Canadian Pension Plans experienced a pullback in investment returns during the first quarter of 2022 as markets entered a heightened period of uncertainty, according to the Northern Trust Canada Universe. The median Canadian pension plan returned -6.4% for the quarter.
The first quarter of 2022 witnessed a resurgence of volatility across financial markets triggered primarily by the Russian invasion of Ukraine. A high inflation trend was largely the focus entering 2022, and the escalating conflict ignited soaring energy and commodity prices and supply constraints that further fueled inflationary concerns. Lockdowns initiated in China to combat coronavirus cases also contributed to fears surrounding supply chains. As a number of central banks responded with a monetary tightening tone during the quarter, the Canadian equity market held up well with the S&P/TSX composite generating a positive return in contrast to negative results posted by global peer indices for the quarter. The Canadian bond market felt the wave of rising yields and a recent inversion of the U.S. yield curve, as bonds posted negative returns for the period.
“The economic headwinds experienced during the last two years of the coronavirus pandemic have abated despite a recent uptick 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 mounting tensions cast a new level of uncertainty across global markets, which rippled across Canadian pension plan returns as witnessed by the sharp decline in the median return for the period. At the same time, rising interest rates have provided some reprieve to pension plan funding ratios. I am confident Canadian pension plans with sound governance and risk management practices can weather this market turmoil and emerge stronger through 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 service offerings.
During the first quarter, major central banks continued to monitor the persistently higher inflation readings and more recently many implemented interest rate hikes to combat this ongoing trend. Financial markets absorbed the shift in monetary tone but the geopolitical environment weighed heavily on global equity markets. Rising oil prices coupled with disruptive supply concerns triggered a wave of volatility, causing major equity indices to decline during the quarter. Canadian equities were an exception, generating positive returns supported by the rise in crude oil and commodity prices. Canadian bonds declined during the period, as yields continued to follow a rising trend coupled with the 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 primarily driven by commodities as both the Energy and Materials sectors posted solid double digit returns for the quarter. Information Technology and Health Care sectors were the largest detractors for the period.
- U.S. 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 remaining sectors generated negative returns with Communications Services witnessing the largest decline for the period.
- International developed markets, as measured by the MSCI EAFE Index, returned -6.8% in CAD for the quarter. The Energy and Materials sectors observed positive returns, while all remaining sectors witnessed negative returns for the period, with the Information Technology sector producing the largest loss for the period.
- The MSCI Emerging Markets Index returned -8.0% in CAD for the quarter, with the Financials and Materials sectors posting positive returns. All remaining sectors declined over the period, with the Energy sector being the weakest performer within 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 records going back to 1976. Higher prices for gasoline and groceries pushed the Canadian inflation reading to 5.7% year over year in February, marking the highest level since August 1991. The Canadian index, with its significant weighting to Energy and Materials, performed well during the quarter, as supply shortages and rising inflation gained traction throughout the period.
The U.S. economy witnessed solid job creation throughout the entire quarter, with the unemployment rate declining to 3.6% for the period. The U.S. also posted the highest inflation since 1982, at 8.5% year over year in March. Strong job gains, low unemployment rate, and rising inflation prompted the U.S. 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 witnessed rising inflation during the first quarter, as observed by the Eurozone hitting a record high of 7.5% year-over-year in March. To combat higher inflation, the Bank of England (BOE) raised interest rates to 0.75%, while softening its stance on future rate hikes as households face higher prices. The Bank of Japan (BOJ) maintained its monetary easing stance and kept its short-term rate target at -0.1%.
Emerging markets witnessed weakness throughout the quarter as concerns mounted over a coronavirus outbreak in China followed by lockdowns, slower economic growth, rising commodity prices, trade risks and disputes surrounding accounting disclosures for American Depository Receipts. Imposition of economic sanctions led the Central Bank of Russia to adopt extraordinary measures, increasing the policy rate to 20%, imposing capital controls to stem outflows. Adding further concern, Sri Lanka spiraled into an economic crisis, while Turkish inflation reached a 20 year high of 61%.
The Bank of Canada (BoC) increased the overnight interest rate for the first time in three years to 0.50% from 0.25% and indicated it would continue with the reinvestment phase of its bond buying program. The BoC noted it expects price increases to be higher in the near term than its earlier forecast in January, as the unprovoked invasion of Ukraine by Russia presents a major new source of uncertainty. Higher interest rates coupled with the expectation for future rate hikes negatively impacted Canadian bond market performance over the quarter.
The Canadian Fixed Income market, as measured by the FTSE Canada Universe Bond Index, declined 7.0% for the quarter. Provincial bonds observed the largest decline, followed by Corporates and Federals. During the quarter, long-term bonds were the largest detractor, followed by mid-term and short-term bonds.
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