Canadian Defined Benefit Plans Return 2.5% in Q2

Plan sponsors saw second straight positive quarter despite May sell-off.

Canadian defined benefit plans generated returns of 2.5% for the second quarter of the year, notching a second straight quarter of positive performance despite US-China trade talks concerns and weaker global growth spurring a stock market sell-off in May, according to data from Northern Trust Canada.

The plans’ performance was slightly below their US defined benefit counterparts, which saw quarterly investment returns of approximately 2.66% during the quarter.

“In the midst of uncertainty surrounding trade policies coupled with a mixed economic climate, Canadian pension plans continue to generate positive investment returns in the second quarter of 2019,” Arti Sharma, CEO and president of Northern Trust Canada, said in a release. “Year-to-date, the median return is positioned at 9.9% versus 2.9% the same time last year.”

Canada’s unemployment rate fell to 5.4% in May, its lowest level in 43 years, but nudged back up to 5.5% in June.

Canadian equities as measured by the S&P/TSX Composite Index rose 2.6% during the second quarter, as seven of the index’s 11 sectors earned positive returns, led by information technology stocks. The health care sector posted the weakest results as stocks in cannabis companies declined after showing strong returns during the first quarter.

Healthy GDP growth, consumer spending, and expectations for future interest rate cuts buoyed US equity markets, and pushed market indices to new records with the S&P 500 returning 2.0% in Canadian dollar terms, and 4.3% in US dollars, while economically sensitive stocks generally outperformed defensive stocks.

The MSCI EAFE Index, which measures the performance of international developed markets, returned 1.7% in Canadian dollars in the second quarter, while the ongoing trade disputes, and slower global growth showed the vulnerability of export-oriented economies such as Japan and Europe, said Northern Trust. Shares in the UK performed well during the quarter in local currency despite ongoing Brexit-related uncertainty and the resignation of Prime Minister Theresa May.

Northern Trust also said escalating US-China trade tensions caused emerging market stocks to lag compared with their developed market counterparts. The MSCI Emerging Market index declined 1.5% in Canadian dollars for the quarter, as eight of the 11 sectors within the index posted negative returns. Stocks in the Chinese information technology sector were hit particularly hard over reports that the Trump administration was considering penalizing more Chinese technology companies while placing Huawei Technologies on a blacklist.

In terms of monetary policy, the Bank of Canada (BoC) kept its overnight rate target at 1.75% through the second quarter, and lowered its GDP growth forecast for 2019 to 1.2% from 1.7% due to domestic challenges and a global slowdown. The FTSE Canada Universe Index returned 2.5%, with long-term bonds outperforming short- and mid-term bonds.

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 servicing offerings.

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