British shares hit a six-year high last week, but a growing chorus of analysts are warning there could be trouble ahead.

The FTSE 100 index of leading shares peaked at 6,395 during trading on Friday, before finishing the week at 6,383.

Several respected commentators believe people are too complacent about shares after four years of strong returns, although they think savvy investors will be able to beat the market by focusing on “super trends” that could deliver above average returns in the coming decade.

Merrill Lynch, the American investment bank, warned last week that the party may not go on for ever because rising interest rates in Europe and Japan could destabilise the markets in the next few months.

Richard Bernstein, chief investment strategist at Merrill Lynch, said: “2007 promises to be a year with many opportunities for investors. However we cannot stress the importance of making the correct calls in the face of higher volatility.”

The Financial Services Authority, the City watchdog, has also warned that investors may be taking bigger risks than they think. Investors have traditionally been advised to place money in a range of asset classes — shares, bonds, property and commodities — to protect themselves from market ups and downs. The theory goes that if one asset dives the others are unlikely to fall at the same time, limiting losses.

But the FSA is worried that markets have become so interlinked recently that even well-diversified portfolios could be hard-hit if conditions sour.

We therefore asked a panel of experts which investments they would be backing in the light of this uncertainty.

China’s generation Y

Many fund managers are nervous about the prospects for the Chinese stock market, which hit a record high last month, amid fears it could overheat.

But Merrill Lynch believes investors will be able to beat the market over the longer term by backing companies that appeal to young urban consumers, nicknamed “generation Y”.

Bernstein said: “If global economic growth disappoints, emerging markets are likely to underperform. Despite the risks, we think investors should be initiating positions in the emerging-market consumer theme, which we think might play out for many years to come.”

Consumer spending in China has been growing at an average rate of 10 per cent over the past decade, the fastest in the world. Chinese banks should benefit from the consumer boom and growth in borrowing. London-listed bank Standard Chartered is one way to tap in to this bonanza.

Those who hope to benefit from this trend could consider a single-country fund such as First State Greater China Growth.

Many advisers recommend an Asian or global fund with holdings in China. Peter Bickley at Tilney Investment Management suggests Martin Currie Asia Pacific or First State Asia Pacific Leaders.

Infrastructure

One of the latest buzz words among professional investors is infrastructure investment — where you buy firms that have tangible assets such as utility supply networks or roads.

Barclays Stockbrokers has launched a scheme called the Global Infrastructure Investment Note: a five-year plan linked to the performance of a basket of 20 global infrastructure firms including Scottish & Southern Energy and National Grid.

The scheme offers 100 per cent capital protection if held for the full term. Investors who hold on until maturity receive 140 per cent of the growth of the index. 3i is launching a global infrastructure fund later this month, investing in firms such as water company AWG and Alpha Schools, which builds and operates schools in Scotland. The minimum investment will be £10,000.

Climate change

Global warming could be one of the most pressing issues in the coming decades, and one of the biggest effects could be a rise in water shortages.

There are already signs that demand is outrunning supply. China’s water minister says 40 per cent of the population lives on an amount of water below international danger levels. But experts say this offers opportunities.

Gary Dugan at Barclays Wealth Management tips water stocks such as Suez in France and United Utilities in the UK, which should benefit if shortages push up prices, while Pictet offers a specialist Luxembourg-based fund investing in everything from water treatment firms to bottled water producers.

Telecoms

Glenn Silverman, chief investment officer at Investment Solutions, a fund manager, doesn’t see economic conditions tripping up the markets just yet, but he thinks investors should be cautious with overpriced assets such as emerging markets and commodities like copper.

Instead, he is backing large, blue-chip companies, highlighting telecoms firm Vodafone as his stock to watch, even though it has underperformed the market; its shares are up 11 per cent over the last three years, compared with a 44 per cent gain in the FTSE 100.

Merrill Lynch is also backing telecoms, and has picked Car-phone Warehouse as its top tip.

Gold

Some experts predict gold will surge this year as investors seek a haven from political risks and a declining dollar. Ross Norman, of The Bullion Desk, expects it to return to its 27-year all-time high of $850 this year, 27 per cent above Friday’s level of $677.

You can track the gold price using Lyxor Gold Bullion Securities, which are traded on the London Stock Exchange. They are shares that rise roughly in line with the gold price. An alternative is the Merrill Lynch Gold & General unit trust, which mainly invests in gold-mining firms.

Times Recommends

• How to sell your home in a downturn
• How to boost your spending power
• Unemployment benefits explained