Where would you invest £3,000 in the current climate? It's a tough one, so Faith Glasgow asked our panel of experts for some investment guidance.

The past 18 months have been pretty turbulent times for everyone. The near collapse of the global banking system in autumn 2008 left stockmarkets reeling and the FTSE 100 index – consisting of the UK's largest and strongest companies – fell by a terrifying 25% from January to early March.

But governments around the world started pumping money into their economies (in the UK this has been done through quantitative easing), and since March the stockmarket tide appears to have turned.

There has been a fairly steady rally for the FTSE 100, from its low of under 3,500 to its close at 5413.88 by the year end.

That pick-up has been backed by improvements in the global outlook, as the US and other western economies (though not yet the UK) have started to grow again.

Looking forward
 
So how should investors view the coming year? Many have already enjoyed a good recovery in the fortunes of their funds as markets have pulled back – according to Morningstar, the average global emerging markets fund grew by 65% in the eight months from early March to early November.

The average UK smaller company fund was up by 57%, while even funds in the mainstream UK All Companies sector averaged almost 50% growth.
 
Clearly, too, people are finally feeling a lot more positive about venturing back into the equity markets. The Investment Management Association reports record-breaking sales of funds to investors in 2009, with sales in September an astonishing 25% up on those for the previous month.

Uncertain times

As we look ahead, however, there are some important questions to consider. What will happen once the economy starts to recover and the government adjusts its current policy? And where should you place your investments?

"The timing and extent of the Bank of England's decision to start tightening policy by raising interest rates or reducing quantitative easing is by far the biggest issue," warns Mick Gilligan, head of research at stockbroker Killik & Co.

"The end of the current liquidity pump is likely to be very badly received by the market if it's too early; however, we don't think the UK or the US central banks will tighten too quickly."
 
Andrew McHattie, who runs the investment trust analyst McHattie Group, agrees.

"In addition to a possible change of government, investors will have to wrestle with the implications of the end to quantitative easing, so political factors are going to be influential in the first half of 2010, and could hold back investment progress."

However, he adds, neither interest rates nor inflation are likely to reach "problematic levels" anytime soon.

So where would you invest £3,000 in the coming year, depending on whether you're a cautious or more adventurous investor? Our experts' advice should help you to come to a profitable decision.

Anna Sofat is founder of Addidi Wealth

Sofat says commercial property funds are looking interesting, after a miserable two or three years.

"Adventurous investors could use a fund that can use gearing [that is, one that can borrow money to increase returns] such as Glanmore Property, a Guernsey-based fund investing in a diverse portfolio of UK offices, shops and warehouses, that was doing really well before the credit crunch.

"Since then, it has restructured, refinanced cheaply, and now has good liquidity and a well-established team. But investors won't be able to get their money out for three years."

For more cautious investors, Sofat suggests a mainstream property fund such as those offered by Resolution or Aviva: "They are producing yields of 5% to 6% – but they're big funds, so they won't shoot the lights out."

She's cautious about corporate bond funds, and stresses the need for a mix of fixed-interest investments. "A huge amount of money has gone into corporate bonds, and that always makes me nervous," she says.

Adrian Lowcock is senior investment adviser at Bestinvest.

Lowcock also likes commerical property: "Prices have started to stabilise, and with yields of over 6% available on prime property, total returns are now improving," he says.

There's no sign of rents rising in the short term (which is what pushes commercial property values up), but high rental yields compensate for the lack of capital growth.

He suggests New Star UK Property as a well-established route into commercial bricks and mortar.

High-risk investors should have exposure to Asia as the strongest emerging market, and Lowcock likes First State Asia Pacific.

But he warns that markets have had a strong run in recent months, and that some investors have been selling and taking profits, slowing up the short-term market growth.

What areas or assets would he avoid? "Stockmarkets have been strong since March, and equities look less rewarding now, particularly recovery stocks such as banks and commodities," he says. 

Mick Gilligan is head of research at Killik & Co

Gilligan recommends investors look for fund managers who have good form in capturing returns when they are there, but also use hedging strategies when the "going gets tough".

On this basis, he suggests adventurous investors might do well with the Jupiter Second Split Geared Growth investment trust, a racier version of Jupiter's impressive Financial Opportunities fund.

More balanced investors could consider Artemis Strategic Assets, run by the highly regarded manager William Littlewood, while for cautious investors, he picks Gartmore's European Absolute Return fund, which aims to produce a positive return whether the market is rising or falling.

Danny Cox is head of advice at Hargreaves Lansdown

Adventurous investors with a long-term perspective should go for emerging markets, says Cox. "The long-term prospects are far more exciting than for UK markets," he adds.

His favourites, both with "first-class track records", are First State Global Emerging Market Leaders and Aberdeen Emerging Markets.

Balanced investors may be best off with a UK equity income fund, where managers are looking for well-established, profitable companies with a record of good dividend levels.
 
"A fund that has no dividend yield stands or falls by the growth it achieves, whereas an equity income fund can fall in value and yet still produce a return for investors through dividend payments," explains Cox.

He likes Invesco Perpetual High Income and Artemis Income, both run by outstanding managers.

For cautious investors, he points to absolute return funds such as BlackRock Absolute Alpha, which, although they may fall in value, should be less volatile and more consistent than conventional funds.

No sectors or asset classes stand out as a particularly bad idea for Cox, but he stresses that although most assets have recovered, setbacks are possible and it would be a bad idea to be over-committed to any specific sector or market.

"There has never been a better time for a properly balanced diverse portfolio," he says.

Alan Smith is managing director of Capital Asset Management

Smith likes funds investing in the BRIC nations (Brazil, Russia, India and China), whose growth trend is set to continue, given their huge resources and increasingly prosperous populations. However, he warns, these markets will remain volatile and subject to political and currency risk.

Smith singles out Aberdeen Emerging Markets. "This fund has delivered consistently strong returns and also provides exposure to a wide range of emerging growth markets, including Mexico and Eastern Europe," he says.

For a more balanced approach, Smith suggests high-yielding blue-chip stocks should give some protection (in the shape of dividend payments) against volatile markets.

He favours M&G Recovery, which looks for out-of-favour companies of all sizes and has a great 30-year track record. "If you really cannot stomach any volatility, cash deposit accounts are the only place to be – you can obtain 3% to 4% gross with mainstream UK banks," he adds.

However, Smith warns that investors should steer clear of gold. The price is currently at record levels because it is used as a safe haven in troubled times – but as markets return to more normal conditions, investors are likely to sell their holdings, which will bring the price down. 

Andrew mchattie is chief executive of The McHattie Group

As a speculative investment, McHattie singles out European property in the shape of the Matrix European Real Estate Investment Trust. "If it's successful in its current bank negotiations, this trust has the potential to provide a big return – especially as its share price is on a discount of around 80%," he explains.

When the market price of a trust's shares is less than its net asset value, it is said to be at a discount. Buying at a discount is one of the advantages of investment trusts as it offers investors the chance to make extra profit.

But if you don't want to take such a gamble, McHattie suggests environmental companies could have another good run once governments stop focusing on economic recovery.

"BlackRock New Energy invests in renewable energy and alternative fuels, and you can now buy shares on a 14% discount," he says.

He advises avoiding emerging markets for a while, simply because they have been rising so quickly recently. "I think there is scope for disappointment there – at least in the near term," he adds.

Top investing tip - diversify, diversify, diversify

While it's fun to have a flutter on an investment tip, don't forget the importance of diversification.

By investing across a range of fund sectors and different types of assets – including cash, property, commodities and bonds, as well as shares – you reduce the risk that all your investments will be equally hard-hit if markets crash.

Stockpicking tips

If you want to build a portfolio of individual shares, it's a mistake to take a one-year view, says Richard Beddard, companies and markets editor of Interactive Investor.

"I try to identify stocks I think are undervalued, often good companies in troubled sectors," he says, "but it may take three years or more for them to recover.

"Two favourites are Haynes Publishing and Ricardo, both related to cars. Haynes produces the famous manuals and Ricardo is an engineering consultancy that primarily designs more fuel-efficient engines, transmissions and electronics.

Although the car industry is in recession, both companies are profitable, have strong finances and seem to be coping well. I've included them in my Thrifty 30 model portfolio."

If you're seeking a larger company, Killik & Co suggests world-leading hedge fund manager Man Group, which seems set to benefit as investor confidence returns to the alternative investments industry.

For a smaller-company alternative, look at Imagination Technologies (which makes Pure Digital radios) – a unique play on the digital revolution.

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