Canadian defined benefit plans posted positive investment returns in the third quarter of 2019, according to the Northern Trust Canada Universe, despite periods of market volatility driven by global economic and political events during the three months ending September 30.
The median plan in the Northern Trust Canada Universe generated a 1.6 percent return in the third quarter. The universe tracks the performance of Canadian institutional investment plans that subscribe to performance measurement services as part of Northern Trust’s asset service offerings.
Markets were roiled during the quarter by developments in U.S.-China trade negotiations, Brexit, an impeachment inquiry in the U.S., escalating tensions between the U.S., Iran and Saudi Arabia, civil unrest in Hong Kong and the crash of Argentina’s Merval Equity Index. A brief inversion of the U.S. yield curve also sparked investor fears surrounding the future state of the global economy. However, North American stock markets ended the quarter with solid gains.
“Despite a backdrop of persistent volatility, fear and uncertainty, Canadian pension plans displayed resilience in the third quarter,” said Arti Sharma, President and CEO of Northern Trust Canada. “Although returns moderated slightly from the previous two quarters, year-to-date the median pension plan remains in positive territory positioned at a healthy 11.3 percent.”
During the quarter, a number of central banks, including the U.S. Federal Reserve, responded to the fears and uncertainties with an accommodative tone, cutting interest rates and engaging in further stimulus. In Canada, the central bank held steady, supported by strong economic data coming out of the second quarter and with inflation meeting the Bank of Canada’s target. The Canadian economy continues to be supported by relatively healthy employment and a recovering housing market.
Canadian Equities as measured by the S&P/TSX Composite generated a return of 2.5 percent for the third quarter, with nine out of the eleven sectors finishing in positive territory. Utilities and Real Estate led with the strongest gains, and the Health Care sector continued to have the weakest results.
The U.S. equity market was supported by solid economic growth, mild inflation and strong consumer confidence, allowing the S&P 500 Index to post a 3.0 percent return for the quarter. Despite the weaker Energy and Health Care segments, all remaining sectors achieved positive results, with Utilities and Real Estate leading the gains. Notably, for the first time since its inception, the S&P 500 index crossed the 3,000 level in July.
The International developed markets, as measured by the MSCI EAFE Index, finished the quarter flat with a 0.3 percent return. These markets faced the challenges of political uncertainty, weak economic data, low inflation and ongoing trade concerns. While the Brexit saga continued to play out in the UK, Italy witnessed its own political drama. Utilities, Consumer Staples and Health Care sectors were the top performers for the quarter.
The MSCI Emerging Markets index, challenged by heightened trade tensions and the resulting impact to the weakness of emerging market currencies, posted a -2.8 percent return during the third quarter. Many of the Central Banks in the Emerging Markets countries continued with an accommodative policy stance. Meanwhile, unrest in Hong Kong continued to impact the Asian markets. The IT sector achieved a strong positive return, while the majority of other sectors generated negative results.
The Bank of Canada (BoC) maintained its overnight rate at 1.75 percent throughout the quarter. Amid high household debt levels, a stabilizing housing market, contraction in business investment and persistent but heightened trade uncertainty, the BoC anticipates slower growth for the rest of the year. The FTSE Canada Universe Index returned 1.2 percent for the quarter, with Provincial and Corporate bonds outperforming Federals, while Long- term bonds outpaced the Short- and Mid-term segments in the Northern Trust Canada Universe.