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Positive feeling

With valuations in equity and corporate bond markets at compelling levels and more positive economic data emerging from the wreckage of the credit crunch, are we starting to see signs of markets reaching a bottom and the beginnings of a recovery?

The global downturn has created turmoil in equity and credit markets over the last year but they have rallied sharply after the announcement of measures by the US government to solve the problem of toxic assets of banks. Many commen-tators now point to the excellent opportunities for long-term investors but while we wait for clarity on whether the measures are going to have the desired effect, a heightened level of volatility is likely to remain.

It will take a long time for confidence to fully return to financial markets but April was a much more encouraging month. News flow on the financial sector remained centre stage, with investors taking some comfort from the US Treasury department’s statement that most US banks appear to be reasonably well capitalised. The results of the US stress tests showed that 10 out of the top 19 US banks require an additional $75bn of capital. The results were considerably better than those predicted by independent bodies such as the International Monetary Fund, which speculated that the banks may need $275bn-$500bn.

A number of leading economic indicators continued to suggest that the pace of global economic decline is slowing. On the corporate front, the quarterly reporting season has so far delivered more positives than negatives, albeit against much reduced expectations. So even though it is far too early to be talking about green shoots, it is starting to look as if some of the more extreme doom and gloom merchants have perhaps overstated their case.

Volatility will remain for a while yet it is very feasible that from the current low base that future returns from financial assets will be positive if viewed over any reasonable time horizon. The best years often follow the worst and there is no denying that 2008 was a terrible period for investors.

Andrew Yeadon is head of investment, multi-manager at Schroders

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