Market Commentary

on 23 September 2015

Overview and a look back at the year so far

To say this year to date has been an interesting year for markets might be something of an understatement.  The combined factors of a sustained drop in oil and commodity prices following on from the dramatic 2014 falls, a continuing GREXIT brinkmanship and now the massive uncertainty that has surfaced regarding the true picture of the Chinese growth story, have all impacted on the global economy in a big way.

Analysts are now predicting only a modest increase in the oil price as we move towards 2016 due to a reduction in capacity.  It seems increasingly likely that the Bank of England will keep interest rates on hold following the devaluation of the Chinese Renmimbi.  However, the US may well raise rates ahead of the UK based on rising employment and slowly increasing consumer confidence, even so rates still look set to remain low, which should help provide a basis for economic growth.

Political instabilities across the world will no doubt continue to contribute to volatility over the coming months, with Greece and Russia particular areas of risk in this regard.  While a dramatic slowing demand for commodities from the Chinese growth engine is also having a growing and wider multi-faceted impact.

Has our strategy changed following market volatility?

The Ovation Finance Investment Strategy sets out our overall approach to investing, including our risk-adjusted portfolios that are constructed to offer a diverse multi-asset approach, with the majority of equity exposure being provided by passive index tracking funds in order to maximise cost effectiveness.

Income generation is at the heart of our investment philosophy as we believe that a solid income stream can underpin long term returns.  Actively-managed funds will therefore have a tendency towards income production or where a passive strategy is in our view, a less appropriate means to access a particular market.

While our portfolios not immune from market falls, the diverse nature of our investment policy helps mitigate the volatility caused by market events.  Our strategy therefore remains unchanged.


Ovation Quarterly Market Round -Up

UK Equities


The FTSE experienced high volatility in July and August due to fallout from firstly, the Greece crisis, then by China growth worries.  Domestic markets actually ended July higher but have since fallen back.  In a reversal of the first half of 2015 when blue chips outperformed medium and smaller companies.  UK domestic economic figures remained broadly positive although there were continued signs of some slowing from exporting manufacturers with new orders declining for the fourth consecutive month.  This has been driven by the continued strengthening of sterling.  The pound has risen 20% on a trade-weighted basis since March 2013, although it has recently softened following the August turmoil.  The strength of Sterling has also assisted the outperformance of domestically focused medium and smaller-companies versus multi-national blue chips.

As the UK is the largest equity holding in most of our portfolios, we seek a balance of returns by investing passive index-tracker funds and actively managed holdings which may include exposure to smaller companies or funds that can exploit special situations.


The US stock market produced excellent returns in 2014, reaching new highs throughout the year, and a strengthening dollar has boosted returns for UK investors.  The outlook for the US market remains positive for the remainder of 2015 with low oil prices and unemployment provided a solid consumer spending base.

It looks increasingly likely that the Federal Reserve will increase interest rates in the final quarter of 2105, although any rise is likely to be limited and should not hinder growth in 2016 and 2017.  As a core part of our portfolios, our exposure to an ultra-efficient US stock market is usually by way of a passive, index tracking fund.


European politics continues to dominate with the fears of Greece leaving the Euro playing on the entire economic area.  Quantitative easing, the effects a weak Euro and low oil price should help promote growth although there are still countries in dire need of reform some of which are now facing an additional challenge of dealing with a growing and complex refugee crisis that has arrived on their doorstep.

Consensus of opinion is that there may still be some growth within Europe for the remainder of 2015.  If so it should breathe some life into its long underperforming equity markets.  As a core part of our portfolios, and similar to other efficient markets, the majority a client’s exposure to European equities is usually by way of a passive, index tracking fund.


Japan continues to mystify investors.  As the world’s third largest economy it has struggled to grow for much of the last 30 years.  The government of Abe has introduced significant reforms and implement strong fiscal stimulae in order the try and shift the economy out of the doldrums.  These efforts had some success resulting in the Japanese market being one of the few to remain in positive territory over the last twelve months.  We believe that this political desire to make real change will continue to have a positive effect for Japanese equities.

Asia Pacific

Most major Asian and Emerging Markets endured a sharp sell-off in July and August on concerns over the Chinese stock market collapse.  At the forefront was the MSCI China A share index which fell nearly 20% in just 8 days in July.  Nevertheless Asia Pacific equities remain a key constituent of our portfolios as these developed economies offer great potential for growth.  Home to around 60% of the world’s population, Asia combines a growing domestic market with large exports to major global markets such as the US and Europe.  Utilising a combination of actively managed growth and income producing funds, we believe this asset class will continue to be an important component of our portfolios.

Emerging Markets

Emerging Markets equities, like Asia pacific equities offer exciting potential growth as their economies grow to meet the demands of an increasingly affluent domestic market and also to export across the globe.  Their very nature points to them as tending to be more volatile than other equity sectors but with good quality fund selection, risk can be reduced and returns generated over the longer term.

The devaluation of the Chinese currency makes an increase in UK interest rates less likely in 2015 in our view, and perhaps not until the end of the first quarter of 2016.  We therefore aim to keep exposure to cash within our portfolios to a minimal level yet sufficient to sustain platform fees and administration costs of maintaining a portfolio.

Fixed Interest

Our philosophy regarding fixed interest investing remains unchanged; flexibility is everything.

Bond yields have been driven continually lower and although traditionally considered as a more defensive element of a portfolio, they are not immune from the negative effect of potential interest rate increases.  Bond yields have been driven ever lower and there is potential for capital losses in certain areas of the asset class.

We believe potential rises in interest rates have already been factored in by bond fund managers, nevertheless, we strongly prefer managers with flexible strategic mandates which give them the ability to invest across the credit spectrum will produce the best long-term returns, and as a result we remain committed to high quality fixed interest funds with strategic mandates.

Commercial Property

Commercial property has provided investors with good returns in recent years.  We believe the rise in capital values will slow significantly with returns reverting to being largely derived from income. We are happy with our current preferred property fund recommendations which have low void rates, good average lease lengths and high quality tenants.  This should provide a stable source of income to portfolios as well as valuable diversification from equities and bonds.

For help with this and all financial services speak to Ovation

Call: 0117 942 4333


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Disclaimer: This document seeks to address general business and financial issues and we have taken due care in its preparation.  No responsibility for loss incurred by any person acting, or failing to act, as a result of any material in this publication can be accepted by Ovation Finance Limited.



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