With the UK falling back into recession and the Coalition unsure whether to pursue growth or austerity, investors could be forgiven for feeling disillusioned with the paltry returns on their equity investments in the last year.

While there are headwinds for virtually every market at the moment, for those who are prepared to look further afield in the pursuit of growth, a strong case can be made for investing in the world’s other developed markets, particularly from a valuation perspective.

North America

The US economy began the year strongly as investors tipped the region to lead the global recovery.

While some of that confidence has ebbed away as fears centred on the eurozone and a slowdown in China have hampered the global economy, Bestinvest’s Adrian Lowcock is still positive on the region.

“While the US is not looking as strong as it did at the start of 2012, compared to the UK, Japan and Europe then it still looks very good indeed,” he said. “Corporate earnings have been robust, jobs are being created and there is traditionally more spending in an election year.”

He added: “There could also be further stimulus measures. The US has already announced an extension to Operation Twist and while policy makers appear to be avoiding further quantitative easing the market certainly seems to be waiting in anticipation of it.”

“One of the problems is that investors need to judge when the US is going to start addressing its huge deficit.”


Europe

With politicians failing to get a grip on the debt crisis, Europe seems like a suicidal place to be invested at the moment.

Greece looks almost certain to leave the euro, Spanish bond yields are through the roof, markets are in free fall and there is speculation that Italy may have to go to the ECB with its tail between its legs to ask for financial support.

However, much of the gloom is already in the price. Star manager Alexander Darwall says that the best European companies are far less exposed to the malaise in the eurozone than investors realise. People are selling up anything even remotely linked to European markets despite the fact that many companies derive most of their earnings from overseas.

Investors with a nervous disposition should certainly stay away but those who can tolerate the volatility may find that cheap European stocks represent the investment opportunity of a generation.


Japan

For more than two decades, Japanese equities have been a dirty word with the vast majority of investors. Those focusing on the region have, of course, made the case for re-entering the market, but multi-asset and multi-regional managers have also spoken up Japan in recent months.

Performance of IMA Japan over 20years


Source: FE Analytics

A weakening yen and the government’s commitment to inflation targets have been met with great optimism, while battered valuations imply now could be a good entry point.

“Japan has moved from a very expensive market 20 years ago to one that is acceptably cheap,” said Andrew Bell, manager of the Witan Investment Trust.

“There is a chance that something may happen which makes the whole herd change its mind and we just don’t want to miss out on that.”

As well as Bell, the highly-rated David Ballance and Steve Russell at Ruffer have also been adding to their positions in the region. The Ruffer Investment Company currently has 24 per cent invested in Japan, while the average portfolio in its IT Global sector has just 4.9 per cent.