016.

However, emerging market debt remained in favour, up 2 percentage points from September to 7.2 percent of bond portfolios. Investors also added to emerging market equities, with Asia ex-Japan holdings rising to 8.4 percent of global equity portfolios, the highest level since April 2013.

"Emerging market equities have looked attractively valued on our analysis for some time," said Boris Willems, a strategist at UBS Asset Management. "While our concerns about industrial capacity and external debt loads remain, we see a number of powerful catalysts supporting equity prices over a more tactical horizon."

Within their global balanced portfolios investors trimmed their equity exposure slightly to 42.3 percent and raised cash 1.5 percentage points to 8.2 percent, the highest level since April.

Investors noted that whilst concerns about China had diminished, along with the risk of being trapped in a low inflation, low growth scenario, they preferred to keep their powder dry.

Matteo Germano, global head of multi-asset investments at Pioneer Investments, suggested that with governments pressured by the electoral cycle, a welcome increase in fiscal expenditure could be on the cards in some countries. This could boost growth and create some inflation.

"In this scenario structural concerns largely remain in place, so we are marginally more positive on equities, but overall we are keeping our cautious approach," he said.

(Additional reporting by Maria Pia Quaglia Regondi)