The Bank of England believes the banks took an overly pessimistic view of the impact of the credit crunch, suggesting bargain hunters may now start to snap up their shares or bonds.

However, the economy is forecast to continue weakening for some time to come, making stock picking more vital than ever.

So is it all over?

While consumer confidence looks likely to remain low this year, much of the impact of the sub-prime lending crisis is now thought to be priced in to the stock market.

Brave investors could therefore stand to make big profits by buying now - as long as they avoid sectors that are reliant on consumer spending.

Justin Urquhart Stewart of Seven Investment Management said: “What [Bank governor] Mervyn King is basically saying is that most of the bad news related to the credit crunch is now in the public domain. That is true, but the banks have to start lending again before the economy can start to recover.

“For that reason, I would advise people to invest in funds rather than individual stocks at and I would certainly urge even the bravest investors to stay away from the retail sector.”

When it comes to funds, Mark Dampier of adviser Hargreaves Lansdown is tipping defensive schemes such as Neil Woodford's Invesco Perpetual funds and John Wood's JO Hambro Capital Management UK Opportunities.

Dampier said: “I think it is still worth being a bit defensive, even though there are some good opportunities around.”

Should I be buying banks then?

The yields on both bonds issued by banks and their shares are at record levels, in some cases in double digits. Yields show income as a proportion of price and are often used as a buy signal - and managers are talking about current levels as a once-in-a-generation opportunity.

If you want access to bank bonds, you could look at the New Star Sterling bond fund or Invesco Perpetual's bond scheme.

For equities, you could consider Jupiter Financial Opportunities or New Star Global Financials.

Should I sell my resources fund?

If you are happy to invest for the long term, no. While there may be a short-term setback, most analysts believe that oil is likely to stay higher for longer because of booming demand from Asia, and the same is true of industrial metals and agricultural commodities.

Can I make money out of falling oil prices?

If you want to take a bet on oil prices dropping in the short term, the best way is to short an oil exchange-traded fund, such as the ETF Securities crude oil ETF, which tracks the DJ-AIG Crude Oil sub index.

What about other commodities?

The commodities boom is forecast to slow this year and, if investors turn their backs on the sector, this will also have an impact on prices.

Simon Wardell at Global Insight said: “The money that has been flooding into commodities in recent months could come out again very quickly if the market turns.”

For investors wanting to take a punt on commodities prices falling, the best option - as with oil itself - is to short a general commodities ETF or one that focuses on a specific commodity.

ETF Securities will allow you to short a number of the major commodities (such as wheat through its SWEA ETF), a better alternative if you are more positive on certain commodities.

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