Markets welcomed news from monetary policymakers as many central banks pivoted their policy stanceNorthern Trust releases it annual Pension Universe date, which we offer as a comparative analysis
February 02, 2024 — TORONTO–(BUSINESS WIRE)–Canadian pension plans harnessed the strength of market momentum at the end of 2023, generating a median return of 8.4% for the fourth quarter. These solid results supported an annual median return of 10.0%, according to the Northern Trust Canada Universe.
The final quarter of 2023 started on a weak note as heightened geopolitical tensions in the Middle East in early October caused financial markets concern. Notwithstanding the uncertainty created by these conflicts, markets welcomed news from monetary policymakers as many central banks pivoted their policy stance to a pause mode as inflation figures continued to soften relative to the highs witnessed earlier this year. Despite a slow start to the period, positive economic fundamentals combined with the shift in monetary narrative enabled equity markets to close the quarter on solid footing. As stocks finished on a high note, the bond market also reacted favorably to the monetary policy outlook as yields started a descent, allowing bond returns to regain strength and conclude the quarter, and the year in positive territory.
“This past quarter and year were undoubtedly a period enfolded in a blanket of volatility. Notwithstanding the waves of uncertainty throughout the year, a focus on geopolitical and economic trends has been paramount for pension plans. As financial markets turned their attention to economic data driving their underlying pulse and pace, plan sponsors have increasingly adopted complex asset strategies that enhance portfolio diversification and drive long term sustainability of their investment programs. Understanding and navigating the current and future trends is a key building block to healthy retirement plans,” 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 institutional investor asset servicing solutions.
Geopolitical Tensions Foster Uncertainty
The fourth quarter presented challenges early on as geopolitical tensions rapidly escalated in the Middle East, cascading uncertainty across financial markets. Although these tensions lingered throughout the period, global markets shifted focus to the decelerating trend in inflation and the pausing of interest rate hikes by major central banks. Favorable macro-economic data coupled with a pivot in monetary tone set the stage for robust returns generated by both stocks and bonds for the period.
Canadian Equities, as measured by the S&P/TSX Composite Index, advanced 8.1% for the quarter and 11.8% for the year. The Information Technology sector led performance for the quarter and the full year. The Energy sector posted the weakest performance for the quarter, while the Communication Services and Materials sectors were the laggards for the year.
U.S. Equities, as measured by the S&P 500 Index, witnessed an 8.9% gain in CAD for the quarter and an impressive 22.9% in CAD for the year. The Real Estate and Information Technology sectors stood out as the strongest performers for the quarter, while Energy was the weakest. Information Technology and Communication Services observed the strongest gains for the year, while the Utilities sector was the most notable laggard for the period.
International developed markets, as measured by the MSCI EAFE Index, returned 7.7% in CAD for the quarter and 15.7% in CAD for the year. All sectors generated positive returns for the quarter, except the Energy Sector which posted a decline for the period. The full year witnessed gains across all sectors, with the Information Technology and Industrials sectors being the top performers.
The MSCI Emerging Markets Index rose 5.3% in CAD for the quarter and 7.3% return in CAD for the year. Most sectors generated positive returns for both the quarter and the year, led by the Information Technology sector for both periods. The Real Estate sector witnessed the weakest performance for the quarter and the year.
The Canadian economy started to feel the effects of tighter monetary policy as noted in a recent GDP figure highlighting a contraction for the third quarter. However, the higher interest rate environment has also eased inflationary pressures as observed by the decline in inflation relative to the prior quarter and year. The unemployment rate concluded the period at 5.8%, up from 5.0% a year ago. Labor market gains witnessed signs of slowing as jobs growth softened in the second half of the year.
A ‘Resilient’ U.S. Market
The U.S. economy continued to show signs of resilience as noted in recent GDP figures. The U.S. Federal Reserve (Fed) kept the Federal Funds Target Rate at 5.25% – 5.50% through the third quarter. Although the Fed continues to monitor its progress on inflation, in December its broader messaging indicated that policy members expect a pivot to lower rates in 2024.
International markets also witnessed a move by central banks to keep interest rates steady during the quarter. The European Central Bank (ECB) moved to a wait and watch mode and the Bank of England (BOE) also kept rates steady at 5.25% despite ongoing inflationary pressures. The Bank of Japan (BoJ) maintained its key short term interest rate of -0.10%, and the 10-year bond yield at around 0%, though removing the 0.5% official cap and maintaining a loose upper band of 1.0%, during the quarter.
Emerging Markets witnessed modest returns for the quarter, lagging their developed market counterparts. The People’s Bank of China (PBOC) kept interest rates steady for the quarter, with their one-year loan prime rate at 3.45%. The Reserve Bank of India maintained its interest rates for the quarter, meanwhile Brazil cut interest rates in December by 50 basis points to 11.75%.
The Bank of Canada (BoC) held interest rates steady at 5.0% during the quarter, marking a 22-year high. The BoC governor agreed the Canadian economy is showing balance in supply and demand and further rate hikes might not be warranted. However, the outlook for inflation still concerns policy makers and they are “prepared to raise the policy rate further if needed.”
The Canadian Fixed Income market, as measured by the FTSE Canada Universe Bond Index, advanced 8.3% for the quarter and 6.7% for the year. Provincial bonds outperformed Corporate and Federal bonds for the quarter, while Corporate bonds were the top performer for the year. In terms of movement across bond durations, long term bonds led performance for the quarter advancing 14.8% and outpaced short and mid-term bonds for the year.