Pension fund managers will raise investments despite uncertain economy

Business a.m.

In spite of the turbulent macroeconomic conditions in Nigeria, pension fund managers have expressed a positive outlook for future investments, according to the recently released 2024 Pension Fund Managers Sentiment Report by the Pension Fund Operators Association of Nigeria (PenOp). 

The report revealed that 100 percent of the surveyed fund managers intend to increase their investments in the upcoming quarter, a strong indication of the growing confidence in the Nigerian pension sector, as evidenced by the rising Assets Under Management (AUM) figures.

According to PenOp, the latest 2024 Pension Fund Managers Sentiment Report serves as a vital gauge of the investment climate in Nigeria, as it draws on the insights of chief investment officers (CIOs) managing pension funds. 

The report is viewed as a key barometer for the broader financial markets, offering critical data on economic indicators, market trends, and the evolving regulatory environment.

The report indicated that the Nigerian economy has experienced a mixed performance this year, with the country’s GDP growth of 2.98 percent in the first quarter of 2024 representing a modest improvement over the previous year’s performance of 2.31 percent. 

This moderate growth, it noted, has largely been fuelled by the services sector, which accounted for 58.04 percent of the country’s total GDP and recorded a year-on-year increase of 4.32 percent.

The report highlighted the impact of persistently high inflation as a dominant feature of the Nigerian economic climate, with the inflation rate reaching a peak of 34.19 percent in June. The inflationary trend, the report noted, has been further amplified by rising food prices, currency devaluation, and increased consumer spending.

In response to the high inflation rates, PenOp observed that the Central Bank of Nigeria (CBN) had adopted an aggressive monetary tightening policy, which it suggested had succeeded in slowing inflation. However, the report also noted that the high borrowing costs associated with this policy have raised concerns that they could adversely impact business activities and discourage investment in the economy.

In light of the volatility in the Nigerian economy, the 2024 Pension Fund Managers Sentiment report found that over 60 percent of fund managers are carefully monitoring key macroeconomic indicators, particularly inflation and interest rates, to inform their investment decisions. 

Although 100 percent of respondents stated their intention to expand their investments in the upcoming quarter, motivated by the growth of Assets Under Management, the report revealed that the overall sentiment towards the economy remains pessimistic. More than half of the fund managers interviewed indicated that they expect no significant improvement in key economic indicators in the next quarter.

The report found that despite the 34 percent growth in the Nigerian equities market during the first half of 2024, fund managers have adopted a cautious approach towards equities, with some shifting to treasury bills out of concern for future market volatility. 

According to the findings of the report, only 36 percent of fund managers surveyed are actively seeking to increase their exposure to equities, while 28 percent are contemplating reducing their equity allocations. 

On the contrary, fixed-income securities remain a preferred asset class among pension fund managers, with 64 percent of managers indicating their intention to increase their allocation in this area.

The report observed that government bonds have maintained their status as a safe haven during periods of economic uncertainty, a trend that is anticipated to continue as inflation rates potentially decrease and interest rates follow suit towards the end of the year.

Meanwhile, infrastructure investments are becoming increasingly popular among pension fund managers, with  73 percent of managers expressing plans to increase their exposure to this sector. 

The report indicated that the growing number of bankable infrastructure deals, as well as government-backed projects, are driving this interest, leading to the positioning of infrastructure as a key component of pension fund portfolios.

As evidenced by the report, there is a rising interest among pension fund managers in alternative investments, with 64 percent of managers intending to diversify their portfolios by increasing their exposure to this class of investments.

This growing demand has led to a call for specialised funds tailored to specific alternative asset classes, including private equity, venture capital, and real estate.

It is evident from the findings of the report that market volatility is a major cause for concern among fund managers, with only 18 percent of respondents forecasting a potential improvement in the upcoming quarter. 

Meanwhile, 36 percent of respondents expressed their belief that market volatility will continue to be a significant issue, primarily due to concerns over foreign exchange rates and the high cost of borrowing.

The report highlighted that the current political climate, which includes political protests, industrial strikes, and a cost of living crisis, has contributed to a heightened sense of uncertainty in the investment landscape. 

These factors have led fund managers to adopt a more cautious approach when investing in the real sector, as they are aware of the potential implications of political instability on economic recovery and investor confidence.

The report revealed that the majority of fund managers expect political uncertainty to continue in the near term, which could further hinder the nation’s economic growth and undermine investor sentiment.

In the face of various challenges, the report found that fund managers remain optimistic about the ongoing regulatory review by the pension industry’s regulatory body. 

There is a widely-held belief among fund managers that more investment-friendly guidelines will emerge as a result of this review, which could lead to a surge in investments across multiple asset classes.

However, some fund managers have raised concerns that the regulatory review process may extend beyond this year, potentially delaying the positive impact it could have on the industry.