Northern Trust Pension Universe Data: Canadian Pension Plans Posted Strong Returns for 2023 as Markets Surged in Fourth Quarter

Rhea-AI Summary

Northern Trust Canada Universe reported a median return of 8.4% for Q4 2023, supporting an annual return of 10.0%. Despite early geopolitical tensions, a shift in monetary policy and positive economic fundamentals allowed equity and bond markets to close the year on a strong note. Canadian pension plans focused on complex asset strategies to enhance portfolio diversification and drive long-term sustainability of their investment programs.

Insights

Market Research Analyst

The robust performance of Canadian pension plans in the final quarter of 2023, as reported, is indicative of a broader market recovery following a tumultuous period of geopolitical tensions and inflationary pressures. The median return of 8.4% for Q4 and an annual return of 10.0% is a significant achievement, especially considering the earlier market volatility. These figures suggest a strategic shift among plan sponsors towards more diversified and complex asset strategies, aiming for long-term sustainability.

From a market research perspective, the pivot by central banks to a pause in policy tightening appears to have been a key factor in the market's recovery. The resulting descent in bond yields and the positive performance of both equity and bond markets underscore the sensitivity of market dynamics to monetary policy. This is particularly relevant for investors and plan sponsors as they navigate future investment strategies and asset allocations.

It is also noteworthy that sector performance varied significantly, with Information Technology leading and Energy lagging in Canadian equities. This trend was mirrored in U.S. and international markets, reflecting a global sectoral shift that investors may consider when evaluating sector-specific risks and opportunities.

Financial Analyst

The reported performance of the Canadian pension plans can be seen as a microcosm of the broader economic landscape. The resilience of the U.S. economy, despite a contraction in Canadian GDP, is a testament to the diverging economic conditions across North America. The Federal Reserve's indication of a potential pivot to lower rates in 2024 could have significant implications for cross-border investment and currency valuations.

Further analysis of the bond market reveals a notable outperformance of provincial bonds over corporate and federal bonds in Q4, with long-term bonds leading annual performance. This shift towards longer-duration bonds may reflect a search for yield amidst a stabilizing rate environment, an important consideration for fixed-income investors.

The Bank of Canada's decision to hold interest rates steady, combined with its readiness to raise rates if inflation persists, presents a cautious outlook for investors. The balance between economic growth and inflationary pressures will be critical in determining the BoC's future policy moves and the resulting impact on Canadian financial markets.

Economist

The performance of pension plans is often a bellwether for the broader economy and the reported returns suggest a degree of optimism in the face of economic adversities such as geopolitical conflicts and inflation. The upward trend in the Canadian unemployment rate, however, signals potential headwinds in labor market conditions, which could influence consumer spending and economic growth.

The interplay between inflation trends and central bank policies, particularly the Bank of Canada's stance, will be a critical factor to watch. The potential for further rate hikes to curb inflation could dampen economic activity, yet necessary to maintain price stability. Investors and policymakers alike must balance the risks of inflation against the need for economic stimulus.

Internationally, the steady interest rates maintained by central banks in Europe, Japan and emerging markets suggest a synchronized approach to monetary policy. The divergence in sectoral performance across these markets, with Information Technology consistently outperforming, may indicate a shift in global investment trends towards technology-driven sectors.

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.

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.

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.

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 24 U.S. states and Washington, D.C., and across 22 locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of December 31, 2023, Northern Trust had assets under custody/administration of US$15.4 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 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.

View source version on businesswire.com: https://www.businesswire.com/news/home/20240202657189/en/

Europe, Middle East, Africa & Asia-Pacific:

Camilla Greene

+44 (0) 20 7982 2176

Camilla_Greene@ntrs.com



Simon Ansell

+ 44 (0) 20 7982 1016

Simon_Ansell@ntrs.com

US & Canada:

John O’Connell

+1 312 444 2388

John_O’Connell@ntrs.com

Source: Northern Trust

FAQ

What was the median return for the fourth quarter of 2023 according to Northern Trust Canada Universe?

The median return for the fourth quarter of 2023 was 8.4%.

What was the annual median return for 2023 according to Northern Trust Canada Universe?

The annual median return for 2023 was 10.0%.

How did Canadian Equities perform in the fourth quarter of 2023?

Canadian Equities advanced 8.1% for the quarter.

How did U.S. Equities perform in the fourth quarter of 2023?

U.S. Equities witnessed an 8.9% gain in CAD for the quarter.

What was the return of the Canadian Fixed Income market in the fourth quarter of 2023?

The Canadian Fixed Income market advanced 8.3% for the quarter.