Canadian Pension Plans finished the first three months of 2024 on a positive note, generating a median return of 2.5%, according to the Northern Trust Canada Universe.

The first quarter of 2024 was dominated by macro-economic data flows, with particular focus on inflation and its salient components. Despite some inflation targets coming into vision, most central banks maintained their current policy stance while adapting their monetary message to share more narrative around the potential, or further required conditions, for interest rate cuts as they carve out a path to normalization.

While investors await the ultimate pivot in monetary policy, the final stretch of the inflation journey comes with volatility as witnessed following the release of some stronger economic data points in the first quarter. Investor optimism surrounding the potential for interest rate cuts this year coupled with economic resiliency pushed equity markets higher for the period, with the U.S. market generating an impressive double-digit return. Conversely, the bond market reacted less favorably to some of the mixed data, eroding gains from the prior quarter and receding into negative territory for the period as yields marched higher.

“The transition through interest rate cycles within the economic ecosystem quite often can be a challenging path, necessitating the need for quality and granularity of data, comprehensive integrated tools and sound investment strategies, as pension managers navigate this journey,” said Katie Pries, President and CEO of Northern Trust Canada. “The strength of Canadian pension returns this quarter validated the pension toolkit, a bespoke asset utilized by plan sponsors, is channeling pension plans on a course to sustainable financial health.”

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.

The first quarter of 2024 witnessed some bumpy days in the financial markets driven by uncertainty surrounding the timing of monetary easing. Despite the strength of inflation figures during the period, market participants took comfort in its long-term direction. As investor optimism gained momentum and recession fears faded, global equity markets advanced higher by quarter end. Notwithstanding the favorable move in stocks, some of the stronger than expected economic data pushed the yield curve higher, creating more friction for bondholders, resulting in negative returns for the Canadian bond universe for the period.

• Canadian Equities, as measured by the S&P/TSX Composite Index, rose 6.6% for the quarter with the majority of sectors posting gains for the period. The Health Care sector was the best performer followed by the Energy and Industrials Sectors. The Communications Services and Utilities sectors witnessed the weakest performance, generating negative returns.
• U.S. Equities, as measured by the S&P 500 Index, advanced an impressive 13.5% in CAD for the quarter, driven mainly by the performance of the “Magnificent Seven”. All sectors posted positive results with the best performance from Communications Services, Energy and Information Technology sectors.
• International developed markets, as measured by the MSCI EAFE Index, returned 8.7% in CAD for the quarter. Most sectors generated positive returns with Information Technology and the Consumer Discretionary sectors observing the strongest performance, while the Utilities sector posted the weakest results for the period followed by the Consumer Staples sector.
• The MSCI Emerging Markets Index increased 5.1% in CAD for the quarter. The majority of sectors generated positive returns with the Information Technology sector leading the way with double digit performance, while the Real Estate sector was the biggest laggard for the period.

The Canadian economy witnessed an easing of core inflation data during the quarter relative to the end of 2023, highlighting restrictive monetary policy is achieving its purpose. The labor market experienced positive job surprises in January and February and posted flat results in the month of March. Despite the strong labor figures, the unemployment rate jumped to 6.1% in March, up from 5.8% during the previous quarter, signaling employment growth has not kept pace with population growth.

The U.S. economy continued to demonstrate resiliency despite being challenged by stickier inflation as the March CPI figure was higher than anticipated. The unemployment rate ticked up marginally to 3.8% in March, from 3.7% in December. Hiring remained strong as witnessed by the new job data each month throughout the entire quarter. The Federal Reserve (Fed) maintained the Federal Funds Target Rate at 5.25% - 5.50%. The Fed, highly dependent on data, indicated it intends to cut rates only when the data suggests that inflation is moving down sustainably towards its target of 2%.

International markets continued the ongoing battle against inflation. The European Central Bank (ECB) kept rates steady during the quarter as it monitored economic data for signs of progress on bringing inflation down. Domestic price pressures remained during the period, fueled in part by strong wage growth. Although U.K. CPI declined in February from the end of the year, the Bank of England (BOE) maintained its benchmark rate at 5.25% with a view that restrictive monetary policy will need to remain to return inflation to the 2% target sustainably in the medium term. The Bank of Japan (BoJ) however made a historic move as it decided to end its monetary policy of negative interest rates. The BoJ raised its short-term interest rates to around 0% to 0.1% and ceased the yield curve control policy for Japanese sovereign bonds.

Emerging markets witnessed positive returns for the quarter, but lagged results observed by developed markets. The lackluster returns were primarily driven by weakness in Chinese equities. During the period, the People’s Bank of China (PBoC) maintained its one-year Loan Prime Rate (LPR) at 3.45% however it lowered its five-year LPR to 3.95% from 4.2%. The central bank of Brazil cut rates 50 basis points twice during the quarter bringing its benchmark rate to 10.75%. The Reserve Bank of India (RBI) chose to keep rates steady at 6.5%, citing concerns over persistent inflation.

The Bank of Canada (BoC) kept interest rates steady at 5.00%, noting it was still too early to lower the policy interest rate even though recent inflation data suggested monetary policy was working largely as expected.

The Canadian Fixed Income market, as measured by the FTSE Canada Universe Bond Index, declined -1.2% for the quarter. Provincial and Federal bonds witnessed declines while Corporate bonds posted a slight gain for the quarter. In terms of bond durations, long-term and mid-term bonds generated negative returns while short-term bonds observed a small gain 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 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 March 31, 2024, Northern Trust had assets under custody/administration of US$16.5 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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