Equity Rebound harder as N2.8trn Pension hangs on to Bonds

Nigerian stocks which are down 14 percent this year alone will have a harder time clawing back lost ground if Pension funds operating in Africa’s largest economy continue to shun equities. Latest data from the regulator ,National Pensions Commission (PENCOM), show that  Pension Fund Administrators (PFA) hold N2.8trillion in Federal Government (FG) securities, comprising of bonds (N2.3 trillion) and treasury-bills (N497.7 billion) as at December 2014.

The PFA assets invested in domestic ordinary shares fell to 11.79 percent in December, from 12.95 percent in October, latest data from PENCOM show.

“I think the PFAs are taking a very cautious approach towards equities investment and that is why we are not seeing them increase their exposure to stocks. PFAs are cutting exposure to stocks and moving cash in treasury bills to preserve gains, ” Kayode Omosebi, an analyst with investment firm UBA Capital said.

The share of equities in PFA portfolios is capped at 25 percent by the regulator, while they are allowed to hold up to 70 percent in government fixed income securities. Pension funds could deploy an additional N607 billion into equities if they decided to meet the stock investment limits, BusinessDay calculations show.

Nigerian stocks average daily value traded N2 billion, mean PFAs would need a minimum of 303 days to fulfil trade mandates which could trigger a bullish momentum for stocks.

Pension funds are, however, deploying their burgeoning deposits into FG debt as yields on the securities rise and prices fall due to their not taking market to market losses on bonds and hold to maturity mode of investing.

Analysts say PFAs should boost stock market investments despite the current negative risks of political uncertainty, crude oil fall and naira devaluation as equities provide the best hedge against inflation.

“It is about the willingness of local investors to muster enough courage to take position in the market given the current macro-economic and socio-political backdrop, knowing fully that Nigeria as a country and an economy will survive beyond these unfriendly times,” said Abiodun Keripe, head of Research and Strategy at Elixir Investment partners limited, in a response to questions.

Total pension fund assets were equivalent to N4.6 trillion in December while Nigerian stocks had total market capitalisation of N9.9 trillion as at February 23. Yields on benchmark ten year bonds fell by ten basis points to 16.04 percent, according to Monday prices from the FMDQ.

Pension assets in Africa’s largest economy have surged twelve-fold from N265 billion or about 1.4 percent of Gross Domestic Product (GDP) in 2006 to today’s level, equivalent to 4.8 percent of GDP.

Assets are currently growing at $2.5bn a year, or roughly 0.5 percent of GDP, per annum. Nigerian stocks currently trade at a price to earnings ratio of 9.2 x, compared to 17.53x for South Africa and 17.20 for Kenya, according to Meristem securities data.