Northern Trust Pension Universe Data: Canada Pension Plan Yields Fall Sharply as Stock Markets Fall in Second Quarter

TORONTO–(BUSINESS WIRE)–Canadian pension plan investments contracted in the second quarter of 2022 as equity and bond markets saw significant declines for the period, according to Northern Trust Canada Universe. The median Canadian pension plan is down -8.8% for the quarter and -14.5% since the start of the year.

The second quarter of 2022 turned out to be a tumultuous time for financial markets. As supply chains found pockets of recovery, a lingering backdrop of tight labor markets, higher wages and soaring food and energy prices continued to fuel inflation, driving it to decadal summits all over the world. Many major central banks, led by the Federal Reserve, adopted a more hawkish tone, initiating aggressive increases in key interest rates at an accelerated pace in an effort to rein in inflation. As markets digest the impact of a much tighter monetary policy environment, uncertainty associated with volatility and negative investor sentiment prevailed, with major stock markets dipping into negative territory for the quarter.

“The last quarter was a reminder of how quickly markets can change course. We saw extreme market declines in the early days of the pandemic and now we are experiencing it again in the face of changing monetary policy. Although rising interest rates create uncertainty in the market, driving down pension assets, higher rates improve pension funding ratios and the overall financial health of pension plans, serving as a cushion during this volatile times,” said Katie Pries, President and CEO of Northern Trust Canada. .

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.

Persistent inflation and attempts by policymakers to stabilize prices have been a constant theme over the past few months. The scale and pace of central bank action to contain inflation this quarter has eroded investor confidence and raised fears of an impending recession. Aggressive interest rate hikes have driven yields significantly higher across the yield curve in recent times, pushing bond yields into negative territory. As financial markets adjusted to higher interest rates, equity markets around the world also saw steep declines in the quarter.

  • Canadian equities, as measured by the S&P/TSX Composite Index, fell -13.2% for the quarter. All sectors were in negative territory, with Health Care, Information Technology and Materials posting the weakest returns.

  • US equities, as measured by the S&P 500 Index, fell -13.4% in CAD for the quarter. All sectors posted negative returns, with the Consumer Discretionary sector posting the largest decline, while the Consumer Staples, Energy and Utilities sectors lost the least over the period.

  • International developed markets, as measured by the MSCI EAFE Index, returned -11.5% in Canadian dollars for the quarter. All sectors posted negative returns for the period, with the information technology sector being the biggest detractor for the period. The energy sector performed reasonably well, registering only a slight decline for the quarter.

  • The MSCI Emerging Markets Index returned -8.4% in CAD for the quarter. The Consumer Discretionary sector posted a strong positive return, while all other sectors posted negative results, with the Information Technology sector posting the largest decline for the period.

The Canadian economy saw a record unemployment rate of 4.9% in June, down from 5.3% at the end of March. The Canadian inflation rate continued to climb, reaching 7.7% in May (year-over-year), up from 6.8% posted in April. The high inflation environment in Canada continued to be driven by rising gasoline prices and service costs throughout the quarter.

The US economy saw healthy job growth in the quarter, with just over 1.1 million jobs added during the period and the unemployment rate hitting 3.6% in June. Soaring inflation prompted the Federal Reserve (the Fed) to raise the benchmark interest rate in May by 0.50% and in June by 0.75%, its largest increase in three decades. This tightening action by the Fed brought the fed funds target range to 1.50-1.75%.

International markets were tested during the quarter with high levels of inflation. Reduced gas supplies from Russia have raised concerns about shortages and had a significant impact on prices. To curb rising prices, the Bank of England (BoE) raised interest rates to 1.25% at the end of the quarter. The European Central Bank (ECB) surprised markets by announcing that it may raise rates by 0.50% in September on top of its planned rise of 0.25% in July. Conversely, the Bank of Japan (BOJ) maintained its stance of keeping rates at their current or low levels, while keeping a watchful eye on the impact exchange rate movements could have on their economy.

Emerging markets fell during the quarter, but to a lesser extent than their developed counterparts. The easing of restrictions on giant tech companies coupled with the easing of Covid restrictions reassured investors as Chinese stocks rose in the quarter. The Chinese central bank refrained from lowering its key rate, while the Russian central bank lowered its key rate to 9.5%, a level seen before the invasion of Ukraine.

The Bank of Canada (BoC) raised the overnight interest rate twice during the quarter, raising it by a total of 1% to bring its key rate to 1.5%. Canada’s central bank has signaled that it stands ready to act more forcefully if necessary to bring inflation back to its target level of 2%.

The Canadian fixed income market, as measured by the FTSE Canada Universe Bond Index, returned -5.7% for the quarter. Provincial bonds fell the most, followed by corporate and federal bonds. During the quarter, long-term bonds posted the largest decline, followed by the medium and short-term segments of the fixed income market.

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 June 30, 2022, Northern Trust had assets under custody/administration of US$13.7 trillion and assets under management of US$1.3 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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