Northern Trust Pension Universe Data: Canadian Pension Plan Returns Advanced in Q2 as Global Equities Gained Momentum

Canadian pension plans witnessed a positive finish to the second quarter, according to the Northern Trust Canada Universe. The median Canadian Pension Plan returned 1.1 percent for the quarter and 3.5 percent year-to-date.

The second quarter marked a pivotal shift in monetary policy to a less restrictive tone in some developed regions, led by the Bank of Canada (BoC) and followed by the European Central Bank (ECB). As these two monetary authorities gained confidence in the path and level of inflation, most other major central banks maintained a cautious narrative as they continued to monitor progress in bringing down inflation in a sustainable manner and in line with their respective targets and mandates.

Financial markets were challenged with volatility early in the period as geopolitical tensions mounted, combined with the release of stronger economic data supportive of persistent inflation. Despite the uncertainty, global equities marched higher throughout the quarter, led by emerging markets, concluding the period with attractive returns. Although Canadian equities posted a modest decline as pockets of softer economic data emerged, the Canadian bond market benefited from the BoC interest rate cut, resulting in a rebound into positive territory for the quarter. The current divergence in major central bank policies coupled with the Federal Reserve's (Fed) consistent messaging regarding the direction of interest rates led to a modest strengthening of the U.S. dollar over the quarter.

"As we conclude the first half of 2024, a theme of sustainability permeated across the globe. We have seen it through central bank actions as policymakers seek a sustainable path of inflation in an effort to normalize monetary policy. This theme continues to echo across the Canadian pension plan landscape as plan sponsors demonstrate resilience and agility while navigating the economic elements of high interest rates, persistent inflation and waves of volatility," 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.

Despite a challenging economic backdrop in the second quarter, corporate earnings remained strong and investor optimism prevailed, leading to solid returns for global equities for the period. Although the Canadian equity market witnessed weaker results relative to its global peers, the Canadian bond universe welcomed the first interest rate cut by the Bank of Canada (BoC) and closed the quarter with a positive tone.

• Canadian Equities, as measured by the S&P/TSX Composite Index, declined -0.5% for the quarter. The Materials and Consumer Staples sectors were the top performers for the period. The Health Care sector posted the weakest performance followed by the Real Estate and Information Technology sectors.
• U.S. Equities, as measured by the S&P 500 Index returned 5.4% in CAD for the quarter, with the Information Technology and Communication Services sectors leading performance with double digit returns. The Materials, Industrials, Energy, Financials and Real Estate sectors retreated during the period.
• International developed markets, as measured by the MSCI EAFE Index, generated 0.9% in CAD for the quarter. Most sectors observed positive returns led by the Health Care and the Financials sectors, while the Consumer Discretionary and Real Estate sectors were the most notable laggards during the period.
• The MSCI Emerging Markets Index advanced 6.3% in CAD for the quarter. Most sectors achieved positive returns with the Information Technology sector leading the index with strong performance, while the Health Care, Consumer Staples and the Materials sectors produced negative returns for the period.

The Canadian economy witnessed some early signs of slower economic growth, disinflationary pressures along with softening employment. Unemployment hit its highest level since early 2022, rising to 6.4% in June, up from 6.1% in March. Although inflation nudged higher in May relative to the previous month, the most recent year over year figure in June of 2.7% highlighted that Canadian inflation continues to cool.

The U.S. economy continued to exhibit strength during the quarter despite softer patches of growth data. Progress on inflation emerged, as CPI rose 3.0% in June (y/y) down from 3.5% (y/y) in March. Despite the solid number of jobs added in the month of June, the unemployment rate witnessed an unexpected rise to 4.1%, the highest since November 2021. The Federal Reserve (Fed) maintained the Federal Funds Target Rate at 5.25% - 5.50%. The Fed Chair emphasized the bank's intention to only cut interest rates once it has "gained greater confidence that inflation is moving sustainably toward the committee's 2% objective."

International markets observed progress in efforts to bring inflation closer to central bank targets. The European Central Bank (ECB) lowered interest rates by 25 bps, marking the start of an easing cycle for the ECB. Although inflation eased in June, the committee remains cautious regarding its inflation outlook and suggested further rate cuts would only come slowly. The Bank of England (BoE) maintained its benchmark rate at 5.25%, despite headline inflation dropping. The BoE justified its decision as it "needs to be sure inflation will stay low" but signaled a rate cut could be possible at its August meeting. The Bank of Japan (BoJ) held rates steady at 0%-0.1% after hiking rates the previous quarter.

Emerging markets gained momentum during the second quarter, outperforming developed markets. Much of the outperformance was attributed to investor interest in the AI/Chips space. The People's Bank of China (PBoC) held the one-year and five-year Loan Prime Rates (LPR) steady at 3.45% and 3.95% respectively. The Central Bank of Brazil dropped the key Selic rate by 25bps in May to 10.5%. The Reserve Bank of India (RBI) also chose to keep rates steady at 6.5%.

The Bank of Canada (BoC) announced at its June meeting that monetary policy "no longer needs to be as restrictive" and lowered its benchmark policy rate by 25 bps to 4.75%. The BoC was the first of G7 nations to cut rates, having held its policy rate at 5% since July 2023.

The Canadian Fixed Income market, as measured by the FTSE Canada Universe Bond Index, generated a gain of 0.9% for the quarter. Corporate bonds outpaced Federal and Provincial bonds with all three segments generating positive performance. All bond durations witnessed gains for the quarter, with short-term bonds leading mid and long-term bonds.

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 24 U.S. states and Washington, D.C., and across 22 locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of June 30, 2024, Northern Trust had assets under custody/administration of US$16.6 trillion, and assets under management of US$1.5 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 X (formerly 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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