Clark Wealth Management Group - ScotiaMcLeod Fredericton

In July I suggested people review their investment asset allocation to prepare for some expected volatility. The sailing analogy I used was to adjust your sails because you can’t control the wind. We have certainly had some rough weather (market volatility) since then. It is expected to continue.

The storms that were brewing in July have become more of a concern than we imagined at that time. While the US Debt ceiling was eventually raised, there is much more difficult work left to do south of our border. The Euro zone sovereign debt and bank solvency issues are rapidly coming to a head. It has the potential to result in a rather significant shock to the Global financial system. It’s reasonable to assume that the system shock will have an impact on Canadian investors given the inter-connectedness of markets.

The seemingly inevitable default of Greece will likely have implications for the structure European Union itself. At the very least it will shake the fragile confidence level of businesses, investors and governments and at worst could result in some sort of temporary panic.   

The financial implications of a small economy like Greece defaulting isn’t a big problem in the whole scheme of things. The real problem is that if Greece’s financial problems are not wholly assumed by the European Union, it will be a signal that the economic union itself is less than stable. That will leave everyone wondering about what will happen to the other weaker Countries. As we all know, markets hate uncertainty.

If the EU does pull together and support it’s member Countries debt wholly, then all they’ll be dealing with is a group of heavily indebted nations and a run-of-the-mill recession, aggravated by government austerity measures. That’s much more manageable.

For investors this has the potential to result in some uncomfortable changes in the value of their equity holdings – whether they are equity mutual funds, exchange traded funds, or shares owned directly. As economies slow and uncertainty increases, commodity (except perhaps gold) prices will likely be negatively impacted as well. This could make it particularly challenging for Canadian investors – many of whom have come to believe that Canada is a low risk equity market. Don’t forget, approximately eighty percent of the Canadian S&P/TSX Index is in three sectors; energy, materials, and financial services. If commodity prices fall a great deal (energy and materials sectors) and financial service companies are impacted as described above, the Canadian market will be impacted.

If you have not already revisited your investment mix in the face of these ever-changing facts, please do so now. While we don’t believe we’ll see the type of market shock and decline experienced in 2008 and 2009, there is potential for some nasty goings-on. Adjusting your asset allocation to shelter additional assets from equity markets now may prove to be wise.

Talk with your advisor today about what, if anything, you should do to brace your portfolio for what may happen as this long and difficult process of global deleveraging continues.

Keir Clark, is a senior wealth advisor, with Clark Wealth Management Group and branch manager at ScotiaMcLeod in Fredericton, NB. He can be reached online at www.keirclark.ca or by telephone at 506-450-6465.

Information and opinions contained herein have been compiled from sources believed reliable but no representation or warranty, expressed or implied, is made as to the accuracy or completeness.