Financial markets participants are increasingly discounting the likelihood of a deep, protracted, global recession, according to the latest edition of Barclays Wealth’s Signpost Monthly Investment Strategy Report.

The US economy is eking out feeble growth, but should move up gear as tax rehearsals boost consumer spending although in the Euro area and Japan the economies due to slow sharply in the second quarter after a strong start to the year, says Barclays Wealth.

And emerging markets now looking more vulnerable, says the UK-based wealth manager.

Michael Dicks, head of Research and Investment Strategy at Barclays Wealth, said: "We have always been confident of an eventual ‘victory’ of policymakers over the forces dragging the global economy down. Developments over the past month have given us greater conviction in that judgment. There has been a turnaround in markets and in market sentiment, and policymakers’ approaches to policy problems have been innovative and forceful.  For the first time since when the credit crunch broke, we have changed our recommended Tactical Asset Allocation to take up more risky assets, viewing that as a short term (3 months) play."

The report says that growth is slowing in the UK although, outside of housing, there has not yet been a pronounced deceleration in aggregate demand.

With the US set to perform better, Barclays Wealth says the rally in equities can continue so it has boosted its equity overweight from 5 per cent to 7 per cent.

Within equities, it has increased the allocation to US, emerging market and UK equities, with the largest increase in the US.

It has maintained its overweight on European equities as it has seen an unfavourable shift in the currency, inflation and monetary policy outlook.

It has continued to favour increasing exposure to emerging markets both on a strategic and tactical basis.

But the case for being underweight on corporate credit is much less convincing than it was last year, so the bank has decided to boost its underweights on US and non-US government bonds to 2 per cent in each case to help fund its equities overweights. It is now neutral on corporate credit as an asset class.

UK sector overweights are materials, financials and telecoms. The last two of these are also European overweights, says the report.

The bank has also upgraded its recommendation on investment-grade corporate bonds from modestly underweight to neutral, and also upgraded the recommendation from banking and brokerage sectors to overweight.

Banking fundamentals are poor, and spreads are not expected to return to pre-crisis levels, but Barclays thinks that current valuations are unsustainably low. Brokers should be helped by more healthy risk appetite, combined with higher capital levels and comparatively less leverage, it says.

The reports says that forecasts for most commodity products still point to high average prices in 2008 and 2009, with upside risks to some of its current forecasts. Many commodity prices are likely to stay volatile in the short term, it says.

On currencies, the bank remains convinced that sterling will fall, the euro will remain strong, while the US dollar will stay weak.