Despite N14.43trn AuM, PFAs Reduce Exposure to Stock Market, T.Bills as Inflation Diminish Investment

 

Kayode Tokede

Despite growth in assets under management (AUM) to N14.43 trillion, Pension Fund Administrators (PFA) exposure to stock market and Treasury Bills (T-Bills) dropped in August 2022 to highlight low-yield environment as inflation rate continued to diminish investment.

The latest report by the National Pension Commission (PenCom) revealed that PFA exposure in the Nigerian equities market dropped by N12billion to N902.65billion in August from N915.49billion in July.

Also, the PFAs exposure in T-Bills dropped by N1.13 billion to N179.49 billion in August from N180.6 billion in July.

Assets under management for the whole industry grew slightly by 0.46per cent to N14.43trillion in August from N14.36trillion reported by PenCom in July.

The PenCom data revealed that PFAs have shifted to the FGN Bonds market in the period under review.

According to the numbers, PFAs exposure in FGN Bonds (Held till Maturity) increased by N114.32 billion to N8.82 trillion in August from N8.71 trillion in July.

The federal government, through the Debt Management Office (DMO) auctioned N255 billionn from three issues that included: Mar 2025, Apr 2032, and Jan 2042) with interest rate at 12.5 per cent, 13.5 per cent and 14 per cent respectively.

Nigeria’s inflation rate, which has surged to its highest level in more than 17 years, is putting a damper on stock market returns as interest rate hikes brighten prospects of the fixed-income market.

The Central Bank of Nigeria (CBN) has since been more hawkish in recent months as their major dilemma is to curtail inflation. The nation’s headline inflation raced to 20.52 per cent in September, from 19.64 per cent in July, according to the National Bureau of Statistics (NBS).

The nation’s economy’s high-interest rate environment aimed at reducing inflation continues to make fixed-income securities more attractive at the expense of stocks.

The withdrawal of PFAs in the stock market also contributed to market deprecation in August as most fundamental stocks depreciated.

Keeping to the trend in the prior month, the domestic equities market closed the month of August in the negative region as investors’ investment declined by N283 billion.

The stock market depreciated by 1.07 per cent to maintain sentiment trending for the third consecutive month, amidst lingering macroeconomic headwinds and rising income yields.

The overall market capitalisation of listed companies closed on August 31, 2022 at N26.880 trillion from N27.163trillion it opened for trading in August 2022.

Analysts, however, projected that PFAs investment exposure in stock market to persist in fourth quarter of 2022, citing the expected rise in yields on FGN bonds and other fixed-income investments following the commencement of tight monetary policy by the Central Bank of Nigeria (CBN).

Speaking on dwindling exposure of PFAs in the stock market, analyst at PAC Holdings, Mr. Wole Adeyeye explained, “some investors migrated from stock market to fixed-income market in a move to take advantage of high yields, which was triggered by the recent hike in policy rate.

He noted that the trend may likely continue in September as yield in the fixed-income market is expected to remain attractive to PFAs.

According to him, this trend may likely continue in September because rates in the fixed-income market are expected to remain relatively high. In addition, foreign investors may not patronise the Nigerian equities market at the moment due to the uncertainty surrounding the economy.

“Nevertheless, our medium-long term outlook for the Nigerian stock market remains positive. This provides an opportunity for investors that want to take advantage of cheap stocks in the market at the moment,” he added.

On his part, the Chief Executive Officer, APT Securities and Funds Limited, Mallam Garba Kurfi maintained that, “PFAs reduced their investment in stock in the month of August due to yield on investment.”

On why there was increased investment in the FGN Bond, Kurfi said: “The rise of MPR from 11.50 per cent to 14 per cent attracted many of the PFAs to shift position to fixed income securities. However, the stock price will attract more investment into capital market, especially as the inflation rate keeps going up which make investment in fixed income securities into negative returns.”

The Vice Executive Chairman, Highcap Securities Limited, David Adonri explained that, “The increase in PFA investment in FGN Bonds may be connected steady hike in yields due to inflation rate and increase in interest rate.”

“Attention of PFAs also shifted to the primary market for debt where FGN Bonds was active. Perhaps also, PFAs were reducing their exposure to equities, following the US Feds rate hike which threatened the global equities market.

On his projection for H2 2022, he noted that, “With the recent rate hike of MPR by CBN and fragile global economy, the possibility is high that financial assets will consistently migrate to the safety of fixed income securities.

“We are already seeing evidence of this with the recent slowdown in the stock market. If the political risk of 2023 general election is factored into the equation, equities may stagnate till year end.”

Analysts at Vetiva research in a report titled “Nigeria H2 2022 outlook: A strange labyrinth”, stated that the government is expected to increase borrowings, and the global economy tightening over the Russia-Ukraine war is to drive FBN bonds rates higher.

According to the report, “Although headline inflation rose 22basis m/m to 15.92per cent y/y in April 2022, inflation is expected to fall in H2 2022. Additionally, we expect to see increased government borrowings in the same period as the FGN gears up for the 2023 Presidential Elections.

“This should lead to an improvement in liquidity in the fixed income space, following an easing of monthly maturities, eased from N893.2 billion in Q1 2022 to c.N354.3 billion in Q2 2022.

“The latest bond offer calendar for Q2 2022 shows that the government is expected to increase its borrowings by 50per cent, and barring an improvement in oil revenue, we expect the government to borrow aggressively in H2 2022 as it seeks to meet its financing needs.

“The expansion of the budget deficit by N965 billion should further boost liquidity in the bonds space, as the country is expected to tap the domestic market to fill the gap.

“Given that the government expects to tap the domestic market to meet its funding needs as well as raise capital for its infrastructure projects ahead of the 2023 elections, we expect this to result in an uptick in yields.

“Furthermore, the tightening of monetary conditions around the world will add further pressure on policymakers to raise rates, in a bid to retain foreign investors in the bonds market.”