The third quarter of 2021 was marked by solid returns, especially for pension funds. However, this optimism is being dampened by fears about inflation, job shortages and stockouts in 2022.

The third quarter was strong, data from CIBC Mellon indicate. Based on $309.3 billion of assets in Canadian investment plans, the BNY Mellon Canadian Master Trust Universe edged upward 0.77 per cent in Q3 2021. As of September 30, 2021, the median one-year return for this plan index was 11.98 per cent, and the median annualized 10-year return was 9.36 per cent. 

BNY Mellon points out that the third quarter 2021 gain is the sixth consecutive positive quarterly median return since the pandemic was declared in Q1 2020.

These results were achieved despite the market turmoil, BNY Mellon adds. “Canadian plan sponsor performance remains strong despite equity markets losing steam, in particular emerging market equities, while rising yields caused negative performance in the bond markets,” explains Catherine Thrasher, Head of Strategic Client Solutions and Global Risk Solutions, CIBC Mellon and BNY Mellon. 

Encouraging signs... 

Encouraging data are also emerging in the fourth quarter. Canada gained 154,000 jobs in November 2021, according to an article published on the Conference Board of Canada website. The independent research organization reports that the unemployment rate plunged for the sixth consecutive month in November, to 6.0 per cent.

Canadian businesses are confident, according to a Business Development Bank of Canada (BDC) survey released on December 8, 2021. The Canadian Entrepreneurs’ 2022 Investment Outlook found that 84 per cent of businesses plan to maintain investments or invest more in the next 12 months. This proportion has increased by one percentage point since spring 2021 and eight points since December 2020, BDC says.

The BDC survey also found that 74 per cent of businesses expect Canadian economic conditions to improve or stay the same. In addition, 83 per cent of businesses predict that their sales will increase or remain steady. Accommodations and food services companies are the most optimistic, BDC said in its release. 

“The results indicate that entrepreneurs' confidence in the economy is strong and that investment intentions are above their pre-crisis level, with one out of five SMEs planning to increase their investments in 2022," says Pierre Cléroux, BDC's Vice-President of Research and Chief Economist. 

...plus headwinds 

On the less rosy side: The same BDC Investment Outlook found that 55 percent of businesses are finding it difficult to hire qualified staff. This is the highest proportion since BDC began its annual surveys in 2019. 

“Fear of new lockdowns is slowly fading, thanks to vaccination, and businesses are optimistic for 2022. However, a persisting labour shortage, as well as supply chain disruptions linked to the reopening have emerged and will limit investments,” Cléroux adds.

The Conference Board of Canada, in an article on employment, reports that sluggish wage growth is fuelling labour shortages even more than the Canadian Recovery Benefit (CRB) did. The research organization says this is particularly true in the low-wage service sector. The federal government ended the CRB on October 23, 2021.

The Conference Board also believes that permanent remote work could continue to impact sectors such as building support staff, hospitality and retail in downtown areas of large urban centres. It notes that despite the lifting of public health measures, about 4.2 million Canadians were still working remotely in November 2021. This number declined by only 400,000 from November 2020. 

Inflation likely  

In a separate article published Dec. 8, the Conference Board noted that the Bank of Canada has kept its overnight rate at 0.25 per cent. The Bank of Canada expects inflation to remain high in the first half of 2022, before falling back to 2.0 per cent in the second half of the year, the research organization says.

"The Bank will leave the policy interest rate at its effective lower bound until economic slack is absorbed and the 2.0 per cent inflation target is sustainably achieved,” the Conference Board mentions in its article. It adds that the Bank's latest projections suggest that the first interest rate hike is not expected until “sometime in the middle quarters” of 2022. 

Bank of Canada statistics published on its website show that total consumer price index inflation was 4.7 per cent on October 1, 2021, versus 0.7 per cent a year earlier. The last time a spike of this scale was reported was on February 1, 2003. 

Heightened volatility 

In a webinar broadcast on December 9, 2021, Franklin Templeton Investments delivered its global investment outlook for 2022. Senior Vice-President and Portfolio Manager, Franklin Templeton Investment Solutions, Michael Greenberg shared his outlook on the financial markets over the next 10 years. He analyzes trends such as inflation, interest rates and the valuation of various assets on an annual basis. Goldberg said he bases his risk-adjusted return outlook on valuations of 46 asset classes. 

“Over the next seven to 10 years, we expect economic growth and global inflation to be around 3 per cent, which is up slightly from the inflation rate we projected last year,” Goldberg says. “That's a pretty good environment for risky assets, but there will probably be an increase in volatility, related to interest rates going up in the next three years.”

Higher returns in Canada 

Michael Greenberg expects higher returns from Canadian equities than from U.S. equities, along with higher volatility. Although Canadian equities have underperformed in recent years, they are now more attractively valued than U.S. equities, he says. Greenberg sees a favourable environment for asset allocation in Canadian and foreign equities, as well as in corporate bonds.

He projects that inflation will remain an important driver of volatility in the coming years. He points out that the U.S. inflation rate hit a 30-year high of 6.2 percent in October 2021. “The effect of COVID-19 on the supply and demand of durable goods, services and commodities, as well as jobs, has a very large impact on inflation,” he points out. 

On the supply side, he mentions that COVID-19 has forced plant closures and disrupted supply chains. At the same time, demand for goods has rebounded very quickly. “This has created price imbalances in goods such as semiconductor chips, appliances, automobiles and building materials,” he says.

Suppliers are expected to be slower to deliver their goods to market. Greenberg believes it will take a few quarters before this situation is resolved. This will continue to drive the inflation rate, he believes.