Many worrying economic scenarios are unfolding around the world, making it hard to pick out the best regions for investment. Heather Connon asks the experts.

It’s very difficult to decide which regions of the world are most attractive for investors.

In Europe, the financial crisis has worsened markedly recently, despite the Irish bail-out. Asian markets are still promising far better growth than Western economies, but the threats — of inflation and overheating — are growing, while the wall of money pouring into the region means valuations are starting to look stretched.

The US recovery is anaemic at best, and gridlock following Democrat losses in the mid-term elections may compromise the implementation of policies to get the economy moving again.

Brazil has been one of the few bright spots, but concerns about inflation, populist politicians and the country’s reliance on commodities are growing.

We asked a wide range of investment experts to weigh up these issues and nominate their favourite areas.

Jeremy Tigue, manager of Foreign & Colonial Investment Trust. sums up investor opinion when he says the outlook for the continent depends on what happens to the euro.

While the most gloomy economists are predicting an eventual break-up of the eurozone, others think normality will eventually be restored.

Tigue believes the eurozone will survive, although perhaps with a reduced membership. He adds that the euro is not particularly pertinent to the performance of European stockmarkets, however, as so many of the region’s best companies are based in Germany, the exporting powerhouse of the region.

Their performance is driven much more by events in Asia than in Europe. Like UK companies, eurozone businesses earn an increasing proportion of their turnover from international markets, so Europe’s continued weakness is working to its advantage.

Mark Harris, head of multi-manager at Henderson Global Investors, thinks there will be a papering over of the cracks in Europe, but its problems will not go away. Like Tigue, he prefers the northern countries, such as France and Germany, to the Mediterranean ones.

Rory Bateman, head of European equities at Schroders, says 2011 should be a good year for European equities. The peripheral countries of Europe face significant economic uncertainty, but we expect the core European recovery to continue through 2011, he says.

Furthermore, corporate profitability and cash generation are strong, given the period of excellent cost management during the downturn. Finally, valuations in the context of historic ranges versus other equity markets around the world and, most importantly, versus many other asset classes look highly attractive.

Mike Lenhoff, chief strategist at Brewin Dolphin, had a zero weighting in Europe until recently. He is increasing his weighting, but he will remain underweight because of political uncertainty.

Bill O’Neill, chief investment officer for Europe, Middle East and Africa at Merrill Lynch Wealth Management, thinks many eurozone countries — and particularly Spain, France and Italy — overestimate their growth prospects, but he

believes large European companies offer some of the best opportunities. He particularly favours energy and telecoms companies, while Harris is enthusiastic about pharmaceuticals.

Conclusion: Europe is attractive, but choose northern companies and big exporters.

The Japanese Nikkei 225 index is now more or less where it was a quarter of a century ago. In the intervening period, there have been regular attempts to call the turn — although they are getting less and less frequent — but bulls have invariably had to retire hurt as the decline continued.

It is not surprising that our investors are reluctant to repeat these mistakes. But, for the first time in ages, Tigue thinks it may be time to go overweight in Japan, although he admits that is partly because everyone is so negative.

However, he is also encouraged by the fact that the yen has strengthened this year, something that has been a long time coming.

He says: The best indication is that a couple of Japanese investment trusts have wound up recently. That has been an infallible bull signal [in other areas] in the past.

David Coombs, head of multi-manager at Rathbone Unit Trust Management, only holds Japanese investments as a diversifier.

But he says Japan’s focus is now much more on emerging than Western markets, so economic strength there should be good for their companies. It is worth looking at, he adds.

Daniel Pasini, portfolio manager at ACPI Investments, says sentiment in Japan is awful, while valuations are cheap, but that has been the case for some time. He thinks recent quantitative easing by the US Treasury and the Bank of Japan could be positive for the market.

Conclusion: Japan is starting to look attractive, but that has been the case in the past and the market has continued falling. It may be worth a small exposure here, focusing on emerging market exporters.

In stark contrast to feelings on Japan, sentiment towards Asia is overwhelmingly positive. It is not hard to see why: while growth in the developed world is tottering at around 2%, China, India and many other Asian markets are growing at close to 10% per year.

Merrill Lynch’s O’Neill sums it up: The emerging world has become the source of global savings, with savings rates for 2009-14 forecast to reach 33% of disposable income, while rates in advanced economies continue to decline.

These savings are turbo-charging emerging market growth to satisfy rising consumer demand, while US consumers strive to cut their debts and European governments tackle their massive deficits.

That strong savings rate means the emerging market story is now domestic rather than export led. Lenhoff points out that, while emerging markets account for a third of global GDP. they have accounted for 70% of GDP growth in recent years.

He thinks developing market growth will moderate, partly because interest rates in some areas — notably China — are rising to cool rapid growth, while the falling dollar is pushing their currencies higher.

There will be a loss of economic momentum which, as [emerging markets] are so instrumental in pushing the global economy, means there will also be a slight loss of momentum for the global recovery.

Harris says emerging markets have been attracting considerable capital and have performed well recently. Long term, they will be strategic winners, but you have to pay a high price for them [at the moment]. If you see a correction, you should buy. For now, however, the question is: will they outperform next year? You want some exposure, but there is no need to buy here and now.

Coombs agrees that the region is looking overvalued and thinks it is better to play the growth story for the region by buying Western companies that do a lot of business in Asia.

Conclusion: Long-term growth prospects are excellent, but wait for weakness before buying.

Matthew Strachan, head of North American equities for Alliance Trust, says the strategy of the Federal Reserve, and quantitative easing in particular, has been the key driver for the US stockmarket. which rallied sharply as the second bout was announced. The question is: will it break free from that next year?

Political uncertainty has increased following the mid-term elections, when the Democratic party lost its majority in the House of Representatives, and that could make it more difficult to achieve a consensus.

That makes Strachan a macroecomic bear, but he says: I am a micro-bull because companies are proving adept at making profits, even in a lower-growth environment. They are beginning to increase their investment budgets.

Henderson’s Harris thinks the US is reasonable value. The risk is that the second round of quantitative easing will have more impact than anticipated and will push up inflation. That could put pressure on interest rates, increasing the economic headwinds.

As in Europe, he favours healthcare stocks. pointing out that industry analysts have talked about valuations in the industry being at generational lows — although reaping the value from this area could take more than a year.

Strachan likes technology and oil shares, where he sees value in companies, such as Intel, and infrastructure companies, such as Canadian Pacific.

Tigue is also enthusiastic about US companies. They are vibrant and their technology lead is strong, he says. It’s a mistake to write off the US.

Pasini thinks the US market will start gaining traction in 2011 while its stockmarket is cheap to fair value. He says: Capital spending growth is gaining momentum, and companies have good cash flow and solid margins.

The weakening of the dollar should give its exporters an advantage. Andrew Bell, chief executive of Witan Investment Trust, is a bull on the US and its ability to make things work.

Conclusion: Economic growth is disappointing, but companies are performing well. Recovery could accelerate this year.

BRAZIL AND LATIN AMERICA

Brazil has been a favourite for investors, but Tigue sees a warning in the investment trust market. He points out that the market has risen 6.5 times in the past decade. That is a reminder of what is going on, said Tigue. The growth prospects are still good, unless there is a big upset in China.

Pasini thinks Brazil might be overheating, with too much credit given for housing in the year ahead of recent elections.

This article was originally published in Money Observer - Moneywise’s sister publication — in January 2011.

Quantitative easing

Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central banks only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts ) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesnt physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.

In the UK, stocks are fixed-interest securities such as corporate bonds and government gilts. In the US, stock is the most widely used term for shares; a diminutive of the term common stock.