By Aime Williams
Funds investing in China delivered the best returns to UK investors in the first half of 2017 as riskier parts of global stock markets paid off.
Funds investing in China returned nearly 19 per cent to investors on average over the six months to June 30, according to data from Morningstar.
Returns from China were closely followed by funds investing in the Asia Pacific region, which returned 15 per cent, and those buying small-cap companies in both Europe and the UK, which returned the same.
"Investor sentiment has remained incredibly positive in 2017 and this is reflected in the returns from high-risk sectors like Asia and emerging markets and smaller company equities," said Patrick Connolly, financial adviser at Chase de Vere.
Ben Yearsley, director at Shore Financial, said China in particular was still a cheap market and that its growth story was attracting investors. "China and Asia are the long-term growth areas, and China has had a good six months," said Mr Yearsley.
Funds investing in small-cap companies, meanwhile, can offer higher returns than those investing in large-cap companies as fund managers have more opportunity to pick stocks that are not well covered by analysts' research.
Darius McDermott, financial adviser at Chelsea Financial said Europe was "out of the doldrums" and beginning to recover.
The worst-performing fund sectors for the period were largely bond funds, with index-linked funds posting a small loss as the worst performer.
They were closely followed by gilts, money market funds, global bonds, which returned abut 2 per cent, and corporate bonds with a return of 2.8 per cent.
"There's nothing particularly exciting or enticing about the bond world," said Mr Yearsley, who said investing in fixed income made sense if the economy was faltering. "It doesn't feel like we're motoring, but it doesn't feel like we'll fall back into a recession either."
Experts were divided on whether investors should invest their money in riskier assets for the second half of the year, however.
Mr Connolly of Chase de Vere said the investment outlook was now "particularly dangerous", with both equities and bonds "looking expensive", and that issues such as the fallout from Brexit or concerns over the Chinese banking system could "come to the fore".
He added: "This could lead to people making big investment losses, because we know that too many investors ignore risks and instead are swayed by strong past performance figures, which led to them investing near the top of the market."
Mr Yearsley disagreed, however. "Where will you make money for the next decade?" he said. "It'll be Asia and China and emerging markets. I'm a big long-term fan, it's still very cheap and the long-term growth is better compared with other markets."
Despite his enthusiasm, Mr Yearsley warned that markets such as Asia tended to be more volatile, and that investors could face losses over a six-month period as well as gains.
Mr McDermott warned that even those prepared to invest in higher-risk investments should not hold more than 5 per cent of their portfolio in China. "Over different time periods, different regions and asset classes do well at different times," he said. "Building a good portfolio of diversified assets to suit your needs is the way to go."