A Reuters poll of continental European debt and equity fund managers released on Friday showed funds were still buying European stocks, trimming holdings of the US assets and increasing exposure to Japan.

Japanese stocks now represent 9.2 per cent of average global portfolios in December versus 7.8 per cent last month.

Guy Monson of Sarasin Investment Management said his firm was bullish on the prospects for European equity markets next year although he said Germany was particularly vulnerable to any European economic slowdown.

This was due to the domination of cyclical, industrial stocks in that market."The interest rate impact on peripheral markets -- the so-called euro bubble -- is not over yet," he said adding his favourite markets were Portugal, Spain, Italy and Ireland.

These countries have had to cut their short-terminterest rates sharply in the run up to economic and monetary Union to converge rates in the core economies of Germany and France, pumping extra liquidity into already buoyant economies.

"The momentum that has been established in these economies should keep their markets bubbling until at least the middle of next year," said Monson. The monthly poll of fund managers was taken between December 16 and 17 and included 14 asset management institutions in Germany, France, Denmark, Belgium, the Netherlands and Switzerland.

In December's poll, Europe (ex-UK) accounted for 35.8 per cent of average global equity portfolios versus 35.1 per cent in November's poll.

Allocations to France and Germany rose to 14.4 per cent from 13.4 per cent last month.

Frank Vanselow, an equity fund manager at Deutsche Investment Trust in Frankfurt, said his firm was now focusing its European investment strategy on a sector rather than country-by-country approach. "But because we don't like cyclicals this means we are moredefensive in the German market," he said.

Global fund managers cited the prospect of massive industrial restructuring in Japan as justifying their more positive outlook for stocks there. "We have dipped a toe back into Japan," said Monson. "We think large Japanese corporates may be where German corporates were in 1994 and British corporates in 1991. In other words it could be the beginning of a period of phenomenal restructuring."

Vanselow said his firm had moved slightly overweight in Japanese stocks."It's not a good idea to be underweight this market now," he said. "Things look better now than they did in the middle of the year and we see an improvement both on the economic side and the banking side next year."

Funds continued to shed holdings of the US stocks and bonds. Average holdings of the US stocks represented 39 per cent of global portfolios versus 39.8 per cent last month.

Monson said his firm had been underweight in the US equity market for some time but planned to go sharply underweight in1999.

"Our view has been that the only interesting sector in the US has been technology," he said. "But we think the best is over and once the technology prop is kicked away it leaves us feeling pretty gloomy," he said.