Overview of pension fund returns and financial markets - 3rd quarter 2021

SAI Balanced Funds Index

Most financial markets saw modest gains during the quarter, with the exception of emerging markets and Canadian bonds which experienced negative returns, resulting in the SAI Balanced Funds Index to rise 0.5% over the period. The quarter was notably marked by a significant price increase of several products and commodities brought on by the continued concerns relating to the management of COVID-19 as well as by China’s real estate giant Evergrande’s difficult financial situation. 

Canadian Bonds

For the Canadian bond market, which is represented by the FTSE TMX Canada Universe Index, performance has fallen 0.5% over the past three months. 

1. The yield curve, represented by returns of various levels of federal bonds maturities, increased modestly in parallel fashion during the quarter.
2. At the sector level, federal bonds returned -0.4%, provincial bonds returned -0.8% and corporate bonds returned -0.1%.
3. At the maturity level, the yield on short-term bonds was +0.1%, while the yields on medium-term and long-term bonds were 0.0% and -1.6%, respectively.
4. During its meetings on July 14 and September 8, the Bank of Canada decided to maintain its overnight rate at 0.25%.

Canadian Equities

The Canadian stock market, represented by the S&P/TSX Index, posted a rather neutral performance during the quarter with a return of +0.2%. 

1. Gradually, the Canadian economy began to recover during the quarter with the opening of Canadian borders to fully vaccinated US visitors.
2. The increase in the consumer price index (CPI) for the month of September (which represents the variation between September 2021 CPI and that of September 2020) was 4.4%. This increase, which is the highest observed since February 2003, can be explained by the continued disruption of supply chains across the world.
3. Over the period, returns for the sector have been mixed. The healthcare sector, made up mostly of cannabis company stocks, continued its plunge for a second consecutive quarter with a return of -19.4%. In sectors with positive performances, the consumer staples sector led with a return of +4.6%.
4. For the first time since the beginning of the year, Canadian small-cap stocks underperformed compared to mid- and large-cap stocks. To this end, returns for the S&P/TSX Small Cap, S&P/TSX Mid Cap and S&P/TSX 60 indices were -2.5%, +0.1% and +0.2% respectively.

Global Equities

As for the developed markets, represented by the MSCI World Index, the quarterly return was moderate, at +0.6% in local currencies.

1. The Canadian dollar depreciated against all local currencies. As a result, the MSCI World Index’s return in local currencies (+0.6%) was lower than that calculated in Canadian dollars (+2.3%).
2. The S&P 500 USD, which represents the US equity market, posted a quarterly gain of 0.6%. To control inflation fears, the Federal Reserve announced a cut in its bond buying program. On the American business side, the labor shortage is putting pressure to increase wages significantly to fill the many vacant positions. As an example, the increase in wages was 1.5% during the quarter, reaching 4.2% over the last 12 months.
3. The MSCI EAFE Index (local currencies), which primarily represents the global stock markets of developed countries except Canada and the United States, returned 1.3%. Since the beginning of the year, but most noticeably during this quarter, the price of natural gas has increased significantly. This price increase puts Europe in a critical situation in preparing for winter since its energy consumption is heavily dependent on natural gas.
4. Emerging markets, represented by the MSCI EM Index in local currencies, declined 6.7%. During the quarter, the Chinese stock market was rattled in part due to the real estate giant Evergrande. The latter defaulted on its bonds coupon payments which were due on September 23 and 29 as well as on October 11, thus starting a 30-day grace period for the payment of each of these coupons.

¹ The composition of the SAI Balanced Funds Index is 40% FTSE TMX Universe, 30% S&P/TSX and 30% MSCI World.