Performance of Markets

For the fiscal year, the FTSE Canada Universe returned 2.1% (CAD), the S&P/TSX composite 14.0% (CAD), the MSCI World Net 25.1% (CAD), and the MSCI Emerging Markets Net 8.1% (CAD).

Canadian 5-year bond yields increased by about 50 bps from March 2023 to March 2024, while those in the U.S. increased by slightly more, about 70 bps. Corporate spreads in Canada decreased in the risk-on environment.

Canadian equities gained 14.0% over the 1-year period. IT and Health Care had the best performance, but with their relatively low weights in the index, didn’t contribute as much as the Energy sector’s 23% gain. Communications was a drag for the index, losing 14.8%.

The global equity market gained 25.1%, with IT and Communication Services the best performers for the period, returning 42.4% and 39.6%, respectively. Utilities and Consumer Staples lagged but were still positive. American equity markets led the way in terms of performance. Emerging markets (EM) had a more difficult year, but still turned out a positive performance, gaining 8.1%. Within EM, Energy and IT names did the best, while Communication Services and Real Estate suffered significant losses, losing 11.4% and 11.0%, respectively.

The private market portfolio helped sustain absolute returns over the fiscal year, with the exception of the allocation to global real estate. Specifically, the JCF private equity portfolio returned 7.7% (USD), global real estate -4.0% (USD), private debt 2.8% (USD), timber, agriculture & infrastructure 3.9% (USD), and Hedge Funds 9.6% (CAD). The private market portfolio was built over different economic cycles and targets long-term returns as opposed to any singular fiscal year.

In the private equity space, deal volume and deal value continued to fall in the face of high rates and economic uncertainty, with both decreasing by about one-third from 2022. There was record-high dry powder of nearly US$2.6 trillion at the end of 2023, with many funds anticipating positive developments in 2024 as rates are expected to fall.

In real estate, the office sector continued to be a sore spot as work from home and hybrid working arrangements reduced demand for office space. That said, with dry powder increasing and assets repricing, we are seeing opportunities open up. On the other hand, the hotel sector performed well. In Q1 2024, the transactional market continued to show subdued activity for the seventh quarter in a row. In total $130.2 billion of income producing properties traded during the quarter, representing a 19% decrease compared to Q1 2023. Levels are comparable to years after the Global Financial Crisis.

In private debt, leverage loan default rates continued to rise throughout 2023, reaching about 2%, around the same level it was pre-COVID, but well above the under 1% low of 2022. Bank retrenchment combined with smaller borrowers looking to private credit manager for funding has provided interesting opportunities for double-digit yields. In Infrastructure, fundraising remains slower, as there has been consolidation in the infrastructure manager market and deal activity has been slower, but is thawing. While there continues to be a wider bid/ask spread, in Q1 2024 there was a steeper decline in deal valuations vs. number of deals. The lower valuation market is attractive to funds currently deploying capital. Current environment of higher rates has put downward pressure on valuations in certain sub-sectors and impacted overall transaction activity, which should create attractive entry opportunities for managers in the market and the making for a strong 2024 vintage year in infrastructure.

Finally, in hedge funds, event-driven and relative value funds performed well. A more normalized interest rate and inflation environment may prove fruitful for systematic strategies which seek to capitalize on sustained momentum and trends in either direction. Going forward, any negative surprises could have capitulation impacts, reinforcing the need for defensive strategies.