Christian Charest: For Morningstar I'm Christian Charest. Interest rates are increasing, inflation is inching up, yet the global economy keeps chugging along. What does this mean for the global bond market? Fiera Capital recently released its latest economic outlook and investment strategy paper and I'm here with Candice Bangsund, Vice President and Portfolio Manager at Fiera.
Candice, thank you very much for being with us today.
Candice Bangsund: Thanks for having me.
Charest: So, we're still seeing, to use your term, "synchronized global expansion." Can you give us an idea of what kind of economic growth we've seen since the beginning of the year in different regions?
Bangsund: So we continue to call for a synchronous global expansion here in 2018. There has been a lot of concern and even question about global growth rolling over. A lot of those leading indicators have sort of crested and turned lower here. But the good news is that the economy is still in relatively healthy shape, and leading indicators are really pointing toward stronger growth going forward. And, encouragingly, very broad-based growth.
So you've got the U.S. really firing on all cylinders: the consumer, the business sector, exports, and now we've got this double dose of fiscal stimulus, lending support as well. And this, in addition to boosting U.S. growth, will also have positive spillover effects for the global economy in general. Canada, obviously, where a big export destination is the U.S. So, our expectation is that stronger growth in the U.S. should also bolster the Canadian economy, which is also thriving on a strong domestic demand backdrop as well here in Canada. Looking abroad, Europe and Japan are also still growing at above-trend levels, helping to soak up some excess capacity there. And then in China it's really a story of stability. We've all but defied expectations for a hard landing in China, and the data is actually quite positive in general. So all in all, a synchronous and broad-based global expansion.
Charest: Now this scenario is the one your team believes is the most probable, but there are other alternative scenarios that you've come up with as well for things that are less probable but still possible. What are some of the events that could happen that could change your forecast?
Bangsund: So we have to look at the entire picture and the risks to that base case. And right now the predominant risk out there is largely political or geopolitical in nature. So trade protectionism is front and centre right now. Obviously after spending 2017 really focusing on pro-growth policies, the Trump administration has now really stepped up that protectionist agenda. And obviously this could have negative implications for the Canadian market, but also for emerging market economies as well such as China. And this is essentially the scenario that the market was pricing in March and creating some volatility. So that's obviously something we are keeping a very close eye on.
The second one is political instability really stemming from Europe. Here you've got a trend toward populism. It didn't really come to fruition in 2017, but here in 2018 we saw the Italian elections where the populist or anti-euro, euro-skeptic parties did gain some ground and now they are struggling to form a government. All the while Brexit negotiations remain in process. So still some uncertainty there, albeit less of a risk we are not overly worried about that second scenario.
And the third one is actually an upside scenario, and it's interestingly what the markets were pricing in February of this year. And that's one of stronger growth, stronger inflation and a faster pace of central bank tightening, which would inevitably result in a policy error and create a lot of volatility, and like I say that's what the markets were pricing in February. But we've since come off of that. Inflation has sort of cooled down a little bit more. Markets have adjusted to what central banks would like to do, so that's less of a risk as well. So right now we're really focusing on that protectionist angle, but our base case is that cooler heads will prevail. A global trade war is in no one's best interest, including the U.S., and that global growth story will really outweigh any risks associated with that protectionism.
Charest: Now the macroeconomic work that you do guides the investment decisions for the funds that Fiera manages. One of those funds is the Horizons Active Global Fixed Income ETF. What kind of adjustments have you made to that portfolio since the beginning of 2018.
Bangsund: So I'll maybe take a little bit of a step back into late 2017, where we reduced risks somewhat, because there again 2017 was a great year for risk assets, be it equities, corporate bonds, high-yield bonds. We saw spreads on corporate fixed income coming into pre-crisis levels. So obviously the easy money was made there. So we did take some profits at the end of the year. The global bond fund -- the ticker is HAF -- it's actually an ETF of ETFs, built with these other ETFs that we are sub-advising at Fiera. So right now we're holding on to a sizable cash-like position in HFR, which is essentially a short-term corporate bond strategy with the interest-rate risk hedged because we want to be short duration in a rising interest rate environment.
Charest: And what are your expectations in general terms for the bond market going forward.
Bangsund: So in this environment -- synchronous global growth and a revival in inflation -- we expect interest rates to move higher across the curve. In this environment we need to obviously focus on shorter-duration plays, so HFR is a good example of that and so we are holding on to that allocation right now in HAF. But also we want to look further up the risk spectrum, away from government bonds toward the corporate and high-yield sector. While right now we are sitting on the sidelines, we've reduced those exposures slightly toward more neutral positions. Our bias would be to re-establish overweights in the riskier sectors of the fixed income market because they will be supported by the stronger global growth backdrop here this year, but we are just looking for more attractive levels for an entry point.
Charest: Candice, thank you very much for sharing all your insights with us today.
Bangsund: Thank you.
Charest: From Morningstar I'm Christian Charest. Thank you for watching.
