“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.
Market volatility
With bond markets rattled by aggressive rate hikes and central bank policymaking, returns were dampened, while equity markets saw sharp declines in the quarter.
The Bank of Canada increased the overnight interest rate twice during the quarter, increasing by a total of 1% to bring its policy interest rate to 1.5%, and indicated it is ready to act more forcefully if needed to bring down inflation to its 2% target level.
Among the biggest impacts for pension plan investments:
- 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.
