Pension Fund Administrators (PFAs) moved massively into the equities market last year, raising investment in the market by 55.3%, 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%, y/y, to ₦12.3 trillion last yearfrom ₦10.2 trillion in December in 2019.
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 2020 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 1.2per cent in December 2020 from 5.0 per cent and 5.5 per cent in December2019.
This development made TBills 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 ₦8.09 trillion to close the year at ₦21.057 trillion from ₦12.968 trillion in 2019.
Similarly the NSE All Share Index (ASI) roseby 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, data from the Nigeria Pension Commission (PenCom) revealed that PFAs’ investment in equities rose to ₦858.5 billion in December 2020 from ₦552.9 billion in December 2019, representing an upsurge of 55.3%.
On the contrary, PFAs investment in treasury bills fell by 66.6 per cent, y/y, to ₦628.2 billion in December 2020 from ₦1.9 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 intreasury 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 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 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.”
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.”
Source: Vanguard
