Overview of pension fund returns and financial markets-1st quarter 2019
SAI Balanced Funds Index
Collectively the stock market rebounded in the first quarter following last December’s correction. Since the beginning of the year, the SAI Balanced Funds Index has increased by 8.6%.
The quarter was marked by the inversion of the curve, as 10-year Canadian government bond yield rates fell below the 91-day Treasury bill rate. The decline in Canadian government bond yield rates, combined with the narrowing credit spreads on provincial and corporate bonds that widened last December, both contributed to the quarterly Canadian bond yield of 3.9% (FTSE TMX Canada Universe).
- The Bank of Canada maintained the overnight rate at 1.75% twice since December 5th. It justified this measure, among others, by the trade dispute between China and the United States and the level of household debt-to-income in Canada.
- The US Federal Reserve (Fed), which initially had a tightening monetary policy stance with possibly three rate hikes in 2019, changed its position last December, at the same time the stock market was in decline, and again in March, indicating that according to the new economic forecasts, a monetary easing was no longer necessary in 2019. Therefore, the Fed left its key rate unchanged at 2.50% during the quarter.
- In terms of sector performance, decline of rates benefited provincial bond yields (+5.2%) more than corporate bonds (+4.0%) and federal bonds (+2.5%).
The increase in the Canadian stock market, represented by the S&P/TSX benchmark, has been in the vicinity of 13.3% over the last three months, allowing Canadian investors to nullify the significant losses incurred during the previous quarter.
- In Canada as in the United States, the Bank of Canada's halt in interest rate increases contributed to the rebound in the market, particularly as concerns relating to debt and real estate decreased.
- All sectors of the Index gained ground in the first quarter. Leading the way is the health sector (+49.0%), driven primarily by cannabis stocks, while the materials sector ranked last (+8.5%).
- It is the mid-cap stocks for which the rebound in the last quarter was the most profitable. The S&P/TSX Small Cap, S&P/TSX Mid Cap and S&P/TSX 60 Index returns were +10.7%, +15.8% and +12.5%, respectively.
Investor optimism was encouraged by the progress in US-China trade talks and the halted interest rate hikes. Global developed market equities, as represented by the MSCI World Index, rose 10.0% in Canadian dollars.
- The appreciation of the Canadian dollar against the US dollar reduced investor gains, when calculated in Canadian dollars (+10.0%) rather than local currencies (+12.6%).
- The US market Index, the S&P 500 USD, gained 13.6% during the quarter. The Fed's change in perspective and the performance of IT stocks contributed significantly to the performance of the Index.
- Supported by the more accommodating stance of central banks, Eurozone and UK equities also rebounded during the quarter despite concerns about economic growth and Brexit. In the end, the MSCI EAFE Index (local currencies) rose by 10.6% for the quarter.
- Emerging market equities recorded a return of 9.83% in the first quarter (MSCI EM Index, local currencies). In China, the Fed's accommodating comments and the US decision to suspend tariff increases of $200 billion worth of Chinese goods as well as the government's continued support for the Chinese economy have all been beneficial.
|Indices||Q1 2019||Year 2019|
|SAI Balanced Funds Index1||8.56%||8.56%|
|FTSE TMX Canada Universe||3.91%||3.91%|
|MSCI Emerging Markets|
1 The composition of the SAI Balanced Funds Index is 40% FTSE TMX Universe, 30% S&P/TSX and 30% MSCI World.
|Medians||Q1 2019||Year 2019|
|Emerging Market Equities||7.79%||7.79%|