With America joining Germany, France and Japan on the march out of recession, many investors will be asking if they should stick with laggard Britain.

The US Department of Commerce announced last Thursday that the economy expanded by an annual rate of 3.5% during the third quarter, its first growth for a year. The news heralded the unofficial end of the worst contraction in 70 years. Growth was up 0.6% over the quarter.

The UK is still languishing in negative growth, with the economy shrinking 0.4% during the third quarter. Nonetheless, a survey by the Association of Investment Companies (AIC) in September found that two-thirds of investors continue to prefer UK equities.

Emerging markets were the second most popular sector, followed by Asia Pacific, Europe and North America, though some of these economies could be in danger of overheating. Growth in China, for example, accelerated to 8.9% in the third quarter.

We asked the experts whether investors were right to concentrate on the home market, and how much of their portfolio should be overseas.

HOME

Investors in Britain typically have about 70% of their portfolio in British shares, according to Rebecca O’Keeffe at Interactive Investor, the financial services website, although that is not necessarily a negative, despite the country’s poor economic performance.

Mike Lenhoff of Brewin Dolphin, the stockbroker, said: “The UK equity market is still attractive at the moment, but that’s got little to do with the UK itself because most of the FTSE 100 stocks are geared to the global economy.”

He said that British blue-chips still offered good growth prospects. Vodafone has an attractive yield of 5.8%. Also, financials with a global remit, such as HSBC and Asia-focused Standard Chartered, are well-positioned to benefit from the global recovery.

EMERGING MARKETS

Figures from the AIC show that global emerging market investment trusts have been the big winners as the world emerges from recession. Their average rise is 63% over the past year and 20.6% over three years, compared with 39% and –0.2% for the average global growth trust. The big question is whether they can continue this run.

Kevin Grice of Capital Economics, the consultancy, said: “The rally in emerging market equities has been impressive and probably has farther to go, at least until next spring.”

Other advisers recommend pulling out of China. O’Keeffe said: “Is the boom in equities, commodities and housing sustainable if China doesn’t repeat its mammoth monetary stimulus package? It has certainly paid to follow China this year with the Asia Pacific sector, excluding Japan, up 89% over 12 months. However, the risks of a downturn outweigh any growth at this point and I’d bank now and put my money in currency funds or cash.”

Nevertheless, emerging markets and Asia still present very attractive growth prospects for the longer term. Ben Yearsley at Hargreaves Lansdown, the adviser, is still keen on these sectors. “While they have had a tremendous run over the past six to nine months, and may well pause for breath at some point, many fund managers see good returns over the next three to five years,” he said. His tips are Jupiter China fund and First State Global Emerging Markets Leaders fund.

EUROPE

News that the German and French economies expanded — by 0.3% and 0.2% in the third quarter — led some economists to declare that continental Europe had turned a corner.

Capital Economics said: “The recovery is unlikely to be rapid. A modest improvement in global demand will mean export growth does not hit pre-recession highs for some time, particularly as the eurozone suffers from the strength of the single currency. But while the recovery is unlikely to be as sharp as that in the US, it may be longer-lived.”

Sudipto Banerji at Fidelity International, the investment manager, tips Nestlé, the food processing giant, and Telefónica, the communications company.

AMERICA

Advisers are expecting long-term growth despite some analysts’ predictions of a significant pull-back in the US stock market.

Tom Elliott at JP Morgan Asset Management said: “There are concerns over the strength of the US recovery and there may be a long, hard slog ahead. However, valuations, while not as cheap as they have been, remain reasonable and ongoing improvements in earnings should help to keep them in check.”

Hugo Shaw at Bestinvest, the broker, said smaller firms would stand to benefit from any recovery. He likes the M&G American fund and Legg Mason US Smaller Companies.THE RIGHT BALANCE Advisers generally recommend that a typical investor has 50-60% in the UK, 5-15% in America, 10-20% in Europe and up to 25% in emerging markets. If those allocations move more than 5% out of line, profits from one fund can be reinvested in another. At the moment, that means most investors should take some money out of their emerging-market funds and reinvest it in markets that have lagged.

Yearsley said: “The question of where to reinvest depends on what you think sterling will do. If you think it will weaken further, buy US assets. If you think it will strengthen, stick with the UK.”

Colonel backing Britain

Retired lieutenant colonel Michael Stevenson is hoping to make money on his investments as the UK economy strengthens.

Like many investors, Stevenson, 63, is keeping most of his money in British assets.

This year, he bought into the M&G Recovery fund, which invests in companies that are in difficulty or unloved by the market. The fund has £4.2 billion invested and is up by 21.8% in the past year.

“As far as I’m concerned, when you are at the bottom the only way is up,” he said.

Stevenson, who lives in Trowbridge, Wiltshire, with wife Sally, 50, a nurse, and their children Andrew, 12, and Verity, 11, has also invested in European funds and is keeping his eye on emerging markets and Asia.

He said: “Even though I’ve not bought into any funds yet, I will definitely look into China as my next investment opportunity. The country has already seen staggering growth but I’m waiting to see how things settle down before I commit to anything.”

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