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In Search of Higher Returns, PFAs Dump Stock Market, Increase Exposure in FGN Securities

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Kayode Tokede

The value of Pension Funds Administrators (PFAs) in the stock market dropped by 3.83 per cent Month-on-Month (MoM) to N965.15billion in June 2022 from N1.01 trillion in May to underlined investors dumping the stock market and investing in FGN Securities.

Investors on Nigeria’s stock market booked approximately N981billion loss in June 30 as sessions of profit-taking outweighed bargains.

Though the PFAs exposure in the stock market has recorded 5.9 per cent Year-till-Date (YtD) growth from N915.31billion as disclosed by National Pension Commission (Pencom) as at December 31, 2021, the hike in Monetary Policy Rate (MPR) and inflation have contributed to the stock market woo in June.

Analysis of PFAs’ investment in the stock market the previous months 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 stock 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, PFAs investment in the stock market 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.

Meanwhile, the report for the month of June 2022 revealed that Pension Fund Net Asset Value in FGN Bonds grew to N9.01 trillion in June 2022, representing 2.27 per cent increase from N8.81 trillion at the end of May 2022.

With the increase in FBN bonds exposure, the total current net asset value hits N14.27trillion in June from N14.19 trillion reported in May 2022. 

The growth follows a 12.5 per cent yield on 10-year FGN Bonds during the period from 12.45 per cent in previous month, according to the Debt Management Office (DMO).

The DMO in its FGN Bonds market report for June also disclosed that yield on 20-year moved to 13.15 per cent from 13 per cent reported in May 2022.

The latest auction by DMO for the month of July revealed that the yield on 20-year bond increased to 13.74 per cent.

The FGN Securities, according to Pencom consist of FGN Bonds, Treasury Bills (T-Bills), Agency Bonds, Sukuk Bonds and Green Bonds.

Further checks by THISDAY revealed that PFAs exposure in the T-Bills market increase significantly by 259.48 per cent to N475.64billion in June from N132.31billion reported by PenCom in May 2022.

Interestingly, the reported N475.54billion PFAs exposure in T-bills is the highest this year.

Analysts, however, projected that the rise in PFAs investment in-stock may not persist in the second half of the year (H2 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).

The inflation rate rose to 18.6 per cent in June, according to the National Bureau of Statistics (NBS).

Nigeria’s inflation rate climbed to its highest level in 65 months (over 5 years), and the fifth consecutive monthly rise. The last time the inflation rate in Nigeria touched the 18.6 per cent ceiling was January 2017, when it stood at 18.72 per cent.

The CBN changed to a more hawkish monetary stand in its last monetary policy meeting as the MPR was raised to 13 per cent and currently at 14 per cent after adopting an expansionary policy direction in the last two years.

Reacting, the Chief Executive Officer, APT Securities and Funds Limited, Mallam Garba Kurfi said, “PFAs reduced their investment in stock in the month of June 2022 as they take profits. Most of them took their profits and same for many others stocks led to a decline 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 per cent and further 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.”

On his part, 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 said, “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.

 “Although headline inflation rose 22bps 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.”