Northern Trust Pension Universe Data indicates that Canadian Pension Plans experienced a positive outcome at the end of the second quarter, as global equities gained momentum. The median Canadian Pension Plan returned 1.1 percent for the quarter and three point five percent year-to-date, showing greater confidence that inflation is moving sustainably toward the committee’s two percent objective.
This quarter marked a significant shift in monetary policy towards a less restrictive stance in some developed regions, initiated by the Bank of Canada (BoC) and followed by the European Central Bank (ECB). As these monetary authorities became more confident in the inflation trajectory, most other major central banks maintained a cautious approach as they continue to monitor progress in achieving sustainable inflation reductions in accordance with their targets and mandates.
Financial markets faced early challenges with volatility due to increasing geopolitical tensions and the release of strong economic data that supported ongoing inflation. Nevertheless, global equities advanced throughout the quarter, led by emerging markets, ending the period with attractive returns. Although Canadian equities saw a slight decline due to softer economic data, the Canadian bond market benefited from the BoC’s interest rate cut, leading to a rebound into positive territory for the quarter. The divergence in major central bank policies, combined with the Federal Reserve’s consistent messaging about the direction of interest rates, resulted in a modest strengthening of the U.S. dollar over the quarter.
“As we conclude the first half of 2024, a theme of sustainability became prominent globally. We've observed it through central bank actions as policymakers aim for a sustainable path for inflation to normalize monetary policy. This theme continues to resonate across the Canadian pension plan landscape as plan sponsors show resilience and agility in navigating the economic challenges of high interest rates, ongoing inflation, and bouts 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 the challenging economic backdrop in the second quarter, corporate earnings remained strong and investor optimism prevailed, leading to solid performances in global equities for the period. While the Canadian equity market saw weaker results compared to its global counterparts, the Canadian bond universe welcomed the Bank of Canada’s first interest rate cut of the year, closing the quarter on a positive note.
Canadian Equities, as measured by the S&P/TSX Composite Index, saw a decline of -.5 percent for the quarter. The Materials and Consumer Staples sectors were the top performers during this period. The Health Care sector exhibited the weakest performance followed by the Real Estate and Information Technology sectors.
U.S. Equities, as measured by the S&P 500 Index, returned five point four percent in CAD for the quarter, with the Information Technology and Communication Services sectors leading the performance with double-digit returns. The Materials, Industrials, Energy, Financials, and Real Estate sectors experienced retreats during this time.
International developed markets, as measured by the MSCI EAFE Index, generated .9 percent in CAD for the quarter. Most sectors observed positive returns led by Health Care and the Financial sectors, while Consumer Discretionary and Real Estate sectors were the notable underperformers.
The MSCI Emerging Markets Index advanced six point three percent in CAD for the quarter. Most sectors achieved positive returns with the Information Technology sector dominating the index with strong performance, while Health Care, Consumer Staples, and the Materials sectors produced negative returns for the period.
The Canadian economy demonstrated early signs of slower economic growth, disinflationary pressures, and softening employment. Unemployment reached its highest level since early 2022, rising to six point four percent in June, up from six point one percent in March. Although inflation nudged higher in May compared to the previous month, the most recent year-over-year figure in June at two point seven percent highlighted that Canadian inflation continues to cool.
The U.S. economy continued to show strength during the quarter despite some softer growth data. Progress on inflation emerged, as CPI rose three percent in June year-over-year, down from three point five percent year-over-year in March. Despite the strong number of jobs added in June, the unemployment rate experienced an unexpected rise to four point one percent, the highest since November 2021. The Federal Reserve maintained the Federal Funds Target Rate between five point twenty-five percent to five point fifty percent. 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 two percent objective.”
International markets saw progress in efforts to bring inflation closer to central bank targets. The European Central Bank lowered interest rates by 25 basis points, 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 maintained its benchmark rate at five point twenty-five percent, 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 held rates steady at zero to .1 percent after hiking rates the previous quarter.
Emerging markets gained momentum during the second quarter, outperforming entwickelte.
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