PFAs Ride on Yields Re-pricing to Adjust Risk Appetite
Conservative investors, Pension Fund Administrators (PFAs) are falling for yields re-pricing in the fixed income market resulting to sell-offs in the stock market.
Equities segment of the Nigerian Stock Exchange, NSE, benefited strongly from low yield interest rate which dragged yields on government securities following ban placed on certain market players in the primary market auction.
Despite trendy inflation rate, few basis points adjustment on fixed income instruments seems to have commanded the investors’ attention, resulting to sell-offs in the equity segment.
Looking at the market direction, analyst at Greenwich Merchant Bank in an equity report expect the sell-offs to linger.
It said the bears showed no sign of letting up, as increased selloffs across heavy weight counters dragged the NSE-ASI to dip by 3.04% week on week.
Thus, year to date return moderated significantly to +0.4%, just as market capitalisation dipped ₦662.7 billion, thus settling at ₦21.2 billion.
Analysts stated that activity level also worsened.
Average volume and value of transactions tanked 2.8% and 20.3% apiece to settle at 536.6 million units and ₦4.7 billion.
Topping the gainers’ chart was MBENEFIT with 10.5% gain in its share price that closed at ₦0.42.
Meanwhile NNFM led the laggards’ table with an 18.8% loss in its share price to close at ₦7.02.
The NSE sectorial performance remained bearish, as the Banking sector led the pack, having shed the most with 8.8%, followed by the Insurance (-6.5%), Industrial Goods (-5.7%), Oil & Gas (-1.0%) and Consumer Goods (-0.9%) sectors.
Bearish sentiment underwhelmed activities in the bourse, driven by downward price pressures on top counters like DANGCEM and GUARANTY.
“That, plus the higher yields offered in the fixed income space, which sent yield-seeking investors away from the market.
“While we expect pockets of selloffs should linger as investors continue to book gains made in previous sessions, bellwether stocks with attractive dividend yields across various sectors appear to be trading at low prices.
This leaves some room for upward price movements, ahead of full year corporate earnings releases”, Greenwich said.
In sum, analysts expect an uptick in the NSE-ASI at the close of the week.
In its outlook for 2021, Greenwich Merchant bank expects stock market gains to slow, supports baseline forecast of +14.0%.
The firm noted the Nigerian bourse started off 2020 on a bullish note, as the year to date return hit an impressive 10.4% in just eight (8) days of trading.
However, analysts said the oil price crash and the pandemic shock dampened investor sentiment and sent the year’s return to a low of 23.0% in April 2020.
More precisely, foreign investors dumped shares of top counters in the Banking and Consumer Goods sectors, ushering in the historic lows seen on these stocks.
Nonetheless, investors’ reactions to better-than-expected earnings reports, subdued fixed income yield, and relatively cheap valuations of top counters returned the market to a tremendous +50.0%, at a closing landmark of 40,270.7pts, and a market capitalisation of ₦ 21.1 trillion.
Ultimately, the Nigerian Stock Exchange All Share Index (NSE-ASI) emerged the world’s best performing index in 2020, according to a Bloomberg Survey.
The predominance of domestic participation over foreign participation (66.4%:33.6%) was a major driver of this return.
Similar factors that shaped 2020 are expected to be sustained in 2021, such as the unattractive fixed income environment, favourable dividend yields, sustained control by domestic investors and robust technology platforms.
Our base case scenario places the year-to-date return at +14.0% at year-end, on the back of persistent interests by Pension Fund Administrators (PFAs), and an increase in public offerings.
“It is also worthy to note that our models keep foreign investors out of the picture, as we expect country risks’ emanating from FX challenges and continued oil price volatility would be major concerns for foreign investors”, the report stated.
Largely on uprising yield, Pension Fund Administrators, PFAs, have become emotional, and they converted sizeable chunk of their portfolio to fund.
Based on latest report, pension assets closed at N12.292 trillion for December, 2020 with N858.464 billion invested in ordinary share as against N552.894 billion in December, 2019.
Fixed Income Market Re-price Yields as Naira Depreciates
As a result, stock market early gain has been wiped off, not totally but 3.04% dip is heavy for the market considered overbought.
Nevertheless, some analysts and stockbrokers think despite the fact that PFAs ride on yields adjustment, market still has strong potential for returns.
PFAs Ride on Yields Re-pricing to Adjust Risk Appetite
