Northern Trust Pension Universe Data: Canadian Pension Plan returns witness sharp decline as stock markets tumble during the second quarter

Rhea-AI Summary

The Northern Trust Canada Universe reported a challenging second quarter in 2022 as Canadian Pension Plan investments contracted, with a median decline of -8.8% for the quarter and -14.5% year-to-date. Market volatility, inflation, and aggressive central bank interest rate hikes contributed to the downturn. Canadian equities declined -13.2%, U.S. equities -13.4%, and international markets struggled. Despite the declines, rising interest rates may improve pension funding ratios, offering some financial health during this turbulent period.

Positive

• Rising interest rates may improve pension funding ratios.
• Canadian unemployment rate fell to a record low of 4.9% in June.

Negative

• Median Canadian Pension Plan investments decreased by -8.8% in Q2 2022.
• Significant declines in Canadian equities at -13.2% and U.S. equities at -13.4% in CAD.
• Overall negative investor sentiment and fears of recession impacted market performance.

TORONTO--(BUSINESS WIRE)-- Canadian Pension plan investments contracted during the second quarter of 2022 as both stock and bond markets observed significant declines for the period, according to the Northern Trust Canada Universe. The median Canadian Pension Plan was down -8.8% for the quarter and -14.5% year to date.

The second quarter of 2022 proved to be a tumultuous period for the financial markets. As supply chains found pockets of recovery, a lingering backdrop of tight labor markets, higher wages and soaring food and energy prices continued to stoke inflation, driving it to decade highs around the globe. Many major central banks, led by the Federal Reserve, pivoted to a more hawkish tone, initiating aggressive increases in policy interest rates at an accelerated pace in an effort to curb inflation. As markets digested the impact of a much tighter monetary policy environment, uncertainty coupled with volatility and negative investor sentiment prevailed, with major stock markets plunging into negative territory for the quarter.

“The most recent quarter served as a reminder of how rapidly markets can shift course. We saw extreme market declines in the early days of the pandemic and now we are experiencing it again in the face of changing monetary policy. Although rising interest rates create market uncertainty causing a decline in pension assets, higher rates improve pension funding ratios and the overall financial health of pension plans, serving as a cushion through this volatile period,” 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.

Persistent inflation and policymakers’ attempts to bring stability to prices has been a consistent theme over the last few months. The magnitude and pace of central bank actions to rein in inflation this quarter soured investor sentiment and sparked fears of an imminent recession. Aggressive interest rate hikes led to significantly higher rates across the yield curve over the recent period, propelling bond returns into negative territory. As financial markets adjusted to higher interest rate movements, stock markets around the globe also witnessed sharp declines for the quarter.

• Canadian Equities, as measured by the S&P/TSX Composite Index, declined -13.2% for the quarter. All sectors were in negative territory, with Health Care, Information Technology and Materials sectors posting the weakest returns.

• U.S. Equities, as measured by the S&P 500 Index, fell -13.4% in CAD for the quarter. All sectors witnessed negative returns, with the Consumer Discretionary sector posting the largest decline, while the Consumer Staples, Energy and Utilities sectors lost the least for the period.

• International developed markets, as measured by the MSCI EAFE Index, returned -11.5% in CAD for the quarter. All sectors witnessed negative returns for the period, with the Information Technology sector being the largest detractor for the period. The Energy sector held up reasonably well with only a modest decline for the quarter.

• The MSCI Emerging Markets Index returned -8.4% in CAD for the quarter. The Consumer Discretionary sector posted a healthy positive return, while all remaining sectors witnessed negative results, with the Information Technology sector producing the sharpest decline for the period.

The Canadian economy witnessed a record low unemployment rate of 4.9% in June, down from 5.3% at the end of March. The Canadian inflation rate continued to climb, reaching 7.7% in May (year over year), up from the 6.8% posted in April. Canada’s high inflation backdrop continued to be boosted by higher gas prices and service costs throughout the quarter.

The U.S. economy experienced healthy job growth for the quarter, with just over 1.1 million jobs added during the period and the unemployment rate reaching 3.6% in June. Soaring inflation prompted the Federal Reserve (The Fed) to hike the benchmark interest rate in May by 0.50% and in June by 0.75%, its largest hike in three decades. This tightening action by the Fed brought the federal funds target range to 1.50-1.75%.

International markets were challenged during the quarter with elevated inflation levels. Reduction in gas supplies from Russia triggered concerns over shortages and impacted prices significantly. In an effort to rein in higher prices, the Bank of England (BoE) raised interest rates to 1.25% by the end of the quarter. The European Central Bank (ECB) surprised the markets by announcing it may raise rates by 0.50% in September in addition to its planned 0.25% hike in July. Conversely, the Bank of Japan (BOJ) maintained its guidance to keep rates at present or low levels, albeit while keeping a watchful eye on the impact exchange rate moves may have on their economy.

Emerging markets declined for the quarter, but to a lesser degree than developed counterparts. Loosening restrictions on giant tech companies coupled with easing of Covid restrictions brought comfort to investors as Chinese equities rose during the quarter. The Chinese central bank refrained from cutting its key policy interest rate, while the Russian central bank cut its key interest rate to 9.5%, a level observed prior to the invasion of Ukraine.

The Bank of Canada (BoC) increased the overnight interest rate twice during the quarter, taking it up a total of 1% to bring its policy interest rate to 1.5%. Canada’s central bank indicated it is ready to act more forcefully if needed to bring down inflation to its 2% target level.

The Canadian Fixed Income market, as measured by the FTSE Canada Universe Bond Index, returned -5.7% for the quarter. Provincial bonds witnessed the largest decline, followed by Corporates and Federals. During the quarter, long term bonds posted the largest decline, followed by mid-term and short term segments of the fixed income market.

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 22 U.S. states and Washington, D.C., and across 23 locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of June 30, 2022, Northern Trust had assets under custody/administration of US$13.7 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. Please visit our website or follow us on Twitter.

Northern Trust Corporation, Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A., incorporated with limited liability in the U.S. Please read our global and regulatory information.

View source version on businesswire.com: https://www.businesswire.com/news/home/20220725005604/en/

Europe, Middle East, Africa & Asia-Pacific:

Camilla Greene

+44 (0) 20 7982 2176

Camilla_Greene@ntrs.com

US & Canada:

John O’Connell

+1 312 444 2388

John_O’Connell@ntrs.com

http://www.northerntrust.com

Source: Northern Trust Corporation

FAQ

What was the median decline for Canadian Pension Plans in Q2 2022?

The median Canadian Pension Plan was down -8.8% for the second quarter of 2022.

How did rising interest rates affect pension plans?

While rising interest rates created uncertainty causing a decline in pension assets, they may improve pension funding ratios.

What was the performance of Canadian equities in Q2 2022?

Canadian equities, as measured by the S&P/TSX Composite Index, declined -13.2% for the quarter.

How did U.S. equities perform in CAD for Q2 2022?

U.S. equities, measured by the S&P 500 Index, fell -13.4% in CAD during the second quarter of 2022.

What is the outlook for inflation and monetary policy?

Persistent inflation and aggressive monetary policy led to significant market volatility, prompting fears of an imminent recession.