Overview of pension fund returns and financial markets - 1st quarter 2023

SAI Balanced Funds Index

The beginning of 2023 started off on a high note as equity and bond markets performed well such that the SAI Balanced Fund Index returned 4.9% for Q1 2023. That said, many investors are wondering whether this is a rebound in a market whose trend is down or a rebound that is sustainable. Indeed, several uncertainties remain, including in particular: 

1. Will inflation eventually stabilize and if so, how quickly?
2. Will central banks continue to raise interest rates, or rather maintain them or even reduce them?
3. What will be the impact of interest rate hikes whose transmission mechanism takes time to trickle down to the economy? 
4. Will geopolitical tensions improve or continue to deteriorate?

Canadian Bonds

Up to early March, the US Federal Reserve maintained a restrictive stance, planning to continue raising interest rates in light of strong economic data. That said, following the run on Silicon Valley Bank when its release on quarterly earnings showed it had sold nearly $21 billion in government bonds for a loss and was trying to raise additional capital, the bond market quickly reflected reduced market rates. In this context, interest rates on most maturities have come down such that the FTSE Canada Universe Bond Index posted a return for the 1st quarter of 2023 of 3.2%.

1. During the quarter, the yield curve in Canada decreased by 0.32%, 0.43% and 0.28% for short (1-5 years), medium (5- 10 years) and long term (10 years and more).
2. From a sector perspective, federal, provincial and corporate bonds had positive returns of 3.1%, 3.8% and 2.8% respectively.
3. The Bank of Canada raised the key rate by 0.25% on January 25 to 4.50%.

Canadian Equities

The Canadian stock market, represented by the S&P / TSX index, posted a quarterly return of 4.6%. 

1. It seems that the trend reversed at the beginning of 2023. The energy sector which had the best return in 2022 of 48.6% was the sector which did the worst in the 1st quarter 2023 with a return of -2.3%. On the other hand, the technology sector which had one of the worst returns in 2022 of -35.6% was the sector which did the best in the 1st quarter of 2023 with a return of +26.0% led by Shopify’s stock which experienced a return of +38%.
2. The materials sector did well in the 1st quarter of 2023, especially with gold mining as the price of gold jumped following concerns relating to banks. Barrick Gold, Franco-Nevada Corporation and Wheaton Precious Metals shares experienced returns of +8%, +7% and +23% respectively in the 1st quarter of 2023.
3. During the first quarter of 2023, Canadian mid cap stocks (S&P/TSX Completion) performed the best with a return of 5.7%, followed by small caps (S&P/TSX Small Cap) with a return of 3.9%, while large caps (S&P/TSX 60) ranked last with a return of 3.2%.

Global Equities

For developed equity markets, represented by the MSCI World Index, the quarterly return was 7.4% in local currencies.

1. Equity markets rose in Q1 2023 thanks in large part to the Mega Cap stock market. We can see this performance (CAD) of Mega Caps being reflected in certain sectors of the MSCI World index: Information technology +22.1% (Apple, Microsoft, Nvidia), Communication services +17.0% (Alphabet, Meta) and Consumer Discretionary +14.6% (Amazon, Tesla). On the other hand, sectors linked to the real economy such as energy (-3.2%) and financials (-0.8%) lagged (CAD$).
2. Silicon Valley Bank’s bankruptcy created an echo with American regional banks and even carried over to Europe, notably with the Crédit Suisse bank, which merged with UBS in order to avoid the worst. For instance, the exchange-traded fund with symbol IAT (iShares U.S. Regional Banks ETF) which represents a basket of publicly traded U.S. regional bank securities was trading at nearly  $48 at the start of the year and ended the quarter in trading at around $35, representing a drop of nearly 27%. Additionally, against this backdrop of banking system uncertainty, the price of gold spiked from nearly $1,800US/ounce to nearly $2,000US/ounce during the quarter.
3. Despite Crédit Suisse's problems, European stock markets still performed well in a context of attractiveness and good economic results. For example, the MSCI EAFE index representing the European market, Oceania (Australia, New Zealand) and the Far East (Hong-Kong, Japan, Singapore) obtained a return of 7.5% in local currencies during the quarter.
4. The MSCI EM Index, representing emerging markets, ended the quarter with a return of 3.8% in local currencies. This can notably be explained by the reopening of the Chinese economy following the end of restrictions linked to the pandemic as well as by a rebound in the information technology sector with, for example, the stock of Samsung Electronics (~ +15% in $US) in South Korea and the stock of Taiwan Semiconductor (~ +25% in $US) in Taiwan representing nearly 10% alone of the index.

¹ The composition of the SAI Balanced Funds Index is 40% FTSE TMX Canada Universe, 30% S&P/TSX and 30% MSCI World.