Overview of pension fund returns and financial markets - 1st quarter 2022

SAI Balanced Funds Index

The beginning of the year was eventful, with high inflation, the sharp rise in interest rates and the start of the war in Ukraine. Overall, most financial markets had negative returns with the exception of the Canadian stock market. During the quarter, the SAI Balanced Funds Index fell by 3.5%.

Canadian Bonds

The inaction of central bankers during 2021 will have been a major monetary error. In fact, while in 2021 they had voiced that inflation would be temporary, their message has changed greatly in recent months: they are now preparing to redouble their efforts during 2022 to control inflation which is more enduring than expected. In response, interest rates have risen sharply since the start of the year, causing the FTSE TMX Canada Universe Index, which represents the Canadian bond market, to fall by 7.0%.

1. Overall, the yield curve has risen, particularly for the 2 to 10 years level rates. 
2. Both at the maturity level and at the sector level, returns were negative during the period. Quarterly yields for short, medium and long-term bonds were -3.0%, -6.8% and -11.7%. Federal bonds returned -6.1%, provincial bonds returned -8.6% and corporate bonds returned -6.5%. 
3. At its January 26 meeting, the Bank of Canada decided to maintain the overnight rate target at 0.25% and to increase it to 0.50% at its March 2 meeting.

Canadian Equities

The Canadian stock market, represented by the S&P/TSX index, posted a return of 3.8% over the past three months.

1. The continued rise in inflation, reaching an annual rate of 6.7%¹ in March, remains an important concern for Canadians. The increase in consumer prices is mainly attributable to the increase in costs related to transportation, housing and consumer consumption. 
2. At the sector level, 7 out of 11 sectors experienced positive returns. The Canadian stock market was mainly supported by the Materials (+20.1%) and Energy (+28.7%) sectors. The price of oil, although very volatile during the quarter, rose, explaining the good performance of the energy sector. For example, the price of a barrel of Western Texas Intermediate (WTI) started the year at around $76 USD, peaked at $123 USD during the period and ended the quarter at $100 USD.
3. On the other hand, the information technology sector experienced a significant drop with a return of -35.5%. It was a difficult quarter for e-commerce platform Shopify, which saw its market capitalization drop by more than 50% during the period.
4. Overall, Canadian equities performed well this quarter. Canadian small cap stocks were the most profitable, outperforming mid and large cap stocks. To this effect, the S&P/TSX Small Cap, S&P/TSX Mid Cap and S&P/TSX 60 indices returns were +8.4%, +5.2% and +3.5%, respectively.

Global Equities

The quarterly return for developed stock markets, represented by the MSCI World Index, was negative at -4.6% in local currencies. 

1. The Canadian dollar has appreciated against all local currencies. Consequently, the MSCI World Index’s return in Canadian dollars (-6.2%) was lower than that calculated in local currencies (-4.6%). 
2. The benchmark S&P 500 $ US index, representing the US stock market, has fallen -4.6% since the start of the year. As the index is more heavily weighted in the information technology sector, the quarter was difficult with the weak performance of several information technology companies. As of December 31, 2021, the index weighting in this sector was 29.2%, while the sector's performance was -8.4% during the quarter. 
3. Sanctions imposed by Western countries against Russia have a significant impact for the European Union, which is a major consumer of Russian natural gas and oil. Approximately 40% of natural gas consumption and 25% of crude oil consumption in the European Union comes from Russia. With high inflation prior to the war, the effect of the sanctions adds a risk to the fragile economy of the European Union. In terms of returns, the MSCI EAFE Index (local currencies), which essentially represents the global stock markets of developed countries except for Canada and the United States, experienced a return of -3.7%.
4. The MSCI EM Index in local currencies, representing emerging markets, fell -6.1% over the same period. With the resurgence of COVID-19 in China, the Chinese Communist Party government decided to impose confinement measures to several regions of the country, which is causing a slowdown in the country's economic development and in its international trade.

¹ Rate calculated according to the variation between the consumer price index (CPI) for a given month and that for the same month of the previous year.

² The composition of the SAI Balanced Funds Index is 40% FTSE TMX Canada Universe, 30% S&P/TSX and 30% MSCI World.