Northern Trust Pension Universe Data: Canadian Pension Plans Carve out Positive Q2 Returns Amidst Inflationary Headwinds

Canadian Pension plan investment returns concluded the first half of the year in a position of strength, according to the Northern Trust Canada Universe. The median Canadian Pension Plan returned 1.0% for the quarter ending June 30 and 5.3% year-to-date.

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 second quarter of 2023 witnessed a resilient global economy against a backdrop of sticky inflation, higher interest rates, concern about distress in the banking sector and a looming debt ceiling in the U.S. Although fears of banking problems subsided and a U.S. government borrowing resolution was achieved, persistent inflation and tight labor markets weighed on the minds of global monetary authorities. Many major central banks around the world continued a restrictive path, while in North America a recalibration effort appeared to be underway. The U.S. Federal Reserve took a pause in June from hiking rates only to assess the productivity of its tightening journey over the last year. The Bank of Canada (BoC) reinstituted an interest rate hike in the quarter following an abbreviated pause over the last three months, as it strives to relieve pricing pressures that have rippled across the economy. Resiliency held firm, enabling global developed equity markets to close the quarter on a higher note, while bond returns weakened as yields rose.

“The first half of 2023 presented many challenges in the financial markets with the primary focus on the battle against inflation. In this environment, pension plans have benefited from a growing trend towards alternative investments, given the diversification and underlying hedging feature embedded in this asset class. As we wait for the inflation pendulum to swing back to more normalized levels, higher interest rates continue to provide a cushion for the funding health of Canadian Pension Plans,” said Katie Pries, President and CEO of Northern Trust Canada.

The strength of corporate and consumer balance sheets remained supportive of economic growth in the second quarter, enabling financial markets to look past the headwind of a lingering inflation cloud and restrictive monetary path. Global developed equity markets advanced higher for the period, generating positive returns for the quarter, while Canadian bond returns were dampened by the continued volatile movement in interest rates.

• Canadian Equities, as measured by the S&P/TSX Composite Index, returned 1.1% for the quarter. Information Technology was the top performer for the quarter, followed by the Consumer Discretionary sector, while the Materials, Real Estate and Consumer Staples sectors posted the weakest results for the period.

• U.S. Equities, as measured by the S&P 500 Index, advanced 6.3% in CAD for the quarter with seven of the 11 sectors posting positive results. Information Technology, Communication Services and Consumer Discretionary sectors led the way with double digit returns, while the Utilities and Energy sectors observed the largest decline for the period.

• International developed markets, as measured by the MSCI EAFE Index, recorded 0.9% in CAD for the quarter. The stronger performers were the Industrials, Information Technology and Consumer Discretionary sectors, while the Communication Services, Real Estate and Materials sectors were the largest decliners for the period.

• The MSCI Emerging Markets Index declined -1.2% in CAD for the quarter, with four of the 11 sectors generating positive returns. The Energy, Financials and Information Technology sectors observed the strongest performance, while the Communication Services, Consumer Discretionary and Real Estate sectors witnessed the largest declines.

The Canadian economy remained resilient during the period, however household debt in Canada is now the highest of any G7 country, representing 107% of GDP. The unemployment rate advanced slightly higher in June, to 5.4% from 5.0% in April. Inflation readings are trending lower versus previous quarters, however it remains above the Bank of Canada (BoC) target. Canadian CPI for June was 2.8% versus 4.3% for March.

The U.S. economy continued on a forward march as fears of the looming U.S. debt ceiling and further banking failures receded. The U.S. Federal Reserve (Fed) hiked interest rates in May by 25 basis points taking the Federal Funds Target Rate to 5.0% - 5.25%. The Fed held rates steady in June as it continues to assess the impact of inflationary pressures and a tight labor market.

International markets generated positive returns for the quarter despite the impact of tightening financial conditions. The European Central Bank (ECB) continued its restrictive path, raising rates by a total of 50 bps in an effort to combat inflation. The Bank of England (BoE) continued its aggressive tightening by raising interest rates 75 bps during the quarter, including a 50 bps hike in June. The Bank of Japan (BoJ) chose to maintain its current monetary policy and announced its strategy to continue with bond purchases to keep an anchor on interest rates.

Emerging Markets witnessed a decline (in CAD terms) during the quarter, lagging developed market counterparts. The Peoples Bank of China (PBoC) cut its one-year loan prime rate by 10 bps for the first time since August of 2022. While China struggled with its manufacturing sector, Turkey’s central bank raised interest rates from 8.5% to 15% as it strives to tame inflation and return to more conventional monetary policy.

The Bank of Canada (BoC) raised interest rates by 25 bps to 4.75% in June following a brief pause, bringing Canadian interest rates to a 22 year high. The BoC maintains a hawkish stance given the persistent demand in the economy and inflation remains above its 2% target.

The Canadian Fixed Income market, as measured by the FTSE Canada Universe Bond Index, declined -0.7% for the quarter. Corporate bonds led with positive returns for the quarter, while Federal and Provincial bonds witnessed negative returns. Long-term bonds returned 0.6%, outpacing both the short and mid-term segments which declined for the period.

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 June 30, 2023, Northern Trust had assets under custody/administration of US$14.5 trillion, and assets under management of US$1.4 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.

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