Northern Trust Pension Universe Data: Canadian Pension Plans Generated Muted Returns During Third Quarter 2021

Canadian Pension Plan returns were marginally positive during the third quarter as global equity markets softened following a decline in September, according to the Northern Trust Canada Universe.

A wave of disruptive forces cast a shadow over equity and bond markets in the month of September, including issues in China, the threat of rising inflation, slowing economic growth, the unwinding of central bank support and the looming U.S. government debt ceiling. As a result of these underlying dynamics, volatility resurfaced and global equity markets closed the quarter with mixed results.

The median Canadian Pension Plan returned 0.6% for the quarter ending September 30, with a year-to-date return of 4.8%. “The third quarter served as a reminder of how quickly volatility can ripple across financial markets and the resulting impact to pension plan returns. Plan sponsors have navigated the ebb and flow of the pandemic in the midst of market volatility and continue to build resilience, and further strengthen pension plans for long-term sustainability,” 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.

The third quarter of 2021 marked a period of heightened volatility which added to uncertainty across broader equity and fixed income markets. China’s increased regulatory scrutiny combined with financial distress of one of its large property developers startled financial markets. In addition, investors remained focused on rising inflation, signals related to the tapering of quantitative easing and the U.S. government’s ability to avert a potential government shutdown. Despite these mounting headwinds of uncertainty, the global economic backdrop remained sound as corporate earnings produced healthy results across developed markets throughout the quarter complemented by an accommodative monetary policy environment.

• Canadian Equities, as measured by the S&P/TSX Composite Index, closed the quarter with a modest gain of 0.2%, despite the index reaching record highs during the quarter. Health Care, Consumer Discretionary, Information Technology and Materials sectors were the largest detractors while all remaining sectors generated positive returns.
• U.S. Equities, as measured by the S&P 500 Index, advanced 2.9% in CAD for the quarter. The majority of sectors generated positive returns, with the exception of Industrials and Materials which concluded the quarter in negative territory.
• International developed markets, as measured by the MSCI EAFE Index, generated 1.9% in CAD for the quarter, led by the Energy and the Information Technology sectors producing attractive returns. Financials, Health Care, and Industrial sectors were also positive performing segments, while all remaining sectors were detractors for the quarter.
• The Emerging Markets, as measured by the MSCI Emerging Markets Index, declined -5.9% in CAD for the quarter, impacted by the overall performance of China. Energy, Financials, and Utilities sectors generated positive returns with all other sectors contracting for the period.

The Canadian economy witnessed attractive job growth throughout the quarter, with 157,000 jobs created during September. The unemployment rate trended lower to 6.9% in September from 7.8% in June. The Canadian stock market witnessed new record highs as corporations produced healthy earnings, energy prices advanced and the economic recovery continued to gain traction. The government also extended various pandemic relief measures into October which brought further economic support. Prime Minister Trudeau retained his leadership, winning the Canadian federal election with another minority Liberal government.

The U.S. economy created jobs albeit at a declining pace throughout the quarter. Despite U.S. market momentum in July and August, slowing economic growth, higher inflation, possible tapering of quantitative easing, potential for a government shutdown and issues in China became the focal point for the markets in September. The Federal Reserve maintained its accommodative stance, keeping the policy rate at 0.00% - 0.25%, as well as maintaining its monthly asset purchasing program. The Federal Reserve Chairman signaled tapering could be imminent if economic progress continues broadly as expected.

International markets generated positive returns for the quarter as monetary policy remained in accommodative mode. The European Central Bank (ECB) and the Bank of England (BoE) maintained their respective policy benchmark rates during the quarter. The ECB announced a new inflation target of a symmetric level of 2% and lowered its purchases for its Pandemic Emergency Purchase Programme (PEPP) to meet its new inflation objective.

Emerging markets contracted during the third quarter, largely impacted by the performance of China. A number of issues surfaced in China which included debt woes of a large property developer, increased regulatory issues, slowing economic growth and a recent power crunch. The People’s Bank of China (PBOC) maintained its policy rate but lowered its reserve requirement ratio during the quarter. The Bank of Korea raised its benchmark interest rate during the third quarter, representing the first Asian central bank to tighten monetary conditions.

The Bank of Canada (BoC) maintained its overnight policy rate at 0.25% during the quarter, but reduced its quantitative easing program to $2 Billion CAD per week. CPI numbers trended higher resulting from base-year effects, higher gasoline prices and supply chain bottlenecks.

The Canadian Fixed Income market, as measured by the FTSE Universe Bond index, contracted -0.5 percent for the quarter. The Provincial sector witnessed the weakest performance followed by the Federal and Corporate sectors. Short and Mid-term bonds outperformed the Long term segment which generated negative results for the period.

About Northern Trust

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