Stock market seen down as PFAs reduce exposure

Pension Fund Administrators (PFAs) continued reduction of exposure to equities, especially as fixed income yields continue to rise, in what could further push down performance of the country’s stock market.

According to analysts at Coronation Research, domestic institutional investors account for 60.0 percent of transactions on the NGX Exchange, with PFAs being the largest contributor.

The Coronation analysts noted that data from the pension industry regulator shows that Nigerian pension funds’ domestic equity exposure fell to 6.4 percent in July 2022, the lowest since November 2020, from a 15-month high of 7.1 percent at the end of April.

“With what looks like pension funds choosing to invest inflows outside the stock market, what could this mean for equity returns going forwards?”

“First, we looked back at pension funds’ historical exposure to domestic equities and found that Nigerian pension funds have essentially halved their equity exposure today, from 11.9 percent levels at the end of 2013.

This is understandable given equities have returned a measly 5.0 percent annually in the period, compared to average inflation of over 13.0 percent.

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Analysing quarterly data from as far back as 2013, the analysts found that equity market returns and changes in Nigerian pension funds asset allocation to equities are correlated (correlation coefficient of 0.86).

“In the month of July, PFA equity exposure fell by 42bps m/m while the NGX ASI fell by 2.8 percent m/m.

With domestic institutional investors continuing to dominate trading in the equities market, it is likely that further reductions in PFA exposure to equities, especially as fixed income yields continue to rise, could lead to further softening of the NGX-ASI, the analysts noted.

Year-to date, domestic institutional investors have accounted for 60.0 percent of transactions on the NGX Exchange, compared to the 2021 figure of 46.7 percent.

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Nigerian pension funds are the largest part of this group, with total Assets Under Management of N14.36 trillion as of July 2022.

The National Pension Commission in its second quarter report that shows the performance of PFA said, pension funds are expected to increase, as higher yields on bond investments would raise nominal values.

It also noted that pension managers may increasingly move to safer assets as they rebalance their portfolios in favour of less volatile fixed income securities.