Is it time to temper outsized risk appetites?

Coming off last year’s strong gains, your clients might be tempted to take on risk.

After all, Canadian investors’ return expectations are high—a Schroders study from November 2017 says they have average return expectations of 8.6% for the next five years—and many fixed income investors (58%) aren’t afraid of inflation, according to a January Invesco study that identified an appetite for both traditional and alternative fixed income assets.

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You might fall into the same camp: the majority of advisors (65%) who took part in the Horizons’ Q1 2018 Advisor Sentiment Survey were bullish on both the S&P/TSX 60 for Q1 (compared to 62% in Q4 2017) and S&P 500 (compared to 53% last quarter).

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One thing that has buoyed optimism about global growth is the IMF’s recent upgrade of its global forecast, says Tom Elliot, deVere Group’s international investment strategist. The IMF expects worldwide growth of 3.9% for 2018 and 2019, up two-tenths of a percentage point in both years. For Canada, the IMF forecasts 2.3% expansion this year, up from an estimate of 2.1% in October, and 2% for 2019.

Read: IMF hikes growth outlook for Canada, world

As a result, “We have seen an unusually strong start to the year for risk assets, as global investors appear confident that a period of non-inflationary, globally synchronized economic growth is underway,” says Elliot.

Both equities and non-core bond markets have seen strong inflows in recent weeks, he adds, and the “slow creep upwards in core government bond yields [has done] little to deter enthusiasm for risk.”

There’s reason to be cautious, however, so portfolios should be diversified, says Elliot.

He suggests “a multi-asset portfolio for the long term to offset financial volatility […],” and he’s keeping tabs on multiple developments. That includes whether the ECB and Bank of Japan end their quantitative easing programs earlier than expected, and how Trump’s tax cuts impact the global economy.

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When it comes to fixed income, Elliot identifies central bank policy errors as “a key risk to capital markets” that could cause “a sudden rise in core government bond yields, or cash rates […].”

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For 2018 ensure clients are aware of market risks and how their portfolios are positioned. Also, offer to discuss their return expectations, needs and risk tolerances to help keep them in check.

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