Download Quarterly Commentary

HAD Quarterly Commentary
March 2017
Market/Economic Update
The Canadian Bond Universe posted a decent 1.24% performance gain in the first quarter (Q1 – the first three months ending
March 31, 2017), with corporates outperforming provincials, which in turn outperformed federal bonds. Sector spreads generally
narrowed during the quarter as a ‘risk-on’ mentality took hold. The yield curve flattened marginally.
In general, global growth remains subdued but has surprised to the upside so far in 2017. U.S. economic growth remains modest
at best at 2.0%. Employment growth is good enough to bring the labour market closer to full employment. Capex and housing
showed strength in Q1. Business and consumer confidence have risen strongly since the U.S. election but has yet to translate into
economic acceleration. Consumer spending remains sluggish with slower personal income gains.
Portfolio performance and positioning
The Horizons Active Canadian Bond ETF (“HAD”) began the quarter with a long duration and moved between neutral and long.
The unexpected Trump victory caused a very sudden and dramatic move to higher yields on fears of fiscal stimulus with
accompanying inflation pressures and an accelerated Fed response. In Q1, the market traded in a narrow range as it was trying
to figure out if the higher yields were justified given the uncertainty of the Trump agenda. The 30-year Canada bond yield ended
Q1 unchanged.
The general interest rate call and short-term trading added positively to performance. An overweight in corporate bonds added
value especially financials and P3 securities but an underweight in lower quality ‘BBB’ rated such as telecom and REITs detracted
value. A close-to-neutral weighting in provincials had little effect on performance. On the yield curve, a small underweight in
mid-term bonds detracted value.
Outlook
Overall, we see signs of a slowly improving global economy with moderate growth in the U.S., around 2.5% in 2017. Shorter-term
rising business and consumer confidence should help the economy. Medium term, there are plenty of drags on the economy
including higher interest rates impacting the automotive and housing industries, rising protectionism and possible trade wars,
demographics, a strong dollar, a slowdown in China and political problems in Europe. Longer-term (2018 and beyond) the U.S.
economy should benefit from personal and corporate tax rates cuts, infrastructure spending and looser restrictions on energy
and banking. We expect the Canadian economy to keep pace with the U.S. at a 2.5% rate. Canada should benefit from firmer U.S.
growth and the government’s infrastructure spending program. A highly indebted consumer and a slowing housing sector will
weigh on the Canadian economy.
Inflation pressures are rising as skilled worker shortages intensify and average hourly earnings rise, but overall inflation should
remain in check with the strong U.S. dollar and secular forces such as automation and globalization still in play. 2017 inflation
likely peaked in Q1.
The Fed began to raise interest rates in December 2015 and resumed hiking rates again in December 2016. It raised rates in
March and two more hikes are anticipated in 2017. It is responding to an economy at near full employment and brewing inflation
pressures. The Fed does not act on potential expansive fiscal policy. The Bank of Canada will likely remain on hold until 2018.
The European Central Bank (ECB) is extending its QE program but at a reduced pace.
Although we believe the longer-term trend is to higher yields, we are bullish on bond prices over the medium-term. We continue
to believe the market is oversold and bond market participants are short duration and quite bearish. The ‘pain trade’ will be to
lower yields. We think the market has priced-in a strong economy, the successful implementation of the proposed Trump fiscal
stimulus, higher inflation and accelerated Fed hikes. The market should rally on signs of an economic slowdown, contained
inflation and any dovish comments from the Fed. We believe longer yields are generally range-bound in 2017 with 10-year U.S.
yields trading between 2.00% and 2.65%. Volatility should remain high in the market. Starting the second quarter, we are slightly
overweight in corporates and closer to neutral in provincials. We believe that sector spreads are unlikely to narrow much more.
We have no plans to increase our weightings of provincials or corporates unless there is a significant widening of spreads.
We have a position on the yield curve that is fairly neutral.
ALPHA
BENCHMARK
BETAPRO
Horizons ETFs is a member of Mirae Asset Global Investments. Commissions, trailing commissions, management fees and expenses all may be associated with an investment in exchange traded
products managed by AlphaPro Management Inc. (the “Horizons Exchange Traded Products”). The Horizons Exchange Traded Products are not guaranteed, their values change frequently and past
performance may not be repeated. The prospectus contains important detailed information about the Horizons Exchange Traded Products. Please read the prospectuses before investing.