Northern Trust Pension Universe Data: Canadian Pension Plan returns retreat in Q3, pressured by restrictive monetary policy

Canadian Pension Plans lost ground in the third quarter, generating a median return of -3.7% amidst market and economic headwinds. The quarterly results were cushioned by healthier returns in prior periods, resulting in a median year-to-date return of 1.6%, according to the Northern Trust Canada Universe.

The third quarter was engulfed in a wave of news headlines which included a downgrade of the U.S. sovereign rating as well as 10 U.S. regional banks, a United Auto Workers (UAW) strike and the potential for a partial U.S. government shutdown. Each of these created a brief negative tone which cascaded across global financial markets. Notwithstanding this backdrop, the most prominent narrative throughout the period was continued uncertainty surrounding monetary policy direction due to mixed inflation readings sparked by escalating oil prices, rising bond yields, and a robust labor market.

Inflation figures are lower than the acute levels witnessed a year ago but remain higher than the target levels for many central banks. Monetary authorities have managed these cross currents of data by either pausing interest rate hikes, further increasing rates or a combination of both, resulting in higher interest rates than what we have witnessed in recent history. Although some data points signaled signs of resilience across the North American economy, both Europe and China experienced challenging economic environments. The combination of uncertainty and high interest rates resulted in a decline for both equity and bond markets during the period.

“This past quarter demonstrated how rapidly volatility can resurface, creating unfavorable market conditions and increasing pressure on investment portfolios. As monetary policymakers adhere to their mandates and exercise discipline amid these pockets of uncertainty, pension plan sponsors also maintained discipline in challenging environments, affording them the ability to deliver on their long-term pension promise,” 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 faced an alignment of macro-economic pressures that created uncertainty across financial markets. As the price of oil reached year-to-date highs, it also factored into inflation readings. This coupled with positive economic data and tight labor markets caused investor alarm, fearing that interest rates will remain higher for an extended period of time. In the wake of these macro tensions, yields continued to climb higher causing a well punctuated sell-off in bonds and a decline across equity markets. As a result, both asset classes concluded the quarter in negative territory.

• Canadian Equities, as measured by the S&P/TSX Composite Index, retreated -2.2% for the quarter. The Health Care and Energy sectors posted positive double digit returns, while all remaining sectors generated negative performance. Communication Services and Utilities sectors witnessed the weakest results for the period.

• U.S. Equities, as measured by the S&P 500 Index, posted -1.2% in CAD for the quarter with three of the 11 sectors generating positive results. Strong performance was led by Energy followed by the Communication Services and Financial sectors, while the Utilities and Real Estate sectors observed the largest decline for the period.

• International developed markets, as measured by the MSCI EAFE Index, returned -2.0% in CAD for the quarter. The Energy sector was the strongest performer followed by Financials and Real Estate sectors. All remaining sectors generated negative returns with Information Technology witnessing the largest decline.

• The MSCI Emerging Markets Index declined -0.7% in CAD for the quarter, with five of the 11 sectors generating positive returns. The Energy sector was the top performer for the period, while the Information Technology and the Communication Services sectors generated the weakest results.

The Canadian economy held up reasonably well and witnessed solid job growth in the last two months of the quarter, with more than 100,000 jobs added in August and September. The unemployment rate concluded the period at 5.5%, a slight uptick from 5.4% at the end of June. Canadian inflation figures edged up higher over the quarter due to higher transportation and housing costs. Canadian CPI for September was 3.8% versus 2.8% for June.

The U.S. economy continued to demonstrate signs of strength supported by a strong labour market amidst inflationary pressures sparked by higher oil prices. The U.S. Federal Reserve (Fed) hiked interest rates by 25 bps taking the Federal Funds Target Rate to 5.25% - 5.50%. The Fed continues to monitor its progress to lower inflation while maintaining a hawkish tone.

International markets posted negative returns for the quarter amidst a restrictive monetary environment. The European Central Bank (ECB) continued to battle inflation raising rates by a total of 50 bps, while the Bank of England (BoE) hiked rates by 25 bps in an effort to bring inflation sustainably back to their 2.0% target. The Bank of Japan (BoJ) maintained its key policy rate of -0.10%, while continuing their yield curve control policy.

Emerging Markets witnessed a modest decline during the quarter, outperforming their developed counterparts. China continued to struggle with the global manufacturing slump, a stronger U.S. dollar and a stressed real estate sector, all of which hampered equity returns. Meanwhile Brazil lowered its interest rate by 100 bps to 12.75% during the quarter as inflation showed signs of easing.

The Bank of Canada (BoC) raised interest rates by 25 basis points to 5% during the quarter. The BoC expects inflation to remain around 3% for the remainder of 2024 and return to the BoC’s target of 2% around the middle of 2025. The BoC continues to maintain a restrictive monetary policy, while it continues to monitor the economic impact of its rate hiking journey.

The Canadian Fixed Income market, as measured by the FTSE Canada Universe Bond Index, declined -3.9% for the quarter. Provincial bonds witnessed the largest decline followed by Federal and then Corporate bonds. Long-term bonds observed the largest drop posting a return of -9.5% while Mid-term and Short-term bonds lost -3.7% and -0.1% respectively.

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 22 locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of September 30, 2023, Northern Trust had assets under custody/administration of US$14.2 trillion, and assets under management of US$1.3 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 X (formerly 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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