BusinessInterest Rate Hikes Brighten Prospects of Pension Assets Expansion

Interest Rate Hikes Brighten Prospects of Pension Assets Expansion

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August 29, (THEWILL) – Recent developments in the interest rate regime are tending towards the fixed income market where a significant portion of pension assets are held. Investors are therefore positioning for the boom that will result from expansion in the pension assets considered a basket of golden eggs.

Experts project a rapid expansion in pension assets during the second half of 2022 and beyond as momentum gathers towards the 2023 general election coupled with impact of rate dynamics in the US. A stock broker, Paul Uzum, said the Pension Fund Administrators (PFAs) already have almost all their assets in the fixed income market and that fresh investment in new deposits or matured obligations will most likely target the same investment window, thereby creating a more robust pension assets.

“The PFAs have about 90 per cent of their cash balance in fixed income assets already. Large sums are tied up in long-tenured bonds created when rates ware low. For these classes the fixed interest will not change. However, for fresh investment made from new cash deposits, or for reinvestment of matured obligations, they will invest at the prevailing rising rates,” Uzum, who is Head of Securities Trading at Planet Capital, told THEWILL in a note last week. He agreed there might be a reversal in the long run, but that the new interest regime would favour pension asset in fixed income against the equities window.

The signs are there, and getting more evident: The domestic equities market which has been predominantly bullish during the first half of the year is beginning to respond to the dynamics of the investment climate. The equities market attained the highest growth in the second half of 2021 since its 61 years of existence with market capitalization recording over N28 trillion at a time. The market reversed its bullish momentum in the second week of August, losing over N570 billion compared to the preceding week as investors further took profits off half-year 2022 earnings results and the fixed income market remains attractive. Domestic equities market recorded N26.79 trillion and All-Share Index (ASI) at 49,183.74 as of August 26, 2022.

Investigation revealed that the rising fortunes of investors in the domestic stock market reflected in the 22.4 per cent year-to-date growth in total value of equities on the Nigerian Exchange Limited, NGX, in the second week of July, triggering a 7.4 per cent increase in the value of pension funds investment in equities to N1.1 trillion.

The performance was in sharp contrast to 0.4 per cent growth in pension funds investment in federal government bonds recorded during the same period, which is considered the preferred and less risky investment option for PFAs. Uzum expects yields in the fixed income market to trend upwards and that this would sustain the preference for investment in PFA assets.

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 followed a 32 basis points decline in yield on FGN Bonds recorded during the period.

Some analysts have 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.

Doyen of the Stockbrokers and Director at UIDC Securities Limited, Sam Ndata noted that the latest development in interest hikes would lead to investment diversification because investors cannot afford to have their eggs in one basket.

“As a result of the latest development in interest hikes, investors are likely to diversify because they cannot afford to put all their eggs in one basket. In this situation, pension assets managers know what to do as experts for greater returns on the investments they manage,” Ndata said.

Looking at the performance of the equities market since the year, a month-on-month analysis of PFAs’ investment in equities showed 3.2 percent 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 when pension investment in equities rose by 4.6 per cent to N1.105 trillion.

The trend 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. Furthermore, the 7.4 per increase in pension fund investment in equities in five months to May 2022 exceeded the 6.5 per cent growth recorded in full year 2021.

Further analysis revealed that pension funds managers are ramping up their investments in government securities as their portfolio went up 6.2 per cent to N9.008 trillion in the first half of 2022, H1’22, from N8.475 trillion in the corresponding period of 2021, HI’21. The Federal Government securities targeted include: FG Bonds, Treasury Bills, Agency Bonds, and Green Bonds.

The performance trend indicates that more funds will go into this class of investment from the PFAs in the second half of the year, as the Central Bank of Nigeria’s (CBN) Monetary Policy Rate (MPR) trends up. The MPR has moved from 11.5 per cent to 14 percent between May and July this year.

Data from PenCom showed that the Green Bonds recorded the highest growth, rising 428 per cent to N68.095 billion in H1’22 from N12.882 billion in H1’21. This was followed by Sukuk Bonds which surged by 58.6 per cent to N136.606 billion from N86.096 billion. FGN Bonds came third, recording 6.4 per cent growth to N8.313 trillion in H1’22 from N7.814 trillion in H1’21 Agency Bonds went up by 1.7 per cent to N13.825 billion from N13.6 billion. On the other hand, Treasury Bills investments declined 13.2 per cent to N475.636 billion in H1’22 from N548.132 billion in H1’21.

The National Co-ordinator, Independent Shareholders Association of Nigeria (ISAN), Prince Dr Anthony Omojola, agreed that the half-year performance of the pension assets in the equities market points to the bright prospects of the instrument as mass exodus to the fixed income market gathers momentum. Omojola in response to an enquiry told THEWILL that the pension assets would be the investors’ delight in the fixed income market that is beginning to regain momentum.

“The shift from equities to fixed income securities will stabilise the investors’ (inclusive of pension assets managers) portfolio in a period when our currency is losing value. The pension assets managers could take greater positions but under rising inflation, they will, in addition, restructure their portfolios to be able to absorb shocks.

“They have about six months to do this till March next year when elections will be over and companies will be releasing their full year accounts. At that time, we will expect gradual price appreciation of stocks in the market in reaction to the performance reports,” Omojola told THEWILL in a note.

The pension assets rose quarterly by N388.98 billion from the N13.88 trillion recorded at the end of Quarter One to N14.27 trillion at the end of the Quarter Two, according to data from PenCom. A significant aspect of this is the Micro Pension Plan (MPP) which has recorded impressive performance since inception in 2019.

The total contributions under the Micro Pension Plan (MPP) rose to N296.96 million as of July 31, 2022, about three years after its launch. PenCom had increased the Minimum Regulatory Capital requirements of Pension Fund Administrators (PFAs) from N1 billion to N5 billion last year, to strengthen the capital base of the Contributory Pension Scheme (CPS).

About the Author

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Sam Diala is a Bloomberg Certified Financial Journalist with over a decade of experience in reporting Business and Economy. He is Business Editor at THEWILL Newspaper, and believes that work, not wishes, creates wealth.

Sam Diala, THEWILLhttps://thewillnews.com
Sam Diala is a Bloomberg Certified Financial Journalist with over a decade of experience in reporting Business and Economy. He is Business Editor at THEWILL Newspaper, and believes that work, not wishes, creates wealth.

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