Canadian institutional investors are still in a sweet spot with the relationship between stocks and bonds in 2023, despite a difficult start to October for the S&P/TSX composite index, says one expert.

At the end of last week’s trading period, the Canadian equities index showed a negative return of 0.72 per cent, leaving the S&P/TSX flat for the year so far. Perry Teperson, managing principal and portfolio manager of institutional clients at Leith Wheeler Investment Counsel Ltd., says the downturn for equities hasn’t changed a dynamic where stocks are still ahead of bonds in Canada.

“Pension funds aren’t getting poorer in this environment, on a balance sheet basis, because their liabilities are getting cheaper. The equities are actually ahead of bonds — slightly in Canada and by a bigger margin globally — because the global markets this year held up better than the Canadian markets.”

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As equities perform better than bonds, pension plans are getting wealthier from an overall portfolio position, says Teperson. “As interest rates go up, you’ve got this relief on the liability side, if the actuaries use the bond market as a very strong signal for where they might peg their discount rates or the rates at which they discount liabilities.”

At the end of September, the bond market was down 1.5 per cent, he says, leading to a cheaper landscape of liabilities for pension plans. Inflation has played a role in every economic storyline for 2023 — and right now, the stubbornness of inflation is challenging several aspects of the domestic economy. “We’re all probably in a higher for longer, higher interest rates scenario.”

The stocks and bond markets have demonstrated lukewarm results in the face of sticky inflation as Canada anticipates an economic slowdown in reaction to higher interest rates. Teperson says he expects interest rates will take a longer than expected to get back under control.

“We’re looking at higher interest rates in the bond market and, as a result, we’re dealing with equity markets that are trying to piece the puzzle together and think about when those interest rates might come to reignite the next upcycle for the economy.”

Canadian institutional investors would be more worried in a scenario where the bond market was selling off at the same time equities were selling more than expected, he adds. “Then you would be more concerned because the equities aren’t keeping pace with the liabilities.”

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