[January 26, 2023]

Northern Trust Pension Universe Data: Canadian Pension Plans Returned Positive Results for Q4 2022 as Global Equities Gained Momentum

Canadian Pension plan investment returns advanced during the quarter, however the volatility plaguing markets in prior quarters resulted in a double-digit decline in returns for the year, according to the Northern Trust Canada Universe. The median Canadian Pension Plan returned 2.8 percent for the quarter and -12.8 percent year to date.

The fourth quarter of 2022 witnessed a welcomed rally across global financial markets. As major central banks marched forward with consecutive interest rate hikes throughout the year, data emerged signaling their perseverance to combat inflation was starting to gain traction. Despite only modest signs of slowing price growth, equities responded favorably with a positive tone and showed a healthy rebound from the previous quarter. Canadian bonds continued to be impacted by the steady rise in interest rates, thus generating muted results for the period.

In contrast to the quarterly results, both equity and bond markets concluded 2022 with annual returns in negative territory as a result of lingering challenges faced throughout the year including supply chain concerns, geopolitical uncertainty, monetary tightening and soaring inflation. The S&P TSX index declined less than its global counterparts for the year, as the Canadian dollar lost over 6% relative to the U.S. dollar. Although investment returns contracted for the year, the steady rise in interest rates contributed to improvement in pension plan funding levels.

"Data was a primary focus in the fourth quarter of 2022. Monetary authorities methodically monitored key economic data points to help map their journey to stem elevated inflation, while understanding the economic implications along the path. Paralleling the importance of data, pension plan sponsors also have an important role in aggregating and digesting data, as it enables them to position pension plan investments to deliver value while ensuring long-term sustainability throughout any economic environment, as witnessed through the resilient returns observed this quarter," said Katie Pries, President and CEO of Northern Trust Canada.

The Northern Trust Canada universe tracks the performance of Canadian institutional defined benefit plans that subscribe to performance measurement services as part of Northern Trust's asset service offerings.

During the quarter, equity and bond markets appeared to demonstrate strength in the face of ongoing restrictive monetary policy. Corporate valuations have been adjusting to the reality of higher interest rates and transitioning to an environment of slower economic growth. Despite the persistent interest rate hikes, the Canadian Bond Universe delivered a slight gain for the period, while equity markets generated attractive returns compared to prior quarters this year.

• Canadian Equities, as measured by the S&P/TSX Composite Index, generated 6.0% for the quarter and retreated -5.8% for the year. Information Technology was the top performer for the quarter, while Energy led performance for the year. The Health Care sector witnessed the largest decline for both the quarter and the year.
• U.S. Equities, as measured by the S&P 500 Index advancd 6.1% in CAD for the quarter and declined -12.2% in CAD for the year. All sectors generated positive returns for the quarter, with the exception of Communication Services and Consumer Discretionary, with both sectors also witnessing the largest declines for the year. Energy was the leading performer for both the quarter and the full year.
• International developed markets, as measured by the MSCI EAFE Index, returned 15.8% in CAD for the quarter, while contracting -7.8% in CAD for the year. All sectors posted positive returns for the quarter, with Financials leading the index during the period. The Energy sector experienced the largest gain for the full year followed by Financials, while all remaining sectors declined over the 12-month period.
• The MSCI Emerging Markets Index advanced 8.3% in CAD for the quarter and declined -13.9% in CAD for the year. All sectors produced positive returns for the quarter, with Communication Services leading the group. The Utilities sector generated a positive return for the full year, while all remaining sectors contracted with Information Technology witnessing the steepest decline.

The U.S. economy continued to witness a strong labor market as approximately 742,000 non-farm payroll jobs were added during the quarter bringing the unemployment rate to 3.5% at the close of the year. The Federal Reserve (Fed), in its effort to bring inflation in line with their target, raised its benchmark overnight rate by 125 basis points in total during the quarter, bringing the target range to 4.25-4.50%.

International markets continued to witness elevated inflation, leading the European Central Bank (ECB) to raise interest rates during the quarter by 125 basis points to 2.50%. The Bank of England (BoE) also followed suit, hiking interest rates to 3.50%. The Bank of Japan (BoJ) maintained its level of interest rates, however it surprised markets with the change of its tolerance level on its 10-year government bond yields to +/-0.50% relative to its target of 0%, up from +/-0.25%.

Emerging Markets generated positive returns for the quarter, however they continued to lag the developed markets over the period. Despite most major central banks maintaining a tightening tone, the People's Bank of China (PBoC) maintained an accommodative stance, cutting its reserve requirement ratio for banks by 25 basis points and thereby increasing liquidity in the market.

The Bank of Canada (BoC) continued with policy tightening, hiking interest rates, with the overnight policy interest rate concluding the quarter at 4.25%. This represented an increase of 400 basis points in aggregate for the full year. With an eye on inflationary pressures and another on economic growth, the BoC will continue to assess how inflation is responding to monetary policy tightening and the impact of this on the economy.

The Canadian Fixed Income market, as measured by the FTSE Canada Universe Bond Index, advanced 0.1% for the quarter, while declining -11.7% for the year. Corporate bonds outperformed Federal and Provincial bonds for the quarter, while Provincial bonds witnessed the sharpest decline for the year. Short-term bonds outperformed both Long and Mid-term bonds for both the quarter and the year. Long-term bonds observed the largest decline for the year.

About Northern Trust

Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of wealth management, asset servicing, asset management and banking to corporations, institutions, affluent families and individuals. Founded in Chicago in 1889, Northern Trust has a global presence with offices in 25 U.S. states and Washington, D.C., and across 23 locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of December 31, 2022, Northern Trust had assets under custody/administration of US$13.6 trillion, and assets under management of US$1.2 trillion. For more than 130 years, Northern Trust has earned distinction as an industry leader for exceptional service, financial expertise, integrity and innovation. Visit us on northerntrust.com. Follow us on Twitter @NorthernTrust or Northern Trust Corporation on LinkedIn.

Northern Trust Corporation, Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A., incorporated with limited liability in the U.S. Global legal and regulatory information can be found at https://www.northerntrust.com/terms-and-conditions.

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