February 15, 2021

Low interest rate: PFAs jerk up investment in equities by 55.3%

Stock market

Stock Market

… Cut investment in treasury bills by 66.6%

By Peter Egwuatu

Pension Fund Administrators (PFAs)  moved massively into the equities  market last year, raising investment in the market  by 55.3  per cent, year-on-year, in a determined bid to escape the abysmally low interest rate regime that prevailed in the treasury bills market last year.

The PFAs manage the nation’s total pension assets which rose by 20.5 per cent, y/y, to N12.3 trillion last year  from N10.2 trillion in December in 2019.

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Low interest rate on TBs

Financial Vanguard analysis showed that the average interest rate on freshly-issued treasury bills also known as Primary Market bills fell by 4,255 basis points (bpts) to 0.58 per cent in December  2020 from 4.8 per cent in December 2019.


For example, the stop rate on 91-Days TBs fell by 3,965 bpts to 0.035 per cent in the primary market auction conducted by the CBN on December 31st   from 4.0 percent in December 2019. Similarly stop rates on the 182 Days and 364-Days bills fell by 4,500 bpts and 4,300 bpts respectively to 0.5 per cent and 1.2  per cent in December 2020  from 5.0 per cent and 5.5 per cent in December  2019.

This development made TBs to be unattractive investors leading to massive shifts into the equities market especially in the fourth quarter of the year (Q4’2020). 

This triggered a bullish run in the equities market, prompting the market capitalization of the Nigerian Stock Exchange (NSE) which represents investors’ worth to rise up by 61.5 per cent, y/y, or  N8.09 trillion to close the year at N21.057 trillion from N12.968 trillion in 2019.

Similarly the NSE All Share Index (ASI) rose  by 13428.63 points or 50.02 per cent to close the year 2020 at 40.270.70 points from 26842.07 in 2019.


Response by PFAs

Reflecting how the above development impacted investment decisions by PFAs, the latest pension  data by the  Nigeria Pension Commission, PenCom revealed that PFAs’ investment in equities rose to N858.5 billion in December 2020 from N552.9 billion in December 2019, representing an upsurge of 55.3 per cent.

On the contrary,  PFAs  investment in treasury bills fell by 66.6 per cent, y/y,  to N628.2 billion in December 2020 from N1.9 trillion in December 2019.

As a result of this massive shift, the  share of PFA investment in equities  to the total pension fund assets grew by 6.9 per cent in December 2020 from 5.3 per cent in December 2019. 

However, the share of PFA investment in  treasury bills to the total pension fund assets fell to 5.1 per cent in December 2020 from 18.6 per cent in December 2019.


Operators /Analysts reaction

Speaking on this development, Chief Executive Officer, Cowry Asset Management Limited, Mr Johnson Chukwu said: “The stock market was attractive to investors following the  low interest rate environment in the fixed income market  despite the effects of coronavirus,  COVID-19 and the accompanying economic recession.

The upward trajectory would be sustained in 2021 if the rates from the money market instruments remain low. Investors would shift to investment that they would give them higher returns.

 “The positive performance of the equity market in 2021 would also be justified by the strong fundamentals of the several quoted companies on account of their resilience during the pandemic and the likelihood that they will remain resilient.”

Also commenting, market analysts and Vice Executive Chairman, HIGH CAP Securities Limited, Mr David Adonri Highcap said: “Q4’220 was when CBN came up with their expansionary monetary policy which resulted in fall of interest rate. At the same time, several FGN Bonds which matured during the period were redeemed without reissue.

 As a result, the financial economy became awashed with excess liquidity. And because rates on debt were not attractive, there was migration of financial assets to equities and forex. PFAs were part of the institutional investors that followed this direction. 

They massively rebalanced their portfolios towards more equities due to the prevailing monetary environment. Up till Q3, 2020, equities were seriously undervalued and their yields were in double digit. 

That intrinsic value attracted investors who were prepared to tolerate the higher risks of equities, since their expected bumper returns outweighed the risks.

Continuing, he said: “It will be difficult for the excessive demand for equities which spilled into Q1, 2021 to be sustained. 

CBN may be forced to rethink its expansionary monetary policy considering the worrisome impact on Inflation. The Federal Government requires huge funds from the domestic debt market this year to finance the budget deficit. This will pile upward pressure on interest rates. Finally, equities may suffer correction if 2020 full year results are below expectations. All these forces are likely to reverse the flow of financial assets from equities to debt.”

PFAs guideline

With regards to some capital market operators’ demand for a review of the PFAs guideline on equity investment, he said: “The PFAs are already guided by the provisions of their regulations which prescribe a ceiling for their exposure to various classes of investment. Before now, they were grossly underexposed to equities. 

Recent events enabled them to properly balance their investments. I don’t think that they have exceeded their cap on equities investment. It is unnecessary for the government to administratively restrain PFAs as long as there is no contravention of existing regulations. Let the market mechanism guide them to make investment choices that will best serve their investment objectives.”

In his own reaction, analyst and Head of Research and Investment at Fidelity Securities Limited, FSL , Mr Victor Chiazor said : “The 22 per cent increase in the equities market by PFA’s for Q4’20 was largely due to the significant drop in interest rate across board in the fixed income market. Yields on FGN bonds dropped to as low as seven  per cent for 30 year maturities while the stop rates for  one-year treasury bills was as low as 1.5 per cent . 

This abysmal rate triggered significant investment flows towards the equity space, as dividend yield for most blue chip companies were now at least five times what was offered in the fixed income market without including the possibility of capital gains. 

However, the current upside being witnessed in the fixed income space may threaten the sustainability of this capital flows towards equities. The last FGN savings bond saw rates move from 3 per cent to five per cent for the 3-year tenor, the last OMO auction saw rates move from five per cent to 10 per cent for 364 days, while the last treasury bill auction saw rates move from two per cent to four per cent. This increase across all the fixed income and money market instruments are continually sending a signal to the market that rates may be on their way up and this is expected to negatively impact the equities market. If this uptrend in rates persist, we may see most PFA’s and other investors sell off their investments in equities and move their capital to the fixed income market.”

Chiazor said: “On the guideline for equity investments, the reality is that PenCom already has guidelines that state the percentage of investments each PFA should have invested in equities for Fund 1, Fund 2, Fund 3 and Fund 4.

 The government should focus on policy statements that will be business friendly and grow the economy by also increasing access to loans at business friendly rates. Once this is achieved, companies listed on the market will be positively impacted and investors will be attracted to the market on the back of a higher return on their investment.

Commenting as well, Economic Consultant, Mrs Kemi Akide said: “The shift in equity was due to the low yield in fixed income instruments so both retail and institutional investors like the PFAs shifted  their  portfolio to the equity market.

 However, the bond rate has started going up so investors would be cautious to invest in equities. We may likely see a shift back to fixed income securities.”

Reacting as well, Managing Director, APT Securities Limited, Mallam Garba Kurfi said:  “We may see the PFAs sustaining the increased investment in equities if the favourable monetary policy persists. Investors generally may sustain the bullish momentum as we witnessed  eight days losses by All Share Index, ASI, until it stopped today (Thursday). But in view of the corporate actions that may soon be released by the companies it will bring another rally especially as most of the stocks’ prices are at a lower level. The PFAs will only remain in the market as long as there is no alternative way to invest and realise better return.”

With regards to the review on PFAs guideline, Kurfi said: “Whether the PenCom review it or not PFAs have enough provision in the current law that allows them to play the capital market for now.”