Where to invest: Asset allocation tips for 2014

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We ask the experts what next year holds for key economies and sectors.

US

"Tapering should provide a utopia for equity investors in the US"

The US central bank, the Federal Reserve, finally took the plunge in December, announcing it would be withdrawing its massive stimulus package by $10bn per month from January 2014, taking it from $85bn to $75bn.

While this is good news as it signals a recovering US economy, there are still uncertainties about the US's long-term debt problem.

Joanna Shatney, head of US large cap equities at Schroders, says that despite announcing the start of tapering - the phrase commonly used to describe the stimulus withdrawal - the Fed will remain accommodative against a backdrop of a slow GDP growth environment.

She adds: "This scenario should provide a utopia for equity investors in the US because it allows for earnings growth and multiple expansion. A slow growth environment should also be conducive to stock picking, as in a moderate earnings growth environment, winners and losers are more clearly delineated."

UK

"The UK recovery is still very tentative"

The general consensus is for UK stock markets to continue their upward trajectory next year, with analysts Goldman Sachs and Citi tipping the FTSE 100, London's blue chip share index, to break through 7,000.

The 7,000 mark would represent an all-time high for the FTSE 100, surpassing the 6,930 level reached in 1999.

However, David Coombs, a multi-manager at Rathbones, is not getting too excited about the FTSE 100. Instead he is focusing on micro, small and mid-cap companies which have outperformed their large cap peers this year.

"It is becoming increasingly difficult to find value in these areas because of outperformance, but there are enough stocks in the universe to take advantage of a return to growth," he says.

Meanwhile, James Griffin, a fund manager at Fidelity, warns that the UK recovery is still very tentative.

"We need to see some follow-through from the housing market recovery in the form of positive wealth effect so the recovery can truly take hold and broaden out," he says.

Overall though, he remains encouraged by improvements in the UK economy, which appears to be on the road to a slow but steady recovery, driven by a strengthening housing market, improving consumer confidence and stabilising employment trends.

Japan

"Japan remains my favoured developed market for 2014"

Abenomics - the aggressive economic package advocated by the current prime minister Shinzō Abe - put Japan back on investors' radars in 2013.

The economy grew in the first quarter of the year but started to slow in the second quarter due to the realities of driving change through a large, complex and conservative society.

Experts are cautious on the outlook for the country.

"It is important to be realistic about the likelihood of a sudden transformation in Japan," warns Fidelity's head of Japanese equities, Alex Treves.

"Indeed, prime minster Abe may have done himself a disservice by raising foreigners' expectations too high - but equally the prospect of long-term improvement in Japan's outlook is very much alive."

Crucially, shares in many Japanese companies look cheap, so ignoring Japan is not an option, Treves says.

Adrian Lowcock, senior investment adviser at Hargreaves Lansdown believes Japanese shares continue to look good value and taking into account a positive outlook for Japan over the next three years - the timescale Abe has to implement his structural policy reforms - means "now is a good time to invest in Japan".

To sum up, Darius McDermott of Chelsea Financial Services says: ""I still like the look of Japan and it remains my favoured developed market for 2014."

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