Overview of pension fund returns and financial markets - 4th quarter 2022

SAI Balanced Funds Index

After a bull market that lasted more than a decade, propelled by a favorable economic environment of low inflation and low interest rates, 2022 was quite the opposite with significant interest rate increases, the increase in inflation and the geopolitical context bringing its share of uncertainty and volatility. This particularly difficult environment did not spare investors when there were few places for them to take refuge. In this context, the SAI Balanced Funds Index posted an annual return of -10.1%. On a more positive note, the 4th quarter of 2022 was favorable as the SAI Balanced Funds Index saw a return of 4.2%.

Canadian Bonds

Central banks raised key rates significantly during the year in their fight against inflation. For example, in Canada, the overnight rate target started the year at 0.25% and ended the year at 4.25%. In the United States, the federal funds rate target started the year at 0.25% and ended the year at 4.50%. However, although the desired effect of these rate hikes is to control inflation, one of the risks is creating a recession. Incidentally, this seems to be the bond market’s view as the yield curve inverted at the start of the 2nd half of the year (i.e. long-term bond yields are lower than short-term bond yield rates). In a rising interest rate environment, the FTSE Canada Universe Bond Index was -11.7% for 2022. During the 4th quarter, the return was neutral at 0.1%.

1. As mentioned, the interest rate curve rose significantly during the year, particularly with short-term rates which increased by 3.0% (all sectors combined). As to medium-term and long-term rates (all sectors combined), the variation was 2.1% and 1.9% respectively. Despite the more modest interest rate increases for medium and long-term bonds, the impact on their market value was greater due to higher duration for these maturities. As such, the annual yields of short, medium and long-term bonds were respectively -4.0%, -10.3% and -21.8%.
2. At the sector level, provincial bonds had the least impressive annual return of -15.1%, mainly due to provincial bonds’ duration (9.7) being longer than those of corporate (5.7) and federal (6.9) bonds. The annual returns for corporate and federal bonds were -9.9% and -10.7% respectively.

Canadian Equities

The Canadian stock market, represented by the S&P/TSX index, experienced an annual return of -5.8%, doing relatively better compared to other stock market indices such as the S&P 500 or the MSCI World. The 4th quarter was favorable with the S&P/TSX index posting a performance of 6.0%.

1. The change in the Consumer Price Index (CPI) went from 4.8% at the start of the year (December 2020 to December 2021), to a peak of 8.1% in the middle (June 2021 to June 2022), to end the year at 6.3% (December 2021 to December 2022).
2. During 2022, the energy sector, now representing 18% of the S&P/TSX index, was by far the best performer with an annual return of +48.4%, benefiting from the rise in the price of the barrel of oil. Six of the ten stocks that contributed the most to the performance of the index comes from this sector, namely the stocks of Canadian Natural Resources (+41%), Cenovus Energy (+69%), Suncor Energy (+36%), Imperial Oil (+45%), Tourmaline Oil (+67%) and Enbridge (+7%).
3. During 2022, the tech and healthcare sectors which now account for 6% and less than 1% respectively were the worst-performing sectors with respective annual returns of -35.6% and -57.7%. Notably, in technology, Shopify's stock saw an annual return of -73% due to market expectations of a deceleration in revenue growth and plans to lay off around 10% of their workforce. In healthcare, the stock of Bausch Health Companies (formerly Valeant) experienced a performance of -76% following a series of consecutive quarters where revenues fell short of expectations, but also after a US judgment invalidating one of their patents.
4. During 2022, Canadian mid cap stocks (S&P/TSX Completion) performed the best with a return of -6.6%, followed by large cap stocks (S&P/TSX 60) with a return of -9.2%, while small caps (S&P/TSX Small Cap) rank last with a return of -11.2%.

Global Equities

For developed equity markets, represented by the MSCI World Index, the annual return was -16.0% in local currencies. As with Canadian equities, global equities had a good end to the year, with a 4th quarter performance of 7.5%.

1. Over the course of 2022, value stocks (-6.5%; MSCI World Value Index USD) have strongly outperformed growth stocks (-29.2%; MSCI World Growth USD). This divergence is mainly due to, particularly high valued growth stocks at the start of the year, with the rise in interest rates exerting greater downward pressure on growth stocks, as well as reduced revenue growth expectations.
2. The US stock market, represented by the S&P 500 index, saw a performance of -18.1% in US dollars in 2022. The US dollar fluctuated a lot during the year, while the DXY index representing the strength of the US dollar in relation to most other major currencies in the world, increased by almost 20% at its peak between the start of the year and September. The rise would have marked its biggest annual gain on record had it maintained that high through to the end of the year. However, during the 4th quarter, economic data suggesting that inflation had peaked, combined with the interventions of the European and Japanese central banks, caused the US dollar to depreciate. Thus, the DXY index relinquished more than half of its gains in the 4th quarter to end the year with an annual gain of nearly 8%.
3. In terms of developed equity markets, excluding North America, the return in local currencies was -7.0% for the year 2022. More specifically, the eurozone was shaken by high inflation which has been amplified by exorbitant energy costs. Prior to the war in Ukraine, the eurozone benefited from the import of energy sources (mainly natural gas) at low cost from Russia. The eurozone must now import most of its energy from elsewhere in the world at higher costs. Fortunately, it turns out that the winter has been quite mild in Europe thus far, which reduces energy demand.
4. The MSCI EM index, representing emerging markets, fell -15.5% in local currencies over the year. For most of the year, China applied a very strict confinement policy which negatively affected the outlook towards the Chinese market. However, towards the end of the year, protests against the Chinese government's confinement policies led the government to declare an end to the measures. In response, the region's index, the MSCI China in local currencies, had an encouraging month of December with a return of 4.8% compared to the MSCI EM index in local currencies’ return of -2.0%.

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