Analysts are increasingly pointing to potential investments from Nigerian pension funds this year to sustain a stock market rally after a severe decline in treasury yields is causing money managers to look for decent yields in other financial assets.
“Stocks will likely continue its great start to the year as investors seeking yield will move out of treasury bills and enter the stock market because of lower yields. We think pension funds will be at the heart of the rally because of the size of money they control and the leeway they have to still invest further in the capital market,” said a money manager at a Lagos-based investment firm.
As at the end of the third quarter of 2019, Nigerian pension assets reached a staggering N9.5 trillion, adding more than N500 billion in assets between Q1 and Q3 2019. The ballooning size of the Pension fund means that more than 9million RSA members may soon start urging their fund managers to take more risks betting on winning stocks on the local bourse.
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Prior to the sharp decline in treasury yields in Q4 2019, PFAs had allocated just 5.78 percent of their portfolio in local and foreign equities, amounting to about N557 billion in stocks (N492 billion in local equities and N65 billion in foreign stocks). Based on PenCom regulation on PFA investment limits in stocks, pension funds have allowance to increase their stake significantly in the stock market.
Based on the allowable limits on RSA Fund I to IV, pension fund can allocate up to 1.3 trillion in equities which is equivalent to 14 percent of total pension fund assets compared to the N557 billion currently invested. This means that there is an additional N781 billion waiting on the side-lines that could enter the stock market if there is an asset rotation from treasury bills into stocks this year.
Currently, PFAs hold as much as N2.26 trillion in treasury bills and almost N4.5 trillion in FGN bonds. With yields declining, analysts told BusinessDay that they except that pension funds may lose as much as N181 billion in reduced interest income from treasury bills and N201.4 billion in FGN Bonds if asset allocation remains unchanged from last year.
“This is because treasury yields have declined precipitously from about 13 percent in Q3 2019 to less than 5 percent today and Bonds have also declined from 14 percent to just around 10 percent,” said Obinna Uzoma, chief economist at EUA Intelligence.
If PFAs are willing to add more than N700 billion in investments in Nigerian stocks, analysts are highly optimistic that the outlook for stocks this year will become a lot more favorable.
The Nigerian Stock Exchange All Share Index has returned 9.9 percent so far this year in what has been a blistering start to the year for the equities market.
