Overview of pension fund returns and financial markets - 3rd quarter 2023

SAI Balanced Funds Index

After an excellent first half of 2023 with attractive returns for the main stock and bond indices, the 3^rd quarter of 2023 was more difficult. As a matter of fact, the SAI balanced funds index, composed of 60% stocks and 40% bonds, experienced a return of 6.4% for the first 6 months and -2.6% in the 3^rd quarter of 2023, for the year to date as of September 30, 2023, the return on this index is now 3.7%.

Canadian Bonds

For the first 6 months of the year, rates had increased mainly on short-term maturity bonds (e.g., less than 5 years). On the other hand, during the 3^rd quarter, it was a different story as the rates on bonds with longer maturities (e.g.: 5 years and more) increased. In fact, in line with the trend observed since the beginning of the year, investors began the 3^rd quarter with optimism that central bankers could orchestrate a soft landing and that the tightening period was coming to an end with possible rate cuts. This optimism faded as central bankers reiterated that they would keep rates high for an extended period.

1. During the quarter, the yield curve in Canada increased by 0.4%, 0.7% and 0.8% for short (1-5 years), medium (5-10 years) and long term (10 years and more).
2. In respect to returns by maturity, short-term, medium-term and long-term bonds experienced returns of -0.1%, -3.7% and -9.5% respectively.
3. For the sectors, federal, provincial and corporate bonds experienced returns of -3.6%, -5.9% and -2.2% respectively.
4. The Bank of Canada increased the key rate by 0.25% on July 12 and did not increase it at the September 6, 2023 meeting. The key rate is now at 5.00%.

Canadian Equities

The Canadian stock market, represented by the S&P/TSX index, experienced a quarterly return of -2.2%.

1. The rise in oil prices in the third quarter caused an increase in various industry stocks. For example, shares of Suncor Energy, Cenovus Energy, Canadian Natural Resources and Imperial Oil rose 20%, 26%, 18% and 23%, respectively, during the quarter. Cameco Corporation (+30%), one of the largest uranium miners in the world, also contributed to the sector's performance with a significant increase in the price of uranium during the quarter.
2. Rising interest rates have put pressure on the telecommunications sector which typically provide for high dividends, experienced a drop of around 14% for three main companies in the sector such as BCE, Telus and Rogers.
3. During the 3^rd quarter of 2023, Canadian mid-cap stocks (S&P/TSX Completion) performed the best with a return of -2.8%, followed by small caps (S&P/TSX Small Cap) with a return of -2.9%, while large caps (S&P/TSX 60) rank last with a return of -4.6%.

Global Equities

For developed equity markets, represented by the MSCI World index, the quarterly return was -2.6% in local currencies.

1. The S&P 500 index representing US stocks experienced a return of -3.3% ($US) for the 3^rd quarter and 13.1% ($USD) for the year to date. Unlike the first 6 months, the group of “Magnificent Seven”, namely Apple, Microsoft, Alphabet, Amazon, Nvdia, Tesla and Meta were down and therefore brought down the index’s return due to their strong representation in the stock. Energy stocks were the most resilient during the quarter. The job market in the United States remained very strong, while the unemployment rate increased from only 0.3% to 3.8% during the quarter..
2. The MSCI EAFE index representing Europe, Oceania (Australia, New Zealand) and the Far East (Hong Kong, Japan, Singapore) market returned -1.3% (local currencies) for the 3^rd quarter and 10.7% for the year to date. Stocks fell in particular due to concerns about the negative effects of interest rate increases on economic growth. On a positive note, inflation in the euro zone slowed to 4.3% for the year up to September, compared to 5.2% for the year to August.
3. The MSCI EM Index, representing emerging markets, returned -1.4% for the 3^rd quarter (local currencies) and 4.0% for the year to date. Concern that the US Fed will maintain higher interest rates for a longer period of time has had a negative impact on the appetite for risk. Added to this is the Chinese’s continued economic weakness and concerns about the Chinese real estate sector.

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