Ovation Finance

Market Volatility
You may have seen recent items in the news about the global economic outlook, particularly regarding the collapse of US investment bank Lehman Brothers, the sale of Merrill Lynch, AIG and HBOS.

This follows months of volatility in global markets including unprecedented steps taken by the US Federal Reserve in supporting two of the biggest backers of US mortgages with $5 billion of taxpayer's money. Shortly afterwards, the Fed moved to nationalise the world’s biggest insurer, AIG, in dramatic steps to prevent its collapse.

The purpose of this note is to provide a few thoughts as to how these events may affect you.

Market Activity
At time of writing, the FTSE 100 index (the index of the UK’s 100 leading shares) has dipped below 5,000. Whilst this may sound low compared to 6,700, the highest point in the last 12 months, we’re also currently just below the level of the market in July of this year.

If we take the recent low points of the FTSE 100 in isolation, we could infer that we may well have experienced the bottom of the market - ie: the lowest point of the downturn. Of course, it is dangerous to predict the bottom - or top - of any market. We would therefore prefer to simply think of now being a low point.

So is this a good time to invest? Well, very possibly, although it requires some fairly strong nerves. Is it a bad time to get out? Also highly likely, hanging on in there seems to be the best option.

One important point to remember is that markets overstate themselves at the high point and the low points as well.

It is tempting to think that the latest news with regards Lehman Brothers, AIG and (somewhat unfairly) HBOS is the final bad news, and now we can all get on with watching markets go up, but there is no certainty that this will be the case.

I repeat, it’s notoriously difficult to predict markets, and one of the many clichés surrounding investments is that ‘time in the markets is more important that timing the markets’. In other words, investment is a marathon not a sprint, and short term volatility is something you have to accept if you are looking for long term growth.

Furthermore, the current volatility in the equity markets is not global in the truest sense of the word. The volatility we’ve seen in the western markets - the US; UK and Europe - has not been fully replicated in other locations.

Emerging markets and eastern economies still offer opportunities for growth, albeit to a lesser degree than in recent years, and other asset classes such as commodities and gilts remain buoyant.

Asset Allocation
At Ovation we construct portfolios using a process known as ‘asset allocation’ - the term that investment professionals use to describe the mix of assets held in a portfolio. This means that, in line with your individual risk profile, we can construct an investment strategy that allows some cushioning against market volatility.

Asset allocation is the key driver in a portfolio when it comes to managing risk and volatility.

The theoretical result is that if you see equity indexes declining by 25% in a year, your portfolio would have been protected from some of this downside through the inclusion of non-correlated assets such as cash or fixed-interest securities.

Bringing this together
The conclusion of this note, therefore, is to offer a degree of re-assurance during these times of market volatility. Whilst most portfolios will have seen a decline in value over the past twelve months, the effects of asset allocation and portfolio construction have allowed, in the main, this blow to be cushioned. We fully expect equity markets to recover - history tells us this is always the case - and if we look at this downturn in five years time it may not appear as bad in retrospect as it feels presently.

If you’d like to read further about the current outlook I’ve included a link to independent commentary provided by F&C.

uk_in_investment_outlook.pdf

This note is intended as a general comment on the current economic climate and does not represent commentary or advice on your individual portfolio, but if you would like to discuss any aspect of your individual portfolio in more detail, then please do not hesitate to call us on 0117 942 4333.

Ovation Finance Ltd