Twelve months after the collapse of Lehman Brothers, market volatility is now back to pre-crisis levels, meaning investors can sensibly deploy risk capital. This has driven significant inflows to risk assets, with equities and corporate bonds the notable beneficiaries.

But while credit spreads are now back at the levels seen a year ago, equities are still between 10 and 20 per cent down on the year (depending on market) despite their recent rallies.

There are still significant sums of cash on the sidelines awaiting investment. This suggests any setback in risk assets could be met with renewed buying.

It is becoming increasingly clear that we are past the worst in the global economy. However, while markets seem to be discounting a rapid recovery, we continue to be cautious on the outlook for economic growth. Consumer balance sheets need to be repaired and the resulting deleveraging will dampen consumption in Western economies for several years.

At the same time, governments need to repay their burgeoning debts, which suggests lower public sector spending and higher taxes.

The good news on the economic front is that inflation is well- contained, and this means central banks will be able to keep interest rates at low levels for a prolonged period, creating good conditions for capital markets.

It also influences sector strategy - for example, low short-term interest rates benefit banks as they help to support healthy lending margins. The recent gains in equity markets have also removed concerns about solvency in the insurance sector.

With these factors in mind, we have substantially added to financials in recent months and are now significantly overweight.

We are seeing a reversal of the dysfunctional vicious circle in capital markets. Having conserved capital in order to survive the past year, companies are now beginning to take a constructive view.

Capital expenditure plans are being reinstated, inventories are being rebuilt and recent weeks have seen a return of M&A activity.

We expect M&A to be an increasing feature of the coming months as companies seek to increase efficiencies, boost growth and lower levels of competition. Meanwhile, the return of capital expenditure bodes well for companies in areas such as engineering, technology and oil services.