Harvest Commentary: Markets Calm in March


April 12, 2024
By Ambrose O’Callaghan

The month of March was largely uneventful and positive, which was worth celebrating from investors’ point of view. Major markets in the United States enjoyed solid gains in March with consistency across sectors. Although the technology sector experienced a slight deceleration in its previously robust momentum, it still concluded the month on a positive note, securing gains and demonstrating resilience.

The Harvest Tech Achievers Growth & Income ETF (HTA:TSX), which aims to deliver both income and the growth opportunities investors seek in technology, has climbed 43% year-over-year as at March 31, 2024. It offers a monthly distribution of $0.1200 to unitholders, which represents a current yield of 7.96% as at April 8, 2024.

Ultimately, the momentum that kicked off in late January continued to roll on through the month of March 2024.

How interest rates are impacting fixed income markets right now

Interest rates had weighed heavily on the minds of investors and portfolio managers alike coming into 2024. Indeed, the US Federal Reserve (the Fed) and its central bank peers in the developed world had signalled that a loosening of interest rate policy was forthcoming. Fed Chair Jerome Powell has “pencilled in” three 25 basis point cuts at the March FOMC meeting. That said, strong US economic data and persistent US inflation have put that prognostication into question.

Fixed income markets have grown more volatile in this environment. Fortunately, Harvest’s fixed income strategy was positioned by our team to take advantage of that volatility and turn it into additional cashflow (discussed further below). The Harvest Premium Yield Treasury ETF (HPYT:TSX) , one of three fixed income strategies, is a portfolio of ETFs that hold longer dated US Treasury bonds that are secured by the full faith and credit of the US government. It employs up to 100% covered call writing to generate a higher yield and maximize monthly cash flow. HPYT has delivered a monthly distribution of $0.1500 to unitholders since inception.

The state of equity markets in spring 2024

Geopolitical challenges continued to cast a shadow over 2024. Conflicts in the Middle East and Eastern Europe and trade tensions between the United States and China mean that exogenous risks persist. To hedge against volatility, some investors sought gold exposure. Indeed, the spot price of gold reached all-time highs in early April, rising to over US$2,300 per ounce.

The Harvest Global Gold Giants Index ETF (HGGG:TSX) is designed to give investors gold exposure through profitable large-scale gold miners. Units of HGGG climbed 9.9% so far in 2024 as of late afternoon trading on April 9, 2024. The ETF has jumped 14% month over month.

Despite some general uncertainty, positive sentiment among investors remained strong. That sentiment is fueled by the increasing likelihood that the US will negotiate a “soft landing” or even a “no landing” scenario as it navigates the end of its interest rate tightening cycle. Policymakers aim to see the US economy slow enough to bring inflation closer to the Fed’s 2% target without falling into a technical recession.

US markets continued to perform well in the face of these lingering macroeconomic questions. It is not unexpected that volatility could resurface, but there remains good reason for optimism as we wade through the spring of 2024. Investors may want to take advantage of any turbulence by snatching up undervalued assets.

Harvest ETFs march into Q2 with momentum

Harvest’s covered call option writing strategy has been executed in line with a market environment that has seen reduced turbulence. The portfolio management team used the opportunity and sought out positions to maximize cash flow and upside exposure. Meanwhile, the team was more systematic with Harvest Fixed Income ETFs. That manifested in the view that given the current environment hitting cash flow targets with its covered call strategy early in the period rather than later was the right move to make as they wait for the actual timing of anticipated cuts.

As always, diversification is crucial in this environment. Investors should pursue diversification to protect against geopolitical risk while also driving consistent returns in a broadly positive market. Market pullbacks have been short and shallow, which present an opportunity to accumulate value assets buying dips.

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