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2020: Anxiety over prospects of PFAs investment in equities

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CBN, USSD, banks
CBN Governor, Godwin Emefiele

…As investment in equities declines for 2nd year by 8.3%

By Nkiruka Nnorom

THERE are anxieties over the prospect of Pension Fund Administrators (PFAs) investment in equities in 2020, with capital market operators projecting a reversal of the 8.2 percent, year-on-year, y/y,  decline recorded in the eleven months ending November 30, 2019, which indicated second consecutive year of decline.

Financial Vanguard’s analysis of the latest data on pension assets released by the National Pension Commission (PenCom) showed that PFAs scaled down their investment in equities to N535.9 billion in the eleven months ending November 2019 from N584.3 billion in the corresponding period in 2018, indicating 8.3 percent y/y, decline.

READ ALSO: Equities: Weak outlook as year ends

This marked the second consecutive year of decline as the level of the PFAs’ investment in equities declined by 11.8 percent y/y, in 2018, falling from N662.7 billion in November 2017.

However, investment analysts and securities dealers indicated that the PFAs are already flooding the stock market, encouraged by the recent rally, and would likely continue to raise their stake, if the Central Bank of Nigeria (CBN) sustains the policy that excludes local investors from Open Market Operations (OMO) Treasury Bills, which resulted in low interest rate regime in the fixed income market.

Though the PFAs regulation (Amended) requires the administrators to invest as much as 30 percent of their total assets annually in equities, but that has not been the case as they committed mere 5.36 percent of their total assets in equities, according to the data obtained by Financial Vanguard.

PFAs equities investment versus others

Financial Vanguard’s analysis showed that the second year decline in PFA investment in equities in the eleven months ending 2019 was due to the negative movement that characterised the stock market throughout 2019 and efforts by the administrators to keep the contributors funds safe.

Thus, while the PFAs reduced investment in equities in the 11 months ending November 2019, there was significant increase in their investment in FGN securities, corporate debt securities and local money market securities among others.

Breakdown showed that PFAs grew their investment in FGN green bonds by 235.8 percent, y/y, to N15.65 billion in November 2019 from N4.7 billion in November 2018 , while investment in FGN sukuk bonds rose by 226.5 percent, y/y, to N78.11 billion from N23.92 billion during the same period.

PFAs investments in Infrastructure Funds, REITs as well as cash and other assets saw 160.2 percent, 109.8 percent and 157.8 percent, y/y, growth respectively.

They also raised investment in bonds to N4.86 trillion in 2019 from N4.44 trillion in 2018, indicating 9.5 percent, y/y, increase, while their investment in TBs rose by 25.4 percent, y/y, to N2.12 trillion from N1.69 trillion in November 2018.

Furthermore, PFA shored up bank placements significantly by 69.5 percent, y/y, to N1.08 trillion from N636.99 billion in 2018, while the investment Commercial Papers (CPs) saw 38.5 percent, y/y, increase to N95.3 billion from N68.8 billion in 2018.

Others are corporate infrastructure bonds (+118.5%), foreign money market securities (+73.2%), agency bonds (+15%), Private Equity Funds (+20.1%), Open/Close End Funds (+17.5%), corporate bonds (+16%) and foreign ordinary shares (+13.3%).

However, like local ordinary equities, PFAs also shied away from state government securities and Supra-National bonds, which fell by 18.1 percent and 34.2 percent, y/y,  respectively during the period.

Monetary Policy induced rally in equities

Recall that the CBN had at the twilight of 2019 banned local investors and non-financial institutions from participating in its Open Market Operation (OMO) Treasury Bills (TBs) auctions, leading to influx of investors to the fixed income space.

The upsurge in demand prompted sharp decline in yields on fixed income instruments, especially the Nigerian Treasury Bills (NTBs). For example, yields on 364-Days NTB fell by 865 basis points to 5.85 percent last week, from 14.5 percent in January last year. This decline in yields, which also translated to negative returns vis-à-vis inflation rate of 12.85 percent, shifted investors preference and attention to the higher yielding but risky assets.

A major beneficiary of this shift is the Nigerian Stock Exchange (NSE), which has recorded year-to-date gains of over ten percent as at January 17, 2020.

Operators’ expectation

Investment analysts who spoke to Financial Vanguard, expressed optimism that pension fund managers would bank on the renewed activity in equities to move funds to that investment space.

Mallam Garba Kurfi, Managing Director/Chief Executive Officer, APT Securities and Fund Limited, opined that if the monetary policy remains the same and monetary rate remains low, there would to be an influx of pension funds into the equities market.

Already, he said there have been signs of more allocations to equities by the fund managers this year.

“As long as the monetary policy remains the same and monetary rate remains low, there would continue to be an influx of pension funds into the equities market because they can invest up to 25 percent of their total assets in equities as we speak,” he said.

Kurfi added that yields in money market is now below double digit, saying: “So if you invest in money market, you are investing in negative return environment; negative in the sense that you are earning less than inflation. So, people are looking for alternative investment and equities provide it. Some individual stocks have gained as high as 30 percent this year and this is a plus for the PFAs.”

Also speaking, Mrs. Toyin Sanni, CEO, Emerging Africa Capital Group, said: “Already, 2020 has witnessed a strong equity market rebound which if sustained will certainly make the market more attractive for equity and other investors.

“If the central bank sustains the drive to keep interest rates low and this is successful, this is another basis for PFAs and other investors to seek more attractive outlets including the equity market and infrastructure funds.”

However, David Adonri, Managing Director/CEO, Highcap Securities disagreed with the others, saying that the equities market is not yet attractive enough to warrant sustained investment by the PFAs.

He explained that “There is a relationship between savings and investment and the mechanism of the PFAs is to mobilise savings in the economy, which can then be invested.

Ahmed, tax
Zainab Ahmed

“However, within the investment space, we have debt and equities, any time the economy is having prospects that are not bright, financials assets plus savings must migrate to fixed income. That was what happened last year and that is what has been happening in recent time.

“Due to under-performance in the economy, a lot of financial assets that would have been invested in equities usually find their way to fixed income and that is logical because when the economy is in distress, the risk of equities market becomes very high. When you look at the PFAs, their major consideration is preservation of capital and safety of investment and that will influence their investment decision.

So, one is not surprised that they took only five percent to equities market and then diluted it with debt.”

Continuing, he said: “If the prospect of the economy is right and people can interpret the situation in the economy that the prospects are now getting right, then it would only be natural for the PFAs or any other investor to pitch their tent in equities market.

“If the prospects are bright, the equities market will be better, more profitable and liquidity will also be high. Those are the factors that would influence the decisions of the fund managers, but as it is, the equities market is still not attractive based on the fact that the economy is not supportive enough to make the equities market to be attractive.

“The decisions and actions of PFAs in recent times have been very rational and appropriate. Therefore, if the economy can grow at a higher rate, if inflation can retrace to lower single digit and allow the interest rate to descend to lower single digit, that means that the economy is recovering and that will impact the equities market.

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“At low interest rate, the yield on equities will surpass the yield on fixed income and financial asset will start to migrate to equities.”

Vanguard

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