Canadian Pension plan investments witnessed modest gains during the third quarter as both stock and bond markets responded to the magnitude and pace of interest rate hikes around the globe, according to the Northern Trust Canada Universe. The median Canadian Pension Plan returned 0.76% for the quarter and -14.75% year to date as of September 30, 2022.

The third quarter was marked by increased market volatility triggered predominantly by persistent inflation and the willingness of monetary policymakers to bring it under control. The U.S. Federal Reserve (Fed) continued its unwavering journey to stem inflation with aggressive hikes to its Federal Funds Target Rate. In turn, the U.S. dollar strengthened relative to other global currencies, reinforcing its status as the “safe haven” asset.

Major central banks across the globe followed a similar tightening direction, spurring fears the battle against inflation would prompt an economic recession. The UK government’s announcement of an unfunded fiscal package, subsequently countered by Bank of England intervention, put further pressure on global bond markets late in the quarter. Despite the restrictive monetary policy environment, North American equity markets held up reasonably well, led by the U.S., relative to global peers. The overall Canadian bond universe closed the quarter with a small gain.

“Measures taken by central banks to restore equilibrium across the global economy cascaded down to the investments of Canadian pension plans. Despite the ebb and flow of volatility, pension plan sponsors have demonstrated resilience and adapted well through ever-changing cycles, as witnessed this quarter by the positive return of the median pension plan against a backdrop of monetary tightening," 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 service offerings.

During the quarter, corporate valuations were challenged with headwinds of rising interest rates and the potential for a slower economic growth environment. Bond prices continued to adjust throughout the period as aggressive interest rate hikes intensified around the globe. In this environment, Canadian bonds delivered modest gains while equity markets declined, except for the U.S. market.

• Canadian equities, as measured by the S&P/TSX Composite Index, declined -1.4% for the quarter. Consumer Discretionary and Industrial sectors were the top performers while Communication Services, Health Care and Real Estate sectors posted the weakest results.

• U.S. equities, as measured by the S&P 500 Index, produced a gain of 1.3% in CAD for the quarter. The strengthening U.S. dollar was a strong contributor to the positive return for the period. Consumer Discretionary and Energy sectors witnessed the strongest performance, while the largest decliners for the period were Communication Services and the Real Estate sectors.

• International developed markets, as measured by the MSCI EAFE Index, returned -3.4% in CAD for the quarter. All sectors contracted during the period, except for the Energy sector, which earned a positive return over the quarter.

• The MSCI Emerging Markets Index declined -5.6% in CAD for the quarter. Energy and Utilities were the top performing sectors, while Communication Services, Real Estate and Consumer Discretionary sectors witnessed the sharpest declines.

The Canadian economy continued to witness the impact of supply constraints, the invasion of Ukraine and strong domestic demand as evidenced by the September inflation reading of 6.9% year over year. The unemployment rate nudged up to 5.2% in September from the record low of 4.9% observed in the month of July. During the quarter, the Canadian dollar gave up ground relative to the U.S. dollar, given expectations for interest rates and the decline in commodity prices.

The U.S. economy continued to witness job growth as 263,000 non-farm payroll jobs were added in the month of September, bringing the unemployment rate to 3.5%. Inflation declined from a peak of 9.1% in June but remained elevated, with the August CPI reading of 8.3% year over year. The Fed, in its effort to curb inflation, hiked its benchmark overnight rate by 150 basis points in total over the quarter, bringing the target range to 3.0% to 3.25%.

International markets continued to struggle with higher food and energy prices in addition to the ongoing European energy crisis. Inflation readings remained elevated in Europe, resulting in the Bank of England (BoE) and the European Central Bank (ECB) raising their overnight interest rates by a total of 100 and 125 basis points respectively. In addition, the UK elected a new Prime Minister, who late in the quarter announced a significant unfunded fiscal package. The Bank of Japan (BoJ) maintained its accommodative monetary policy during the quarter.

Emerging markets lagged developed markets during the quarter, as global central banks continued their tightening path. India increased its policy repo rate by 1%, to 5.9%, while Brazil witnessed one rate hike over the quarter bringing their target rate to 13.75%. Despite ongoing restrictive global monetary policy, the People’s Bank of China (PBoC) kept its lending rates relatively steady during the period.

The Bank of Canada (BoC) increased the overnight interest rate in total of 1.75% during the quarter, bringing its policy interest rate to 3.25%. The policy rate is expected to rise further in order to achieve the BoC’s inflation target of 2%.

The Canadian Fixed Income market, as measured by the FTSE Canada Universe Bond Index, advanced 0.5% for the quarter. Provincial bonds outperformed Corporate and Federal bonds, while long-term bonds outpaced both short-term and medium-term bonds.

About Northern Trust

Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of wealth management, asset servicing, asset management and banking to corporations, institutions, affluent families and individuals. Founded in Chicago in 1889, Northern Trust has a global presence with offices in 25 U.S. states and Washington, D.C., and across 23 locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of September 30, 2022, Northern Trust had assets under custody/administration of US$12.8 trillion, and assets under management of US$1.2 trillion. For more than 130 years, Northern Trust has earned distinction as an industry leader for exceptional service, financial expertise, integrity and innovation. Visit us on northerntrust.com. Follow us on Twitter @NorthernTrust or Northern Trust Corporation on LinkedIn.

Northern Trust Corporation, Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A., incorporated with limited liability in the U.S. Global legal and regulatory information can be found at https://www.northerntrust.com/terms-and-conditions.

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