Northern Trust Pension Universe Data: Canadian Pension Plans on solid footing in Q1 2023 despite market turmoil

Canadian Pension plan investment returns demonstrated resilience during the first quarter of the year, shrugging off volatility and turmoil that erupted within the U.S. banking sector, according to the Northern Trust Canada Universe. The median Canadian Pension Plan returned 4.2% for the quarter.

The first quarter of 2023 was marked by continued high inflation and tight labor markets, expectations of prolonged monetary tightening and a banking crisis triggered by the collapse of Silicon Valley Bank and the subsequent downfall of Credit Suisse. Assertive actions undertaken by the U.S. government and Federal Reserve (Fed), the Swiss National Bank and Financial Market Supervisory Authority(FINMA) served to restore confidence and stability within the banking sector.

Throughout the period, most major central banks stayed the course in their fight against inflation, hiking interest rates with the objective of restoring price stability in the economy. The Bank of Canada (BoC) was the exception as it became the first major central bank pivoting to a pause mode, in an effort to assess the impact of consecutive rate hikes over the last year. Despite economic and global disruption, including devastating earthquakes in Turkey and Syria, financial markets concluded the first quarter on a strong note, with both equities and bonds producing attractive returns for the period.

“The confluence of events taking place this quarter unveiled the unwavering nature of monetary authorities, as they remained focused on their commitment to tame inflation. As central banks navigated through the ongoing macro tensions, pension plans rose to the occasion underscoring their adaptive nature generating superior returns during such a precarious period,” 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 servicing solutions.

During the first quarter of 2023, monetary authorities remained focused on the pillars of inflation. Absolute readings continued to be much higher than central bank targets, however the trajectory of inflation signaled restrictive monetary policy was gaining traction. Financial markets navigated the macro environment as well as turbulence that manifested within the banking sector, regaining momentum late in the period, as witnessed by the robust returns generated by the equity markets. Although yields observed volatile movements throughout the period, Canadian bonds closed the quarter with healthy positive returns.

• Canadian Equities, as measured by the S&P/TSX Composite Index, advanced 4.6% for the quarter. Information Technology was the top performer for the quarter, while Energy was the only sector that declined for the period.
• U.S. Equities, as measured by the S&P 500 Index, generated 7.4% in CAD for the quarter with seven of the eleven sectors posting positive results. Information Technology, Communication Services and Consumer Discretionary sectors led the way as top performers, while the Financials, Energy and Health Care sectors were the largest decliners for the period.
• International developed markets, as measured by the MSCI EAFE Index, returned 8.5% in CAD for the quarter. Ten of the 11 sectors witnessed positive returns for the period, led by the Information Technology and Consumer Discretionary sectors. Real Estate was the lone sector that posted negative returns during the period.
• The MSCI Emerging Markets Index advanced 3.9% in CAD for the quarter, as Information Technology and Communication Services sectors stood out with the strongest performance, while the Utilities and Health Care sectors had the largest declines.

The Canadian economy continued to produce data supportive of a tight labor market as witnessed by strong labor figures and an unemployment rate that held steady at 5.0%. Inflation showed signs of moderating with results of 4.3% (y/y, NSA) for March, down from 6.3% in December.

The U.S. economy demonstrated resilience during the quarter as the U.S. Federal Reserve (Fed) raised interest rates by 50 basis points throughout the period, taking the Federal Funds Target Rate to 4.75-5.0%. The labor market remained strong, while CPI declined to 5.0% in March down from 6.5% (y/y, NSA) in December. Behind this economic backdrop, the U.S. witnessed the largest bank failure since 2008, led by the collapse of Silicon Valley Bank.

International markets generated attractive returns for the quarter despite the downfall and subsequent takeover of Swiss financial institution Credit Suisse. The European Central Bank (ECB) raised interest rates 100 basis points over the period in an effort to rein in elevated inflation. The Bank of England (BoE) continued on its tightening path, raising rates 75 basis points during the quarter. Conversely, the Bank of Japan (BoJ) maintained its ultra-loose monetary policy.

Emerging Markets posted positive returns for the quarter, however they could not keep pace with developed markets over the period. Although monetary policy remained restrictive in most developed markets, the People’s Bank of China (PBoC) maintained an accommodative stance, cutting its reserve requirement ratio for banks by 25 basis points.

The Bank of Canada (BoC) hiked interest rates by 25 basis points to 4.5% in January and then pivoted to a pause mode in March, maintaining the overnight interest rate. BoC officials are expected to keep rates on hold, conditional on economic developments.

The Canadian Fixed Income market, as measured by the FTSE Canada Universe Bond Index, started off the year strong advancing 3.2% for the quarter. Provincial bonds outperformed Federal and Corporate bonds for the quarter, while long term bonds outpaced both the short and mid-term segments for the period.

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 March 31, 2023, Northern Trust had assets under custody/administration of US$14.2 trillion, and assets under management of US$1.3 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.

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