African Thoughts: January 28, 2013

General view from Nigerian PFA's:

This week we approach our regular thoughts piece slightly differently. We have had meetings with 8 different Pension Fund Administrators in Nigeria separately during the course of last week and in all cases the feedback was the same. The PFA's did not participate very much in the market in 2012 when there were very good returns being made. This has left their portfolio to be underweight in equities. On average the PFAs have about 10% of their portfolios in equities compared to the maximum limit of 25% recommended by PENCOM, the Industry regulators. The portfolio skew towards Fixed Income was also encouraged by the high yields from Government Bonds and Treasury Bills.

The PFAs all confirmed that they will be participating in equities during the year to close the deficit in their equities allocation for the following reasons;

• It appears that interest rates will go down this year based on pronouncements of the Central Bank and the effect of adding the Government Bonds to the JP Morgan emerging market index. Barclays will also add the bonds to its index this year. Swap to equities will become attractive.
• Equities will likely do very well this year behind expected profitability of companies from the reduced cost of business behind the expected increase in electricity output following the privatization of the electricity generation and distribution companies.
• Transaction costs are also likely to go down as the regulators implement the reduction in taxes already announced by the Ministry of Finance. This will encourage trading.

Most of the PFAs indicated that they will be entering the market immediately whilst a couple said they will start after the 1st quarter results are released. It appears the PFA's will be on the BUY side early in the year which may lift the index.