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Market outlook 2018: What to expect

After a bull run in 2017, volatility could be on the horizon. What should advisors keep in mind as they guide clients through 2018?

By: MARJO JOHNE

Date: January 12, 2018

After the heady markets of 2017, many financial advisors are facing the new year with a mixture of optimism and concern.

There's good reason for both. Market analysts largely foresee strong results in the coming months, but there are also fears that there will be an inevitable pullback after an unusually long bull run.

"Eventually the markets will correct — it's just a matter of when," says Bill Green, a fee-only financial planner based in Muskoka, Ont. "For now, however, it's a good time for people to review and rebalance their portfolio."

What should financial advisors keep in mind as they guide clients through 2018? Chhad Aul, vice-president and portfolio manager at Sun Life Global Investments, says advisors should expect to see more volatility this year, but there's no need to tell clients to brace for a bear market.

"We've had a great run in risk assets of every kind, including stock markets, so a lot of investors are wondering if we can go much higher," says Mr. Aul. "Our expectations are that we're not at the end of the current bull market, although we anticipate some pullbacks given some of the anxiety over how strong markets have been."

Here are some of the key areas that could impact Canadian investors in the year ahead:

There's room to grow in Canada — but the risks are plentiful

Compared to the rest of the world, Canadian markets lagged in 2017, says Mr. Aul. This year, as the country continues to face ongoing challenges such as soaring consumer debt, overvalued real estate and the potential breakdown of NAFTA, advisors will be wise to push for a more selective and active approach to portfolio management, he says.

Advisors may also want to point their clients towards Canadian bonds in 2018, he suggests. While bonds around the world will face greater volatility this year from central bank tightening and the potential for higher inflation, Canadian bonds may perform relatively well given the long list of risks to our economy.

"And certainly from the perspective of diversification, bonds still serve an important place in investors' portfolios," says Mr. Aul.

Bright outlook south of the border

U.S. capital markets will likely continue to shine bright in 2018, thanks in part to developments such as the passage last December of the Republican party's tax reform bill, which will cut corporate tax in the U.S. from 35 per cent to 21 per cent.

"The tax reform bill is a positive development for U.S. equities," says Mr. Aul. "We already have a reasonable view on U.S. economic growth into 2018 — which should drive earnings growth as well — and the tax reform is the icing on the cake [for] the U.S. economy."

While a renegotiated or dismantled NAFTA wouldn't likely have a notable impact on the U.S. economy in the short term — as it would for Canada — over time it could have a negative effect, says Mr. Aul.

"Freer trade benefits all parties, and certain industries in the U.S. — such as auto manufacturing — could be impacted negatively," he says. "These industries have built supply chains and processes around their ability to move goods across the border multiple times."

Still, even taking tax reform into account, Mr. Aul says he expects the U.S. economy to grow only slightly more than the 2.3 per cent rate achieved in 2017.

"It's modest, but it's the sort of growth we've become accustomed to in this post- financial crisis world," he says. "While markets are getting excited about tax reform, it will not add more than a quarter percentage point to the U.S. economy."

Cautious optimism for emerging markets

Emerging markets were among the biggest stories in 2017 for investors, says Mr. Aul. There was India's "exceptional run" and China's economic rebalancing — an engineered slowdown to regain better control of the economy.

The upside of these pullbacks will be greater buying opportunities for investors seeking more exposure to the long-term growth potential of emerging markets, says Mr. Aul — something advisors may want to point out to clients as they review portfolios.

Europe's looking good in 2018

Equity markets in Europe have continued gaining strength over the last seven years, driven primarily by earnings growth in companies, says Mr. Aul. He expects more growth in 2018.

"There's still room for the earning power of these companies to continue to grow and catch up to the peak level seen prior to the last recession," he says. "The crisis in Spain looks to be a well-contained regional issue, and the banking system in Italy — while still the weakest in Europe — has improved over the last year. These risks are not as acute for Europe this year."

Time to get back to the core

Mr. Green says the start of the year is a good time to urge clients to get back to their core portfolio.

"If there's anything too aggressive, consider taking some profits off the table," he suggests. "Are there greater gains potentially from these investments? Yes, but I always tell my clients to not just think about what they could gain, but also what they're not willing to lose."

After an exceptionally long and strong run in capital markets, some investors may think it's time to get out of the market. Mr. Aul's advice for advisors: Be tactical and nimble in your approach to long-term planning with clients, but urge your clients to continue with the plan they built with you.

"As you get later into the economic cycle, it becomes more difficult for investors to stick with their investment plan," notes Mr. Aul. "But it's important that they stick with the plan they made with their advisor."

With potential market corrections on the horizon, it's even more imperative that advisors ensure their clients understand the risks in their portfolio, says Mr. Green.

"That's part of the advisor's job — to make clients aware of the downside," he says. "[Advisors] are the guiding light for their clients, so they have to ensure they or their clients are not being too aggressive or risky."

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