PFAs to Rotate Asset Mix from Bonds to Equities

13 Nov 2012

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 Mr. Bismarck Rewane

Obinna Chima
The sustained market rally by the Nigerian Stock Exchange (NSE) during the second and third quarters of the year is certain to result in a growing interest in equities by Pension Fund Administrators (PFAs).

Managing Director/Chief Executive Officer, Financial Derivatives Company Limited (FDC), Mr. Bismarck Rewane, said this during his monthly economic presentation at the Lagos Business School’s executive breakfast meeting, a copy of which was made available to THISDAY.

In fact, Rewane stated that the rotation from bonds into equities will rise further next year as PFAs continue to show more interest in the stock market.

However, the report showed that there was no significant shift from FGN bonds to equities during the four months from May to September 2012, with bonds still accounting for 50 per cent of PFAs’ portfolios in September.

The equity mix of PFA assets during the period, on the other hand, fell from 8.5 per cent to 8 per cent. Rewane, however, said “we expect to see a rotation from bonds into equities in 2013.”

The NSE All-Share Index recorded a year-to-date appreciation of 29 per cent or 6,047 basis points to 26,718.30 basis points by the close of business Friday, from 20,671.06 basis points recorded on January 3, 2012.

In the same vein, market capitalisation recorded a significant year-to-date appreciation of 30.7 per cent, from N6.514 trillion during the first trading session this year to N8.514 trillion last Friday.
According to Rewane, the equities market has staged a stealth rally. “The rotation from bonds into equities is expected in 2013 as PFAs are now showing interest in equities. But there was no significant change in the asset mix between May and September,” he added.

The renowned economist also revealed, “Bond yields superiority to other asset classes is now a declining function of time.”

He noted that stocks listed on the NSE are undervalued at their current prices. “Historically investors do not take a straight path from undervalue to fair value. The market is going through the meandering path to market equilibrium,” Rewane explained.

He, however, predicted that the investors would remain cautious until the third quarter and fourth quarter results are released, noting that a reduction in interest rates by the Monetary Policy Committee (MPC) which meets for last time next week, could strengthen the market rally.

“CBN is under public pressure to ease interest rates. After three consecutive months of falling inflation, we expect a temporary jump in prices due to flooding. CBN could make a politically populist move on interest rates to undercut the legislature.

“The forbearance of margin loans for stock brokers will not happen in 2012,” he said

Commenting on the upgrade of Nigeria’s ratings by Standard and Poor’s, Rewane declared that a strong credit rating reduces the risk premium on Nigerian debt instruments.

He added: “This is a big deal because it reduces borrowing costs of the Nigerian government and corporates in the euro bond market. Inclusion in the JP Morgan and Barclays’s bond index increases interest in the Nigerian instruments, which are now being included in most Emerging Markets portfolios. Nigerian peers with a similar rating include Angola and Gabon.”

Tags: Business, Nigeria, Featured, Bismarck Rewane, PFAs, NSE

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