Market Commentary – Third Quarter 2023

The following market commentary is courtesy of the Plan’s Foreign Equity investment manager, MFS Investment Management Canada Ltd.

Global Equity market review

After a strong first half of 2023 driven by enthusiasm in artificial intelligence and hope for a soft landing, the global equity market declined in Q3 as bond yields rose and investors worried that interest rates could stay higher for longer. A generally strong US economy contrasts with a faltering growth outlook in China and Europe, while rising oil prices may compound worries about persistent inflation. With much uncertainty in growth, inflation and interest rates outlook, equity markets may remain volatile as the lagged effects of higher interest rates and tighter credit standards continue to weigh on the economic and earnings outlook.

GLobal Equity performance as at Sept 30, 2023
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Canadian Equity market review

Canadian equities declined 2% in the second quarter (S&P/TSX Composite Index, total return basis, CAD). This aligned with broad-based global equity weakness as sharply rising long-term interest rates reflected increasingly persistent inflation and spooked investors. The Canadian index performance was weighed down by its high proportion of interest-sensitive stocks such as banks, telecoms, utilities and pipelines, only partly mitigated by strong performance from its influential energy sector as the price of oil jumped nearly 30% in the quarter. The S&P/TSX forward earnings consensus fell for the fourth consecutive quarter. Aggregate 2023 EPS estimates were revised lower by 4% for a cumulative 11% negative revision over the past year and indicating a 6% outright decline from 2022 levels. The 2024 consensus outlook remained roughly unchanged in the quarter and indicates a 13% rebound in 2024. Only the technology sector registered positive revisions for both 2023 and 2024 in the quarter. The 12-month forward price/earnings multiple for S&P/TSX composite dipped to approximately 12.5x during the quarter and remains roughly 15% below the long-term average and 30% below the S&P 500.

Canadian Equity performance as at Sept 30, 2023
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U.S. Equity market review

The US market, as measured by the S&P 500 Index, finished lower in Q3 2023. While the quarter started on a positive note in July, it turned negative during the last two months of the period as investors became concerned that interest rates could go higher than expected and stay higher for longer. Economic growth in the United States expanded during Q2 2023, with GDP increasing 2.1%. This was nearly the same as the previous quarter as the economy continued to grow despite higher interest rates. While inflation is significantly lower than where it was a year ago, it is still not at the US Federal Reserve’s 2% target rate. For the quarter, growth and value performed in line with each other in the large-cap space and value outperformed growth in the midcap and small-cap spaces. Energy, communication services and financials were the best-performing sectors, and utilities, real estate and consumer staples the worst.

U.S. Equity performance as of Sept 30, 2023
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Canadian Fixed Income market review

The FTSE Canada Universe Bond Index returned -3.87% in Q3. The negative total return was driven by rising government bond yields, as credit spreads declined slightly in the quarter. The Bank of Canada increased the overnight rate to 5% in July and left the rate at that level during their September meeting. After a strong start to the year, the Canadian economy has entered a period of weaker growth, marked by weakening consumption and a decline in housing activity. However, inflationary pressures, which have eased for much of the year, remain broad-based. The market is now pricing in another 25 basis point hike by January 2024, with the terminal rate for the cycle now at 5.25%. Canadian government bond yields rose across the curve in the quarter. In a change to the recent trend, long-term yields rose more than short-term ones and the yield curve steepened. Canadian investment-grade spreads, as represented by the Bloomberg Canada Aggregate Corporate Index, tightened by 3 bps in Q3 leading to the outperformance of corporate bonds. Spreads finished the quarter at 147 bps, which is just below the average level for the year (YTD range: 141 to 171). The technical backdrop remains supportive with YTD 2023 issuance behind that of last year, meanwhile the streak of inflows into global fixed income continued.

Canadian Fixed Income performance as of Sept 30, 2023
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The views expressed in this report are those of MFS and are subject to change at any time. Issued in Canada by MFS Investment Management Canada Limited. MFS Institutional Advisors, Inc. provides certain sub-advisory services to all MFS Investment Management Canada Limited portfolios, including discretionary investment management for non-Canadian portfolios or components of portfolios. Data is as at September 30, 2023.

MFS Disclosures