PFAs exposure to Local Equities Nosedive

September 14, 2022 PensionNigeria

The share of local equities to total pension fund assets has fallen to its lowest level since November 2020.

Year-to date, domestic institutional investors have accounted for 60.0% of transactions on the Nigeria Exchange NGX (2021: 46.7%). Nigerian pension funds are the largest part of this group, with total Assets Under Management of N14.36trn as of July 2022.

However, data from the National Pension Commission (PenCom) shows that Nigerian pension funds’ domestic equity exposure fell to 6.4% in July 2022, the lowest since November 2020, from a 15-month high of 7.1% 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, from 11.9% levels at the end of 2013. This is understandable given equities have returned a measly 5.0% annually in the period, compared to average inflation of over 13.0%.

But how do changes in equity exposure affect stock market returns? Analysing quarterly data from as far back as 2013, we 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% 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 rise, could lead to further softening of the NGX-ASI.

Source: Extract from Coronation Research

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