Market Commentary

Returns among the PEPP asset allocation funds were positive with the more aggressive funds achieving higher returns than conservatively structured funds. The Accelerated Growth Fund gained 2.9 per cent, the Balanced Fund increased 2.4 per cent, the Conservative Fund advanced 1.8 per cent, and the Bond Fund rose 1.6 per cent. This performance pattern among the funds broadly reflected the market action in the month as market gains on Canadian and foreign equities exceeded those achieved in the bond market. Alternative investment holdings depreciated modestly in market value and currency translation had a net negative influence on returns as the U.S. dollar depreciated versus the Canadian dollar. On a relative return basis, the majority of PEPP funds narrowly underperformed their benchmarks, as the positive returns in the foreign equity portfolio trailed those of the broader market. Conversely, the income portfolio delivered favourable relative results which had a positive influence on excess returns among the PEPP funds.

In more detail, equities delivered another month of positive returns. In a long-familiar theme, returns were led by stocks that exhibit growth characteristics, while value-stocks lagged. In terms of corporate financial performance, over half of S&P 500 companies have reported second-quarter earnings. According to FactSet, while analyst expectations have been very low, a majority of companies have exceeded analyst estimates thus far in the earnings season. There is a wide divergence in trends and earnings results, as the aggregate earnings decline for the second quarter is on pace for a -35.7 per cent decrease. In Canada’s large cap index, the gold sub-sector and the railroad companies were responsible for half of index gains achieved in July. Gold futures set all-time record highs as the contract price rose for the fourth consecutive month. Canada’s two main rail operators reported earnings in July that exceeded consensus estimates. While both companies experienced lower overall volumes in the past quarter, record quantities of grain were shipped and the outlook for future growth and activity for a number of segments improved. In fixed-income markets, the Canadian bond market advanced for the fourth month in a row, driven by the narrowing of credit spreads and moderately lower benchmark bond yields. Consequently, investment grade corporate issues strongly outperformed federal government bonds, and longer dated maturities outperformed short-term fixed-income securities.

As alluded to above, disciplined, value-investing has underperformed growth-investing for several years, resulting in a dramatic divergence of return outcomes between these two styles. From a valuation perspective, the PEPP equity portfolio is more conservative than index holdings, with risk controls that, in aggregate, guard from paying an excessive price for future growth.

Market Review – July 2020

Equities and fixed-income markets advanced, alternative investments declined, and the Plan’s foreign currency position had a small net negative influence on returns in July. Market details:

• The FTSE Canada Universe Bond Index, which tracks broad Canadian bond market investments, gained 1.3 per cent, while money market investments held steady.

• The S&P/TSX Composite Index advanced 4.5 per cent while gains for Canadian small/mid cap stock indices ranged between 6.5 and 7.4 per cent.

• In the U.S., the S&P 500 Index gained 5.6 per cent in U.S. dollars and rose 4.0 per cent in Canadian dollar terms as the U.S. dollar depreciated versus the Canadian dollar. The unhedged Russell 2000 Index advanced 1.1 per cent.

• The unhedged MSCI ACWI Index gained 3.7 per cent, the unhedged MSCI World Index increased 3.2 per cent, and the unhedged MSCI EAFE Small Cap Index rose 1.7 per cent. The unhedged MSCI Emerging Market Equity Index advanced 7.3 per cent.

Market Review – April - July 31, 2020

Equities achieved percentage gains in the low to mid-twenties, fixed-income markets advanced, alternative investments declined modestly, and the Plan’s foreign currency position had a net negative influence on returns on a Plan year-to-date basis. Market details:

• The FTSE Canada Universe Bond Index advanced 7.2 per cent, while money market investments increased 0.1 per cent.

• The S&P/TSX Composite Index increased 22.2 per cent, while gains for Canadian small/mid cap stock indices ranged between 33.6 and 48.7 per cent.

• In the U.S., the S&P 500 Index advanced 27.3 per cent in U.S. dollars but rose 20.9 per cent in Canadian dollar terms as the U.S. dollar weakened versus the Canadian dollar. The unhedged Russell 2000 Index increased 22.4 per cent.

• The unhedged MSCI ACWI Index gained 19.4 per cent, the unhedged MSCI World Index rose 19.0 per cent, and the unhedged MSCI EAFE Small Cap Index advanced 17.9 per cent. The unhedged MSCI Emerging Market Equity Index increased 22.4 per cent.

as at July 31, 2020