Overview of pension fund returns and financial markets - 3rd quarter 2022

SAI Balanced Funds Index

The 3^rd quarter proved to be a volatile one. The month of July was favourable with a return of 5.12% for the SAI Balanced Funds Index. This rebound came as investors hoped for a moderate intervention from the central banks in their fight against inflation. However, reality caught up with investors when the central banks delivered a much stronger message about their intention to bring inflation down. Thus, the SAI Balanced Funds Index decreased by -2.20% and -2.94% in August and September, resulting in a practically nil quarterly return of -0.25%.

Canadian Bonds

Throughout the quarter, investors simultaneously reflected on the central bankers increasingly clear message on fighting inflation and the growing probability of an economic slowdown or recession. Naturally, this market perspective resulted in a much faster and more pronounced increase in short-term interest rates than in medium/long-term rates, in such a way that there was an evident inversion of the yield curve during the quarter. Within this context, the FTSE Canada Universe Bond Index posted a return of 0.5% for the quarter. For the year to date, as of September 30, 2022, the performance of this index remains largely negative at -11.8%.

1. During the quarter, short-term interest rates in Canada (federal bonds with 1-to-5-year maturity) increased rapidly by approximately 0.6%. On the other hand, medium-term (federal bonds with 5-to-10 years maturity) and long-term (federal bonds with 10 years and more maturity) interest rates remained at similar levels to the previous quarter.
2. In this context, medium and long-term bond yields (all sectors combined) experienced a positive performance of 0.8% and 1.5%. Conversely, short-term bonds (all sectors combined) experienced a negative performance of -0.3%.
3. From a sector perspective, federal, provincial and corporate bonds had positive returns of 0.4%, 1.0% and 0.2% respectively.
4. The Bank of Canada raised the overnight rate target to 2.5% at its July 13, 2022, meeting, and then to 3.25% at its September 2022 meeting. the fifth consecutive rate hike, pushing borrowing costs to the highest level since 2008.

Canadian Equities

The Canadian stock market, represented by the S&P/TSX index, experienced a negative quarterly return of -1.4%. For the year to date as of September 30, this index’s return is -11.4%, which is still higher than most other traditional stock market indices so far (e.g. : MSCI World, S&P 500, MSCI EM).  Its notable performance compared to other indices since the beginning of the year is mainly due to its higher exposure to the energy and materials sectors which offer better protection against inflation.

1. The Consumer Price Index (CPI) increased by 6.9% between September 2021 and September 2022, this is a decline from the 8.1% increase recorded between June 2021 and June 2022. Lower gas prices are the main source of the deceleration.
2. During the quarter, the industrial, consumer discretionary and materials sectors were the best performers with returns of 3.9%, 3.6% and 1.9% respectively. Waste Connections Inc., a garbage collection, bin rental and waste management services company, saw its stock rise 17% during the quarter and was a strong contributor to the index's performance. In terms of materials, the stock of Nutrien, one of the world's largest producers of potash, nitrogen and phosphate-based fertilizers for agriculture, saw its price appreciate by 12.0%.
3. Communications, real estate and energy services were the 3 sectors that experienced the most difficulties during the quarter with negative returns of -9.7%, -7.3% and -6.0% respectively. To illustrate, within communications services, Rogers Communications stock posted a quarterly return of -14.0%. In the energy sector, the decline was fairly widespread with the price of a barrel of Western Texas Intermediate having fallen by nearly $30 during the quarter, affecting gas and oil producer stocks as well as energy carriers (e.g. oil pipelines, natural gas pipelines).

Global Equities

The quarterly return of developed equity markets, as represented by the MSCI World Index, was negative -4.4% in local currencies. For the year to date as of September 30, 2022, the return of this index in local currencies is -21.9%.

1. The US dollar hit multi-year highs against several other major currencies such as the euro, British pound and Japanese yen. In this respect, Japan intervened directly and massively during the quarter on the foreign exchange market to curb the depreciation of its currency. On the other hand, the Canadian dollar, which had nevertheless resisted well against the strength of the American dollar until August 2022, experienced a real depreciation during the month of September, which explains the marked differences in the level of quarterly returns in local currencies or in US dollars versus those in Canadian dollars in the table below.
2. Even though the benchmark S&P 500 US index had a positive return equal to 1.3% compared to the previous quarter at -13.4%; the latter recorded a sharp drop in September due to the consumer price index which turned out to be higher than expected in August. As a result, the market is concerned that raising the policy interest rate will trigger a recession.
3. The MSCI EAFE index, which mainly represents the global stock markets of developed countries except for North America, fell significantly with a return equal to -3.4%. With the energy crisis in the European zone, inflation continues to increase, reaching double digits at more than 10% between September 2021 and 2022. In addition, the war in Ukraine has caused considerable uncertainty for the European Union economic outlook at a time when tensions are only increasing. Finally, in England, pension funds, many of which use leveraged strategies as part of an interest rate risk management framework, have been forced to massively sell off bonds due to rising interest rates and margin calls, which had a spiralling effect, prompting more and more funds to be sold, thus creating a situation of rapid and sudden illiquidity in the bond market. The Bank of England had to step in urgently, as a buyer, to support the bond market.
4. The MSCI EM index, representing emerging markets, fell -8.2% in local currencies during the quarter, bringing the year-to-date return to -20.8% through to September 30. The Chinese stock market which is an important part of the index was heavily affected during the quarter with a local currency return of -21.7%. The zero COVID-19 policy as well as the persisting weakness in the real estate market continue to adversely affect reactions towards the Chinese market.

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