The increase in corporate takeover activity across several markets supports the view that the worst may be over.

The badly bruised London stock market began the week with a sharp bounce driven by a surge in the share prices of financial stocks. The catalyst for this positive price action was an announcement from the Financial Services Authority (FSA) that it was relaxing its rules on the solvency requirements for life assurance companies.

Insurance stocks were catapulted higher on the news, led by Friends Provident, which rose by 11.3 per cent on the day and Aviva up by 9.5 per cent. Banking stocks with large life assurance arms such as Lloyds/TSB and Abbey National also rose sharply, climbing by 7.7 per cent and 4 per cent respectively on the day of the announcement.

Impressive as these gains were they have only reclaimed a fraction of the losses sustained by these stocks in recent years. The global bear market of the past three years is still not quite as deep as that of 1973/74, but it is now very close in terms of magnitude.

In real terms the price decline of the London stock market in the early 1970s was more than 70 per cent. This compares with the current market, which is trading at roughly 50 per cent of its peak value reached three years ago.

The decline in the US market in the early 1970s was just over 50 per cent, which is very similar to the magnitude of the current bear market decline.

For Germany, which is now approximately 60 per cent below its peak level, the current bear market is much worse than the early 1970s bear market.

After the 1973/74 bear market it was not until the mid-1980s that most major equity indices regained their previous peaks reached in 1972. In fact, the US stock market did not retrieve its 1972 peak level until 1993.

What these figures bear testament to is that once an asset price bubble is burst it takes a long time to reclaim peak values. The Japanese stock market is a stark reminder of what can happen in the aftermath of an asset price bubble.

Japanese share prices would need to quadruple to regain their peak levels of the late 1980s.

The London market, which is now at 50 per cent of its peak level, would have to double to regain early 2000 price levels. If those equity analysts predicting average annual long-term returns of no more than 8 per cent from equity markets are right, it will be over 10 years before the British market retrieves its losses of the past three years.

However, the magnitude of the falls in share prices in Britain and Europe now means that European share prices are beginning to appear attractive on several valuation yardsticks. The same cannot be said of the US stock market, which still looks quite expensive.

Looking at the British market, the dividend yield is now about 4 per cent, which compares favourably with short-term interest rates and bond yields. If the real growth in dividends rises in line with the estimated real long-term growth rate of the economy of 2.5 per cent, this implies long-term real equity returns of 6.5 per cent per annum.

For much of the 1980s and 1990s real average annual equity returns were much higher than this. In many stock markets, including the Irish market, real annual returns ranged between 10 per cent to 15 per cent.

However, over much longer time periods the real average annual long-term return from equities has been calculated in the 6 per cent to 8 per cent range. Therefore, a prospective real rate of return of 6 per cent plus does represent good value when judged by the very long-run historical norms.

Other measures of value such as the price/earnings ratio indicate that shares in Europe are now relatively cheap. This is particularly true of the Irish equity market where the forecast price/earnings ratio for 2003 of about 10 times earnings is low compared with other markets.

This ratio is sometimes expressed in terms of earnings to share prices. Therefore, the earnings yield for the Irish equity market is approximately 10 per cent.

With borrowing costs so low it is not surprising to see an increase in corporate takeover activity across several markets. If at current share prices, good quality companies are generating an earnings yield of 10 per cent and funds can be borrowed at (say) 6 per cent, then takeovers funded with debt become very attractive.

In the Irish market Arnotts is currently the subject of a takeover approach and it seems there may be a competing bid from a management buyout team. A number of quoted technology companies are now the subject of either takeover or management buyout approaches.

In Britain, the supermarket chain Safeway is the subject of expressions of interest from several rival supermarket chains.

Such activity suggests that acquisitive corporates are now taking the view that, at current valuations, some companies are worth taking over for cash. This represents a strong signal that share prices have fallen to levels that offer very good value.

Whether this will be enough to halt the bear market in the near term is impossible to predict. However, it does offer some support to the view that the worst is over and that some recovery in equity values may be in prospect once the uncertainty of the Iraqi situation is resolved.