High interest rates push Pension Funds to corporate bonds

The biggest investment body in Nigeria, Pension Funds Adminis trators (PFAs), is now increasing its holdings of corporate bonds due to rising interest rates and the uncertainty surrounding the forthcoming general election in 2023.Infomation Guide Nigeria

The Monetary Policy Rate, or MPR, was increased by the Central Bank of Nigeria (CBN) the previous week, marking the third time in the previous three months that it had done so. This increased rate pushed up returns on fixed income securities while depressing the stocks market.

According to Vanguard, the most recent information from the National Pension Commission (PenCom) reveals that PFA investments in corporate fixed income securities increased Year-on-Year, YoY, by 41.1% to N1.371 trillion in the seven months ending July 2022 from N957.7 billion in the same period in 2021.

The report also reveals that PFAs’ interest in equity markets was subdued, increasing only 5.3 percent to N1.020 trillion YoY from N968.8 billion in the same time in 2021.

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In addition, the allocations of PFAs’ investments into corporate securities accounted for 9.5% of their overall investments throughout the course of the period, while the allocations into equity securities accounted for 7.1% of the entire investments made by PFAs during that time.

Reacting on this development, analyst and Vice Executive Chairman, Highcap Securities Limited, David Adonri, said: “The greater investment in corporate bonds may be attributed to fears by the PFAs with regards to the uncertainty as Nigeria approaches the 2023 general election.    Statistics of the past had shown that  during the second half to general elections in Nigeria, the equities market suffer most because of uncertainty in the political space.

“The rise in PFA investment in corporate bonds could be attributed to safety and interest rate in fixed income. Attention of institutional investors also shifted to debt where FGN was active. Perhaps also, PFAs were reducing their exposure to equities, following rate hike by the CBN. With the recent rate hike by CBN and fragile global economy, the possibility is high that financial assets will generally migrate to the safety of debt.”

In his own reaction, the Chief Executive Officer, APT Securities & Funds Limited, Mallam Garba said: “PFAs reduced their investment in equities is due to profit taking. Also you know that equities investment has higher risk than fixed income investment.   So PFAs may have reduced investment in equities for fear of uncertainty of what is likely to happen as we approach the general election. Jamb Result 

“Furthermore, the rise of MPR could attract many of the investment to fixed income instruments.

“However, after the election, the equities price will attract more investment into equities especially as the inflation rate keep going up which will make investment in fixed income into negative returns.”

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