High interest rates push Pension Funds to corporate bonds

Pension Funds Adminis trators (PFAs), the largest investment group in Nigeria, are now expanding their investments in corporate bonds amidst rising interest rates and uncertainties associated with the upcoming 2023 general election.

Central Bank of Nigeria, CBN, had raised its benchmark interest rate, Monetary Policy Rate, MPR, previous week, the third time within three months pushing up returns on fixed income securities while bringing bearish sentiments to the equities market.

Vanguard’s findings from the latest data released by National Pension Commission, (PenCom) shows that PFAs’ investments in corporate fixed income securities rose Year-on-Year, YoY, by 41.1 per cent to N1.371 trillion in seven months ending July 2022 from N957.7 billion in the corresponding period in 2021.

The data also shows that PFAs’ interest in equities was sluggish rising just 5.3 percent to N1.020 trillion YoY against the N968.8 billion recorded in the corresponding period in 2021.

Furthermore, PFAs’ investments allocation to corporate securities accounted for 9.5 per cent of their total investments during the period, the allocations to equities accounted for a 7.1per cent of the total PFAs investments within the period.

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.

“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.”