POLL-Fund managers still bet on Asia growth, cautious on China

* Fund managers in Asia grow cautious on China

* Fund managers see cash allocation stable over next 6 months

* Most funds overweight Indonesia

HONG KONG, Sept 9 - Foreign equity fund managers in Asia are cautiously sticking to their bets for a domestic demand driven recovery, though market volatility in China has made some reduce their weightings on the country, a Reuters poll shows.

Indonesia has clearly emerged as the best buy in Asia, gaining in popularity since the beginning of the year, while export-reliant Taiwan and Malaysia were the most underweighted markets despite signs of a global economic rebound.

Eleven of the 12 fund houses with combined assets under management of more than $183 billion in Asia (ex-Japan), Australia and New Zealand expect their allocations for cash to remain stable over the next six months, despite persistent signs that appetite for risk taking is high.

While investors remain wary of shares of Asian exporters, viewing that the global recovery could be bumpy, they are encouraged by better-than-expected earnings reports from Asia in recent weeks and want to take advantage of resilient domestic demand in countries like Indonesia and China.

Seven funds were overweight on Indonesia and six were overweight on China. Indonesia's weighting in benchmark indices is often relatively small, so a regional fund manager can be overweight with a holding that is small relative to the portfolio.

"If U.S. consumers continue to save, I want exposure to countries that have a lot of domestic consumption like Indonesia where more than 70 percent of GDP growth comes from domestic demand," said Daphne Roth, head of Asia equity research at ABN Amro Private Bank.

The Lipper Global Indonesia equity index, a proprietary benchmark, is up 97.4 percent year-to-date, making it the best performing Lipper Global index.

In a similar poll taken in February, eight of 10 fund managers were overweight Hong Kong and China-listed equities while only one was overweight on Indonesian stocks.

India continues to benefit from rising domestic demand although investors fret about valuations and only four polled were overweight Indian equities, up from three in the February poll.

Six fund houses were also overweight on Singapore and Thai equities although four were underweight Thailand, compared with three on China and Singapore. Only one house was underweight Hong Kong and five were overweight.

Taiwan and Malaysia were the least popular markets in the latest poll, followed by Australia and New Zealand. As developed markets, Australia and New Zealand will see slower economic recovery than Asia, while in Taiwan valuations are looking lofty and Malaysia is overshadowed by more convincing growth prospects elsewhere, fund managers say.

Massive fiscal stimulus is helping China's economy rebound but share prices, up 60 percent in Shanghai this year and nearly 50 percent in Hong Kong, have turned volatile, making investors cautious.

Skandia Global Funds (Asia Pacific) Ltd still likes Chinese oil producer CNOOC and mobile phone carrier China Telecom, which it says is less prone to speculative price swings than rival China Mobile.

It has also long favoured Hong Kong property developer Cheung Kong Holdings, flagship of tycoon Li Ka-shing's business empire, and conglomerate Swire Pacific for their sound business strategy and corporate governance.

"When we see a correction in stock prices we won't hesitate to go in and hold more," said Skandia executive director Jane Fung.

The MSCI index of Asia Pacific stocks traded outside Japan has rallied 53 percent this year, recovering to levels seen just before the collapse of U.S. investment bank Lehman Brothers a year ago.

Fund managers polled said they saw their Value at Risk -- the estimated maximum amount of losses that a fund could incur in a given market on any given day -- as staying stable or rising over the next six months. For recent Reuters asset allocation polls, click (Additional reporting by Kevin Plumberg)