Overview of pension fund returns and financial markets - 2nd quarter 2022

SAI Balanced Funds Index

It was a grueling second quarter for the markets as was the first quarter that was also quite difficult. While the various equity markets have fallen sharply since the beginning of the year, bonds have also been hit hard, not offering investor protection that usually is expected from them. Thus, the SAI Balanced Funds Index, which represents a traditional balanced portfolio composed of 60% equities and 40% bonds, returned -10.4% for the 2nd quarter of 2022 and returned -13.5% for the first 6 months of the year.

Canadian Bonds

During the quarter, inflation grew consistently, and the market poitioned itself to reflect further interest rate increases in addition to those already announced by the central banks. Recession fears then heightened due to the increased pressure on consumers arising from higher borrowing costs coupled with higher prices for various goods and services. In this context, the FTSE Canada Universe Index, which represents the Canadian bond market, fell 5.7% during the 2nd quarter of 2022 and fell 12.2% for the first 6 months of the year.

1. During the quarter, there was a parallel shift in the Canadian yield curve of approximately 0.8% while corporate bonds credit spreads (all sectors combined) of various maturities increased by approximately 0.2 to 0.4%.
2. Both at the maturity and sector level, returns were negative during the period due to increased interest rates and credit spreads as previously mentioned. Quarterly yields for short, medium and long-term bonds were -1.5%, -4.8% and -11.8%. Federal, provincial and corporate bonds posted returns of -5.0%, -7.7% and -4.8% respectively.
3. The Bank of Canada raised the overnight rate target to 1.5% at its June 1st meeting, and to 2.5% at its July 13, 2022 meeting. As you may recall, at the start of the year, the overnight rate target was set at 0.25%, which means the bank raised rates by 2.25% in almost 6 months in order to fight uncontrolled inflation.

Canadian Equities

While the Canadian stock market, represented by the S&P/TSX index, had a good start for the first 3 months of the year with a return of 3.8%, the latter suffered a major setback in the 2nd quarter of 2022 with a return of -13.2%, therefore posting a return of -9.9% year-to-date to June 30, 2022.

1. The consumer price index increased on an annual basis by 8.1% in June 2022. Inflation has manifested itself through various goods and services, but the rise in the price of gasoline is a major factor that strongly contributed to the increase.
2. The price per barrel of Western Texas Intermediate crude oil, which had risen sharply during the 1st quarter, remained essentially at the same level during the 2^nd quarter, while refining costs rose sharply to reach record levels. To illustrate, the average refining costs between 1985 and 2021 were approximately $10.5 per barrel, while costs exceeded $50 per barrel during the second quarter. Although the price of a barrel of crude oil remained at a similar level during the quarter, consumers continued to experience an increase in their gas bill.
3. At the sector level, all sectors recorded a negative return during this quarter, in particular the information technology and health care sectors which posted a considerable drop in return of -30.7% and -49.6%, respectively. The energy sector was relatively spared with a return equal to -1.9%.
4. At the cap level, small cap stocks had a more significant drop in returns than mid and large cap stocks. To this effect, the S&P/TSX Small Cap, S&P/TSX Mid Cap and S&P/TSX 60 indices returns were -20.8%, -15.3% and -12.7%, respectively.

Global Equities

The MSCI World Index, which represents the global stock markets of developed countries, quarterly return was negative at -14.3% in local currencies, while for the year-to-date as of June 30, 2022, the return is -18.3%.

1. The Canadian dollar depreciated against the US dollar and appreciated against a combination of other currencies (e.g. the euro, the Japanese yen) so that overall, the MSCI World index in Canadian dollars’ return (-13.4%) is slightly higher than the return in local currencies (-14.3%). Note that the US dollar represents more than 65% of the index.
2. The benchmark S&P 500 US, representing the US stock market, fell -16.1% in the second quarter. In this time of uncertainty, the US dollar appreciated significantly compared to other currencies during the quarter. As such, the DXY Index, which represents the change in the value of the US dollar relative to a multitude of other major currencies such as the euro, the Japanese yen, and the pound sterling, rose by 6.5% during the quarter. From the Americans' point of view, this is an advantage for consumers since imported products are less expensive. However, it is a disadvantage to American companies that export. From the foreign countries standpoint, these are mainly disadvantages, particularly for countries importing energy and raw materials, but also for countries who hold US dollars denominated debts since it becomes more difficult for them to service their debts.
3. The MSCI EAFE Index in local currencies, which primarily represents global equity markets of developed countries except for Canada and the US, returned -7.8%. Germany, which is an important manufacturing economic engine in Europe, but also worldwide, is heavily affected by high energy costs in Europe, its economic monthly balance was negative at almost 1 billion euros in May, the first time in about 14 years. With little prospect of relief at the moment, it will be important to monitor developments closely in case Russia further reduces natural gas supplies later this year. Moreover, Germany and several of its neighbors have decided to temporarily return to coal-fired power plants to conserve their precious natural gas reserves.
4. The MSCI EM index in local currencies, representing emerging markets, fell -8.1% over the same period. Latin American stock markets such as Colombia, Peru and Brazil saw the weakest returns due to concerns about a potential global recession and lower prices for industrial metals. For example, for industrial metals, we can see that copper, of which China is the main importer, fell from $4.74/lbs to $3.71/lbs during the quarter due to COVID-19 confinements imposed by the Chinese government reducing economic activity.

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