The risk of depression appears reduced, leading Barclays Wealth, part of UK banking group Barclays, to predict that equities will recover in the second half of this year. However, the firm warns that while equities may appear cheap, caution is still warranted in the short term.

Macroeconomic news is now no longer uniformly bad and the global policymakers continue to take aggressive - and unorthodox - action to stimulate activity. A slight increase in risk appetite is therefore justified, says Barclays Wealth, but investors should be wary of an overeager re-entry into equities.

“All in all, it may not be the case that there are any green shoots of recovery just yet, but at least a thaw has set in which should let the sap rise and, in time, give investors a bit more spring in their steps,” said Michael Dicks, head of research and investment strategy at Barclays Wealth.

“We judge that it is right for investors to turn up the ‘risk dial’ a little in their portfolios… but it still feels to us too early to jump wholeheartedly into over-weighting equities.”

Barclays Wealth is not overweight of equities overall, despite its prediction that markets will recover in the second half of 2009. Geographically, the firm believes that the US is a safer place to be for equities than Europe or Japan.

The biggest overweights recommended by Barclays Wealth are investment grade and high-yield credit. Spreads here still have plenty of room to narrow from the previous very extreme pricing, the firm says.

In foreign exchange, Barclays Wealth expects that the dollar will be supported by the US growth outlook. Recent policy successes are likely to gain traction, the firm asserts, noting in addition that the US economy bounced in February, suggesting that the recession may be moving into its final phase.

Barclays Wealth does however recognise that quantitative easing does present a risk to the dollar’s strength; while the firm expects that the euro will weaken, this will not be the case if investors turn against the dollar. Meanwhile, sterling appears cheap, with improving prospects: “We judge that its long sustainable recovery may start soon,” Barclays Wealth said.