Robust equity markets provided a solid foundation for Canadian pension plans during the fourth quarter of 2020, with the median Canadian plan returning 5.0% for the quarter and closing a volatile year with a 10.0% gain, according to the Northern Trust Canada Universe.
During the last quarter of the year, major global economies continued to feel the impact as the coronavirus renewed its path around the world. Despite the headwinds of the pandemic, global equity markets generated healthy positive returns as investors welcomed the relief of further fiscal stimulus and the long-awaited approval of vaccines.
"The global pandemic undoubtedly was the focal point over the last year, but 2020 also symbolized a period of leadership, adaptation and resiliency," said Katie Pries, President and CEO of Northern Trust Canada. "Monetary and fiscal leaders were challenged with seeking unprecedented solutions for economic and financial relief. Many Canadians were confronted with pivoting from a traditional work setting to a virtual work from home environment. Canadian pension plan sponsors faced the difficult task of navigating through an extraordinary and unpredictable period in history, while safeguarding plan assets for future retirement. This test of resiliency was met with solid performance."
The Northern Trust Canada Universe tracks the performance of Canadian institutional investment plans that subscribe to performance measurement services as part of Northern Trust’s asset service offerings.
Pockets of uncertainty marked the fourth quarter, ranging from a U.S. Presidential election and Brexit negotiations to the growing need for further stimulus and the second wave of the coronavirus. Equity markets navigated through these obstacles, as optimism surrounding additional fiscal stimulus and the approval and roll-out of vaccines ultimately prevailed. Major central banks around the globe continued to maintain an accommodative stance which further complemented this optimism. Despite the year beginning with a very weak and volatile first quarter, major equity indices closed 2020 with strength and momentum, generating attractive positive returns.
Canadian Equities, as measured by the S&P/TSX Composite Index, advanced 9.0% for the quarter and 5.6% for the year. Health Care and Consumer Discretionary sectors led performance for the quarter and the Information Technology sector was the top performer for the year.
U.S. equities posted solid gains with the S&P 500 Index generating 7.0% in CAD for the quarter and 16.3% in CAD for the year. All sectors finished the quarter in positive territory, with Information Technology leading performance for the year. The NASDAQ witnessed its best year since 2009 (in USD), while the S&P 500 and Dow Jones concluded 2020 at record highs.
International developed markets, as measured by the MSCI EAFE Index, generated 10.7% in CAD for the quarter and 6.4% in CAD for the year. All sectors posted positive returns for the quarter, with the exception of Health Care returning a modest decline. The Energy sector led performance for the quarter, while the Information Technology sector closed the year as the top performing sector.
The MSCI Emerging Markets Index advanced 14.2% in CAD for the quarter and closed the year with a solid 16.6% return in CAD. All sectors produced positive gains for the quarter, with the Health Care and Information Technology Sectors leading returns for the year.
The Canadian economy witnessed modest momentum during the fourth quarter, benefiting from fiscal measures implemented to bring support to businesses as well as household incomes. The labour market observed an increase in jobs throughout October and November followed by a decline in December. Overall, the unemployment rate nudged lower to 8.6% in December from 9.0% in September. The Canadian dollar also advanced during the quarter in the face of USD weakness.
The U.S. economy benefitted from an overall improvement in employment numbers with the unemployment rate trending lower and finishing the quarter at 6.7%. The U.S. Federal Reserve (The Fed) maintained the federal funds target range at 0 – 0.25% and its commitment to using the tools necessary at its disposal to support the economy. The Fed also reiterated maintaining an accommodative stance until its targets for employment and inflation are achieved.
International markets welcomed further fiscal relief with the European Central Bank (ECB) ramping up its Pandemic Emergency Purchase Programme (PEPP) while extending it through the first quarter of 2022. The Bank of England (BoE) also increased its bond purchase program bringing further stimulus to the economy. Markets received a boost in the quarter as the European Union (EU) and the UK finally agreed to a post Brexit free trade agreement. In the Asia Pacific region, the Bank of Japan (BOJ) left interest rates and its Quantitative Easing program unchanged; however, it extended the time frame of the funding program for an additional six months.
Emerging markets witnessed solid results during the quarter, leading performance among the world’s regions. The Chinese Central Bank left interest rates unchanged as the economy continues to recover. The People’s Bank of China injected cash intermittently throughout the quarter, bringing further liquidity and support to the country’s banking system. The Reserve Bank of India (RBI) also maintained an accommodative stance as it left interest rates unchanged for the quarter.
The Bank of Canada (BoC) maintained its current pace of their quantitative easing program and left its overnight interest rate unchanged at 0.25%. The Canadian Fixed Income market, as measured by the FTSE Canada Universe Bond Index, returned 0.6% for the quarter and 8.7% for the year. During the quarter, the Canadian yield curve witnessed a rise in long term government bond yields while short term yields declined. Corporate bonds led performance for the quarter, while Provincials outpaced Federal and Corporate issuers for the year. Long term bonds outperformed the Short and Mid-term segments of the universe for both the quarter and year.
Northern Trust – Canada
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