As the regulatory landscape evolves and economic conditions stabilize, pension fund managers are positive about playing a critical role in shaping Nigeria’s financial markets. While inflation and high interest rates present significant challenges, they remain optimistic about growth in certain sectors, particularly infrastructure and alternative investments.
This was canvassed in The Pension Fund Managers Sentiment Report 2024, a biannual index released recently, which provides deep insights into the investment climate in Nigeria from the perspective of chief investment officers (CIOs) managing pension funds. MODESTUS ANAESORONYE presents the report.
Macroeconomic Landscape
The Nigerian economy has been experiencing a mixed performance in 2024, as evidenced by the country’s gross domestic product (GDP) growth of 2.98 percent in Q1 2024, up from 2.31 percent in the same period last year. This modest growth has been primarily driven by the services sector, contributing 58.04 percent of total GDP and growing 4.32 percent year-on-year. The agricultural sector, although showing signs of recovery, grew by only 0.18 percent. The industrial sector, which has lagged in previous years, grew by 2.19 percent, a significant jump from the 0.31 percent recorded in 2023.
A dominant feature of the Nigerian economic climate has been persistently high inflation. In the first half of 2024, inflation peaked at 34.19 percent in June. The inflationary pressures have been exacerbated by higher food prices, currency depreciation, and increased consumer spending, with food inflation reaching 40.87 percent by mid-year. The Central Bank of Nigeria (CBN) responded with aggressive monetary tightening; raising the Monetary Policy Rate (MPR) to 26.75 percent in July 2024, up from 18.75 percent in May 2023
While these actions have helped to slow inflation, concerns remain that high borrowing costs could stifle business activities and hinder investment.
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Investment Sentiments: A mixed outlook
The report highlights that pension fund managers are closely monitoring the macroeconomic indicators to guide their investment decisions. Over 60 percent of fund managers stated that their investment levels would be dictated by these indicators, particularly inflation and interest rates. Pension fund managers have responded to the CBN’s hawkish stance by increasing exposure to government securities, which now represent over 63 percent of total pension fund assets.
Despite macroeconomic headwinds, fund managers expressed optimism about future investments. 100 percent of respondents reported intentions to increase their investments in the upcoming quarter, driven by growing assets under management (AUM). However, the overall sentiment towards the economy remains bearish, with more than half of the managers expecting no improvement in key economic indicators over the next quarter.
Sector-Specific Outlooks
Equity Market
Despite a 34 percent growth in the equities market in the first half of 2024, fund managers exhibit a cautious stance towards equities. While the market has performed well, some managers have opted to shift to treasury bills due to concerns over future market volatility. Only 36 percent of managers are actively looking to increase their exposure to equities, while 28 percent are considering reducing their equity allocations
Fixed-Income Securities
Pension fund managers maintain a strong preference for fixed-income securities, with 64 percent of managers indicating that they will increase their allocation to this asset class. Government bonds continue to dominate as a safe haven amid economic uncertainty. This trend is expected to persist as inflation cools and interest rates potentially decline later in the year.
Infrastructure
Infrastructure investments are gaining traction, with 73 percent of fund managers intending to increase their allocation towards this sector. The growing pipeline of bankable infrastructure deals and government-backed projects are driving this interest, positioning infrastructure as a critical component of pension fund portfolios.
Alternatives
An increasing appetite for alternative investments is emerging, with 64 percent of managers looking to expand their exposure. However, there is a call for more specialized funds to cater to the growing demand for alternative asset classes such as private equity, venture capital, and real estate.
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Key Concerns and Risks
Market Volatility
Market volatility remains a significant concern for fund managers, with only 18 percent expecting improvement in volatility over the next quarter. Factors such as exchange rate uncertainty and the high-interest-rate environment continue to weigh on the market. A substantial 36 percent of respondents expect further market volatility, attributing it to foreign exchange concerns and high borrowing costs.
Political Uncertainty
The current political climate has added a layer of uncertainty to the investment landscape. Political protests and industrial strikes, coupled with a cost-of-living crisis, have made fund managers more cautious about investments in the real sector. The majority expect political uncertainty to persist, potentially impacting economic recovery and investor sentiment.
Optimism on Regulation
Despite the challenges, there is optimism surrounding the ongoing regulatory review by the pension industry’s regulatory body. Many fund managers expect more investment-friendly guidelines to emerge, which could stimulate increased investments across various asset classes. However, some managers are concerned that the regulatory review process may stretch into the following year, delaying its positive impact.
The Pension Fund Managers Sentiment Report offers a nuanced view of Nigeria’s investment landscape in 2024. While inflation and high interest rates present significant challenges, pension fund managers remain optimistic about growth in certain sectors, particularly infrastructure and alternative investments. The mixed sentiment towards equities and the strong preference for fixed-income securities reflect the cautious approach fund managers are adopting in response to macroeconomic uncertainty.
This biannual index is a valuable tool for stakeholders across the investment spectrum.
