Yesterday the Bank Of Canada released its semi-annual financial system review, which highlights the BOC's "ongoing work in monitoring vulnerabilities in the system with a view to identifying risks to its overall soundness".
1) The elevated level of household indebtedness: Canadian household leverage remains high. debt levels have increased.
2) Imbalances in the housing market: overvaluation remains a concern
3) Illiquidity and Investor Risk-taking in financial markets: a buildup of higher risk positions, especially if accompanied by leverage (borrowing to invest) could lead to systemic stress if there were a sharp drop in asset prices.
In other words, investors are increasing their exposure to risk in order to get higher returns. ( I have often discussed this in my blog).
"Asset price changes resulting from a sudden adjustment of investor positions could be exacerbated by a lack of market liquidity, leading to increased volatility and price distortion across several Canadian Financial Markets."
We have seen an increase in bond market volatility in the Euro area and this has impacted North American Markets.
Bond Markets lead all other markets and we have seen an increase in equity market volatility recently.
Investors need to take heed of the elevated risk factors: We have had 6 years of above average returns and markets will revert back to the average (at some point).
For this reason we continue to be cautious with our client portfolios at the moment. We believe that to prudent.
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist