July 18, 2022

STOCK MARKET BOOM: Pension fund investment in equities up 7.4% to N1.1trn

Pension fund

•Analysts project fixed income dominance in H2’22

•Contributors, retirees lament impact of inflation

By Peter Egwuatu

The rising fortunes of investors in the nation’s stock market, as reflected in the 22.4 per cent year-to-date growth in total value of equities on the Nigerian Exchange Limited, NGX, has triggered a 7.4 per cent increase in the value of pension funds investment in equities to N1.1 trillion.

This is in sharp contrast to 0.4 per cent growth in pension funds investment in federal government bonds recorded during the same period, which is the preferred and less risky investment option for Pension Fund Administrators, PFAs.

According to data by Pension Commission of Nigeria, PenCom, Pension Fund Net Asset Value in FGN Bonds grew to N8.808 trillion in May 2022 from N8.773 trillion at the end of December 2021. The marginal growth follows a 32 basis points decline in yield on FGN Bonds recorded during the period.

Analysts however projected that the rise in pension fund investment in equities may not persist in the second half of the year, H2’22, citing the expected rise in yields on FGN bonds and other fixed income investment following the commencement of tight monetary policy by the Central Bank of Nigeria, CBN.

Meanwhile, pension contributors have expressed indifference to the rise in value of pension funds investment in equities or bonds, saying they are more concerned about the impact of the rising inflation which is eroding the value of their contributions and pension.

The inflation rate rose for the fifth consecutive month to 18.6 per cent in May, the highest in five years.

The contributors and retirees also noted that the impressive performance of the equities market may not be sustained due to the political uncertainty as the country approaches election period.

While noting that the way pension funds are invested have not greatly impacted on their lives given the escalating inflationary trend in the country, they buttressed that the PFAs who are custodians of their money and investment experts will definitely switch to bond as there are laws that mandate them to invest in mixed instruments (risky and less risky).

Equities market in H1’22

In the first half of the year, HI’22, the equities market recorded 21.3 per cent return as market capitalization appreciated by N5.64 trillion on the back of improved liquidity in the market due to asset reallocation to equities from debt securities.

Explaining the factors behind this performance, analysts at Afrinvest Securities Limited said: “This was driven by impressive full year 2021 corporate earnings, dividend payments, market stimulating corporate actions, and robust system liquidity.”

“Although yield reversal in the fixed income market and the CBN hawkish switch (150 basis points  increase in Monetary Policy Rate, MPR to 13.0%) dented the broad-base market rally from 2021, the resilience of major bellwethers – MTNN (+16.8%), AIRTELAF (+81.4%), DANGCEM (+7.0%), and SEPLAT (+100.0%) – with over 50.0% share of market capitalisation supported the NGX return over the period.”

PFAs’ investment in equities

Reflecting the performance of the equities market, Month on Month, M-o-M analysis of PFAs’ investment in equities showed 3.2 per cent to growth in January to N1.070 trillion from N1.037 trillion as at December 2021. The growth persisted in February with 1.6 per cent increase to N1.087 trillion.

While there was a 2.9 per cent decline in March to N1.056 trillion, the upward trend resumed in April as pension investment in equities investment rose by 4.6 per cent to N1.105 trillion, and continued in May with marginal growth of 0.8 per cent to N1.113 trillion.

Consequently pension fund investment in equities rose by 7.4 per cent to N1.1 trillion at the end of May from N1.037 trillion as at the end of December 2021.

This is in sharp contrast to the 4.4 per cent decline recorded in the corresponding period of last year, January to May 2021. During this period, pension funds in equities dropped to N821.34 billion at the beginning of the year to N821.34 billion at the end of May 2021.

Furthermore, the 7.4 per increase in pension fund investment in equities in five months to May this year, exceeded the 6.5 per cent growth recorded in full year 2021.

Analysts/operators react

Reacting, David Adonri, analyst and Vice Executive Chairman, Highcap Securities Limited, said: “The slight increase in PFA investment in equities in May 2022 may be connected with the markdown of several stocks during that period for dividends. Attention of institutional investors also shifted to the primary market for debt where FGN was active. Perhaps also, PFAs were reducing their exposure to equities, following the US Feds rate hike which threatened the global equities market.

On its projection for H2’22 Adonri said: “With the recent rate hike by CBN and fragile global economy, the possibility is high that financial assets will generally migrate to the safety of debt. We are already seeing evidence of this with the recent slowdown in the equities market. If the political risk of 2023 general election is factored into the equation, equities may stagnate till year end.”

In his own comment, the Chief Executive Officer, APT Securities and Funds Limited, Mallam Garba Kurfi said: “PFAs reduced their investment in equities in the month of May was due to taking profits by most of them, especially as you are aware that many of them took position in MTN Nigeria whose price rose to N270 gaining 50%. Most of them took their profits and same for many others stocks that led to declining in their investment.

On why there was increased investment in the FGB Bond, Kurfi said: “The rise of MPR from 11.50 per cent to 13.00 per cent attracted many of the PFAs to Fixed Income. However, the equities price will attract more investment into equities especially as the inflation rate keeps going up which make investment in Fixed Income into negative returns. We are expecting more investment in equities as the All Share Index, ASI, currently is about 20 per cent returns ahead of inflation which is less than 18 per cent making the investment in equities in the positive returns.

Reacting as well, Victor Chiazor, Analyst and Head of Research and Investment at Fidelity Securities Limited said: “Going by the equities market rally experienced in the first quarter of the year 2022, it is quite normal to see increased sell down of portfolios from asset managers and pension fund managers as most investors would aim to book these profits triggered by share price appreciation. The elevated share price during the quarter will have also slowed down further investment in equities as investors would rather sell down their holdings and wait for a price correction before they re-enter the market.

“However, there are possibilities that we may not see an increase in PFA investment back into equities going the gradual rise in yields across debt instruments as higher yielding debt assets will further trigger a reversal of funds flow away from the equities market to the debt market.”

In his remark, Tajudeen Olayinka, an Investment Banker and Stockbroker said: “Yes, the equity market is gradually bouncing back, but still not at the level it should be. It is also good that we now have more PFAs participating in the market, with the index pushing up to the level we had in 2007. When we begin to have strong demand for shares in the secondary market, we will begin to see more PFAs participate in the primary issue market, and that is what is required to accelerate growth in capital formation.”

Contributors/retirees react

Mr. Omisande Michael, a Lagos Retiree PFA Pensioner, said: “Both investments’ value which could have led to higher return is nothing to write home about when you compare it with the rising price of food and other commodities. The economic situation is not helping matters and that is affecting us retirees. We do not invest our money directly, the PFAs invest on our behalf. So we can’t do anything on the return coming from our investment than to take the little they give us. Some of us take risk and while some don’t take risk and that is why the PFAs have mixed investment portfolios.

“However, what we are pleading with the government is to consider our welfare and increase the money they remit to the PFAs so that whatever returns we get can help us take care of our health, feeding and transportation. Our entitlement should not remain fixed but be increased from time to time.”

Mr. Ernest Chukwuka, a University of Lagos staff said: “The investment value is not encouraging and we cannot blame the PFAs but the comatose economy. It is what we contribute that they invest on our behalf.  So we bear whatever risk that comes with the investment provided our funds are safe. Everything is blamed on the economy. Look at the inflation rate, how it is rising and getting worse. So no matter the net investment value it will not take care of our family but result in more hardship.”

Mr. Shittu Amao, a member of Association of Federal Contributory Scheme said: “I don’t want to comment on the investment value because the PFAs are responsible and there is nothing the contributors can do. There is a regulation on where they can invest. I will speak on the laws another time.”

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