CPP Ends Q1 on a High with Positive Returns

Canadian Pension Plans (CPP) finished Q1 2024 on a high note following a strong performance in the equity market.

CPP generated a median return of 2.5% across the quarter, according to the Northern Trust Canada Universe, which reflected the macroeconomic data flows that dominated 2024.

Investors' expectation of interest rate cuts by central banks later in the year, alongside economic resilience, pushed equity markets higher while bonds suffered.

The report noted that, despite the strength of inflation figures during the period, market participants took comfort in its long-term direction and fears of a recession faded.

Katie Pries, president and CEO of Northern Trust Canada, said:  “The strength of Canadian pension returns this quarter validated the pension toolkit, a bespoke asset utilized by plan sponsors, is channeling pension plans on a course to sustainable financial health.”

The Canadian economy experienced an easing of core inflation data during the quarter relative to the end of 2023. The Bank of Canada predicted that inflation is likely to stay around 3% through the second quarter of 2024, ease below 2.5% during the second half of the year and return to its target of 2% in 2025.

Canada’s labor market also improved in January and February, with employment increasing 0.2 percentage points in both months before it posted flat results in March, according to Statistics Canada. However, the employment rate declined by 0.1 percentage points to 61.4% in March, the sixth consecutive monthly decrease, signaling employment growth has not kept pace with population growth.

The Bank of Canada kept interest rates steady at 5% to continue to normalize its balance sheet. It said while inflation is still too high and risks remain, consumer price index and core inflation had eased further in recent months.

The Canadian Fixed Income market, as measured by the FTSE Canada Universe Bond Index, declined -1.2% across the quarter. Provincial and federal bonds witnessed declines while corporate bonds posted a slight gain across the quarter. In terms of bond durations, long-term and mid-term bonds generated negative returns while short-term bonds observed a small gain for the period.

The Global Landscape

The report examined the factors impacting the Canadian bond and equity markets in comparison to the performances of the US and the rest of the world.

It found Canadian equities rose 6.6% across the quarter, measured against the S&P/TSX Composite Index with most sectors posting gains for the period. The strongest performance came from the healthcare sector followed by the energy and industrials sector. However, the communications services and utilities sectors showed the worst performance, generating negative returns.

In contrast, communications services, energy and information technology sectors had the best performance in the US equities market. Northern Trust highlighted that this was mainly driven by the performance of the “Magnificent Seven”,  despite falling profits for Tesla in recent months. In particular, both Microsoft and Alphabet saw a large increase in their share prices in Q1 as the companies continued to progress in their investments in AI.

International developed markets, as measured by the MSCI EAFE Index, returned 8.7% across the quarter. As in the US, most sectors generated positive returns and the information technology and consumer discretionary sectors showed the strongest performance.

The report also noted that the MSCI Emerging Markets Index increased 5.1% across the quarter. Among emerging markets, the real estate sector showed the worst performance while the information technology sector showed the best with double-digit performance.