Data from Northern Trust’s Pension Universe: Canadian Pension Yields Pull Back Amid Market Uncertainty in Q1 2022

TORONTO–(BUSINESS WIRE)–Canadian pension plans saw declining investment returns in the first quarter of 2022 as markets entered a period of heightened uncertainty, according to Northern Trust Canada Universe. The median Canadian pension plan posted a return of -6.4% for the quarter.

The first quarter of 2022 has seen a resurgence of volatility in financial markets, triggered mainly by the Russian invasion of Ukraine. A strong inflationary trend was much of the focus heading into 2022, and the escalation of the conflict has triggered soaring energy and commodity prices and supply constraints that have further fueled inflationary concerns. Lockdowns initiated in China to tackle coronavirus cases have also contributed to fears surrounding supply chains. While a number of central banks responded with monetary tightening during the quarter, the Canadian stock market held up well, with the S&P/TSX Composite Index generating a positive return in contrast to the negative results posted by comparable global indices for the trimester. The Canadian bond market felt the wave of higher yields and a recent inversion of the US yield curve as bonds posted negative returns for the period.

“The economic headwinds experienced over the past two years of the coronavirus pandemic have eased despite a recent surge in cases. However, markets faced new challenges this quarter with geopolitical friction and supply chain challenges on the rise,” said Katie Pries, President and CEO of Northern Trust Canada. “These growing tensions have created a new level of uncertainty in global markets, which has impacted Canadian pension plan returns, as evidenced by the sharp decline in the median return for the period. At the same time, rising interest rates have given some relief to pension plan funded ratios. I am confident that Canadian pension plans with sound governance and risk management practices can weather this market turmoil and emerge stronger from this cycle.

The Northern Trust Canada universe tracks the performance of Canadian institutional defined benefit plans that subscribe to performance measurement services as part of Northern Trust’s asset servicing offerings.

During the first quarter, major central banks continued to monitor ever-higher inflation figures and, more recently, numerous interest rate hikes were implemented to combat this persistent trend. Financial markets absorbed the change in monetary tone, but the geopolitical environment weighed heavily on global equity markets. Rising oil prices coupled with disruptive supply issues triggered a wave of volatility, driving major equity indices lower during the quarter. Canadian equities were the exception, generating positive returns supported by higher crude oil and commodity prices. Canadian bonds fell over the period as yields continued to trend higher coupled with anticipation of further interest rate hikes.

  • Canadian equities, as measured by the S&P/TSX Composite Index, rose 3.8% for the quarter. The positive performance was driven primarily by materials, with the energy and materials sectors posting strong double-digit returns for the quarter. The information technology and healthcare sectors were the main detractors during the period.

  • US equities, as measured by the S&P 500 Index, returned -5.7% in CAD for the quarter. The energy sector was the best performing sector, followed by the utilities sector. All of the remaining sectors generated negative returns, with communications services posting the largest decline over the period.

  • International developed markets, as measured by the MSCI EAFE Index, returned -6.8% in Canadian dollars for the quarter. The Energy and Materials sectors posted positive returns, while all other sectors posted negative returns for the period, with the Information Technology sector posting the largest loss for the period.

  • The MSCI Emerging Markets Index returned -8.0% in Canadian dollar terms for the quarter, with the financials and materials sectors posting positive returns. All of the remaining sectors fell over the period, with the energy sector being the worst performer in the index.

The Canadian economy continued to witness healthy job creation during the first quarter, with the unemployment rate dropping to 5.3%, the lowest rate on record since 1976. Rising prices for gasoline and groceries pushed Canadian inflation to 5.7% year over year. in February, marking the highest level since August 1991. The Canadian index, with its large weighting in energy and materials, performed well during the quarter as supply shortages and rising inflation gained ground throughout the period.

The US economy saw strong job creation throughout the quarter, with the unemployment rate down to 3.6% for the period. The United States also posted the highest inflation since 1982, at 8.5% year-on-year in March. Strong job creation, low unemployment and rising inflation prompted the US Federal Reserve (the Fed) to raise interest rates by 25 basis points, bringing the federal funds target range to 0.25 – 0.50%.

International markets also saw rising inflation during the first quarter, as witnessed by the Eurozone which hit a record high of 7.5% year-on-year in March. To combat rising inflation, the Bank of England (BOE) raised interest rates to 0.75%, while easing its stance on future rate hikes as households face headwinds. higher prices. The Bank of Japan (BOJ) maintained its monetary easing stance and maintained its short-term rate target at -0.1%.

Emerging markets saw weakness throughout the quarter as concerns mounted over a coronavirus outbreak in China followed by lockdowns, slowing economic growth, rising commodity prices, trade risks and disputes surrounding accounting disclosures for American Depository Receipts. The imposition of economic sanctions led the Central Bank of Russia to adopt extraordinary measures, raising the key rate to 20%, imposing capital controls to stem outflows. To add to the concern, Sri Lanka has descended into an economic crisis, while Turkish inflation has reached a 20-year high of 61%.

The Bank of Canada (BoC) raised the overnight interest rate for the first time in three years from 0.25% to 0.50% and indicated that it would continue the reinvestment phase of its bond purchase program. The BoC noted that it expects price increases to be higher in the near term than its previous forecast in January, as Russia’s unprovoked invasion of Ukraine presents a major new source of shock. uncertainty. Higher interest rates, combined with expectations of future rate hikes, negatively impacted the performance of the Canadian bond market during the quarter.

The Canadian fixed income market, as measured by the FTSE Canada Universe Bond Index, fell 7.0% during the quarter. Provincial bonds posted the largest decline, followed by corporate and federal bonds. During the quarter, long-term bonds detracted the most from performance, followed by mid-term and short-term bonds.

About Northern Trust

Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of wealth management, asset servicing, asset management and banking services to businesses, institutions, affluent families and individuals. Founded in Chicago in 1889, Northern Trust has a global presence with offices in 22 US states and Washington, DC, and 23 locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of December 31, 2021, Northern Trust had assets under custody/administration of US$16.2 trillion and assets under management of US$1.6 trillion. For over 130 years, Northern Trust has distinguished itself as an industry leader for its exceptional service, financial expertise, integrity and innovation. Please visit our website or follow us on Twitter.

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