The decision by the Central Bank of Nigeria (CBN) to restrict individuals and local firms, non-bank financial institutions inclusive, from investing in its open market operations (OMO) auctions may end up providing a welcome boost to one of the world’s worst-performing stock markets, the Nigerian Stock Exchange (NSE).
Holdings of OMO amount to about N2.2 trillion ($6 billion), a quarter of the assets managed by Pension Fund Administrators (PFAs), a report by Bloomberg stated.
With the bonds, which yield an average of 15 per cent, out of the picture, funds may turn instead to the local stock market, the third-worst performer globally over the past year among benchmark indexes tracked by Bloomberg.
“There is real hope this could be good for equities,” an analyst with Lagos-based CardinalStone Partners Limited, Michael Nwakalor,” said.
“We should see a lot of corporate heavyweights gain in coming weeks as pension funds look for high-yielding investment.”
Nigerian pension funds, the largest in sub-Saharan Africa after South Africa, have cut their exposure to local shares to five per cent of total assets from a high of nine per cent in April 2018, according to the market regulator, the National Pension Commission (PenCom).
CardinalStone estimated that pension funds’ position in local shares may return to around 10 per cent, mostly in companies with high dividend yields. Retirement funds could also seek higher returns in corporate debt, bank fixed deposits and other domestic government debt, according to the firm.
With only eight per cent of working Nigerians saving for retirement, the pension industry has vast scope to grow in a country the United Nations expects to be the world’s third most-populous by 2050.
At the same time, the government of President Muhammadu Buhari needs to undertake more ambitious reforms to spur the economy and in turn make local stocks more attractive to fund managers.
“While it is possible to see some asset re-allocation towards equity markets, for pension funds to start buying equities again, the economic policy environment has to show credibility around structural reforms to unlock economic growth,” Head of Investment Research at Sigma Pensions, Wale Okunrinboye said.
The co-founder of Cardinal Stone Partners Limited, a Lagos-based investment firm, Mr. Mohammed Garuba, had said even before the CBN decided to place the restriction on OMO auction, it was only in Nigeria that private sector and individuals were allowed to invest in the instrument.
He had explained that OMO auction was supposed to be strictly between the central bank and the banks.
“OMO is a liquidity management tool. PFAs and the rest were never supposed to invest in OMO. For normal Nigerian Treasury Bills (NTBs), it is open to everybody, you fill your forms and go for auction. But OMO is 100 per cent at the central bank’s discretion. The central bank can decide to issue it anytime or any day they like. That is how it is everywhere in the world apart from Nigeria,” Garuba had explained.
A recent report by Stanbic IBTC Stockbrokers Limited, showed that PFAs’ exposure to equity investment had dropped significantly from a high of 9.25 per cent in April 2018, to as low as 4.93 per cent in August 2019.
The equity market declined by 20 per cent in 2018, and it is currently in the red as it has plunged by 15.8 year-to-date (YtD) at the close of business last Thursday.
However, the report had stated that over the same period, investments in FGN securities was up by a whopping 22 per cent to N6.819 trillion, from N5.589 trillion in March 2018.
Government total public debt stock is now sitting at N25 trillion ($70 billion) – about 20 per cent of Nigeria’s GDP today. But this does not include CBN OMO Bills.
“If we strip out the performance as a result of the MTN listing, the market loss YtD would be above 20 per cent.
“In absolute terms, the equity exposure of PFA has declined by N275 billion ($765 million) in the last 18 months. This would be driven by a combination of losses accrued from the share price depression and also absolute sale of shares,” it had added.
Meanwhile, the Primary Market Auction (PMA) for Nigerian Treasury Bills (NTBs) held yesterday was oversubscribed to the tune of N433 billion as the Central Bank of Nigeria only allotted N132.5 billion out of a total subscription of N566 billion recorded.
This was a reflection of the demand pressure observed in the market since last week when the regulator announced its restriction of OMO auction.
A breakdown of the results of the auction seen by newsmen showed that for the 91-day tenor, whereas the total amount offered was N28.019 billion, total subscription was N72.441 billion. Also, for the 91-day bills, while the total amount offered was N10.615 billion, total subscription was N49.677 billion; just as for the 364-Day bills, while the central bank put up a total of N93.915 billion for auction, total subscription recorded was N443.503 billion.