Will the recovery continue? UK investors may wish to circle the date of March 12, 2003, in their diaries because it may well herald the end of the severe bear market that began in January 2000.

Since that date, the FTSE 100 Index has soared by over 23 per cent.

At first, 2003 appeared to be yet another truly awful year for stockmarket investors, as it began with one of the worst months in recent history. The FTSE 100 Index declined 9.5 per cent in January, rattling investors who were already shell-shocked from prolonged stock market falls.

Indeed, fears of war in Iraq, combined with economic worries, caused the index to go on an unprecedented 11-day losing streak, shedding close to 500 points (nearly 12 per cent) in the process. The worst was yet to come; the Footsie fell to an eight-year low of 3,287 on March 12, having lost a sixth of its value in just ten weeks. However, true to the old adage that "it's always darkest before the dawn", March 12 has so far proved to be the turning point. The index recorded one of its biggest jumps on March 13, rising six per cent, and this upward trend has continued since.

Indeed, many market commentators argue that the last three months are the beginning of another bull run of rising valuations.

So, what has caused this new found optimism among investors? In truth, there has been very little change to the major factors driving the markets, such as economic growth, interest rates and predictions for company earnings. Instead, we believe investor sentiment has improved because more people are realising that a lot of bad news is already factored into current share prices.

At the time of the March low, the average dividend yield on the Footsie climbed to 4.3 per cent, almost half a per cent over the Bank of England base rate of 3.75 per cent. The fact that the stock market was and is delivering a higher yield than most banks or building societies goes some way to explaining the current levels of support for share prices.

Conversely, the base rate is the lowest it has been since 1955 and is expected to fall further.

The historically low interest rate in the UK has also encouraged many wary investors to put their money in corporate bond funds. These carry less risk to capital than equity funds and currently provide a higher income than cash and some equity income funds. As global interest rates have fallen, so too have bond yields, which has led to higher bond prices. The result for some bond investors has been a lower income, but this has been compensated for by an increase in capital value of the bond fund investment.

Although it is easy to understand investors' desire to stop the losses of the last three years, investors who cashed holdings or halted contributions during recent falls would have missed the subsequent steep increase in share prices.

UK investors looking to maximise their returns might want to consider reinvesting their dividends to buy more shares, as this is likely to dramatically boost their long-term results.

As valuations still appear to be at attractive levels, you might want to consider investing fresh capital to take advantage of future market gains. What's more, you may wish to benefit from the pound-cost averaging effect, by drip-feeding money steadily into funds using a monthly plan that allows you to buy throughout the market lows.

There's no doubt that since the end of 1999, returns from most equity funds have been very poor indeed. However, shares should be the major beneficiary of any global economic recovery, especially if earnings expectations in the US and UK are driven higher.

Prospects for financial businesses are improving, which may lift shares in the banking and insurance sectors.

What's more, a spate of management buy-outs and private equity bids demonstrates that several institutions are finding valuations appealing and are keen to finance acquisition sprees.

Last, but not least, it is encouraging to note that shares have beaten all other mainstream investments over the long term. Since 1945, the UK stockmarket has returned 12 per cent a year.

We still believe that although the ride may be bumpy, the benefits of long-term investing in equity and bond funds remain clear-cut.

* John Dresser is a director of Hennessey and Partners, Darlington, and can be contacted on (01325) 488556.

Published: 07/10/2003