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Business News of Thursday, 22 July 2021


Pension funds increase participation in equities market

As of June 2021, local pension funds had increased their trades on the market to 7% of total trades As of June 2021, local pension funds had increased their trades on the market to 7% of total trades

The ongoing stellar performance of the equities market is driving more interest among investors – to which the local pension funds are not exempt, the market’s half-year report has revealed.

As of June 2021, local pension funds had increased their trades on the market to 7% of total trades compared to 0.38% in 2020. During the period, foreign investors contributed 68% of equity market trades compared to 85.43% in 2020.

A perusal of the main market’s performance for first-half of the year, vis a vis the comparable period for 2020, shows that the volume of shares traded appreciated by 24.73% – from 262 billion last year to 327 billion in 2021.

More telling, however, was the corresponding rise in the value of these shares by more than 50 percent (58.53%) in the period under consideration, from GH¢194million to GH¢308million. Consequently, market capitalisation and the primary index – the GSE Composite Index (GSE-CI) – are up 15.83% and 39.15% respectively; with analysts projecting a flurry of positive activities on the market after the release of second-quarter results.

Offering insight into the aversion of pension funds to investing in equities, Deputy Managing Director of the Ghana Stock Exchange (GSE) Abena Amoah, in an interview with B&FT, stated that direct and indirect consequences of the financial sector clean-up were to a fair degree responsible, as some pensions funds were hard-hit. She also indicated that the flight away from equities to government-issued securities is also due to the very attractive rate of the practically risk-free instruments; but added that she expects the change in strategy to continue, albeit at a cautious pace.

“That has fuelled a lot of their behaviour, and they have currently exceeded what they have to put into government securities – but they also understand that in the long-term that is not where their investments should be. We see that this trend is short-term and is responding to the current situation of the market. When the market goes to where normal market levels should be, you will see them behave differently.”

On the current attractiveness of the market, she said: “Last year, their [pension funds] holdings in equities was 2.5%. What has happened is that while the prices on the market stayed the same, the companies’ performances in terms of profit has grown. Now, their prices – relative to their profits as measured by their price-to-earnings ratio – are so low. More than half of our companies are trading at a P/E ratio of 5 and below; it is unbelievable. They are looking at the arena and it is so cheap; it is like a giveaway. That is why we are seeing many more of them coming back into the equities market”.

Data from the Exchange as of Monday, July 12, 2021 showed that of the 30 quoted stocks on the main market, 20 are trading at single-digit P/E ratios – with 17 of them at a ratio of 5 or less.

The Chief Investment Officer with Axis Pensions, Nana Boamah, in an interview with B&FT classified the behaviour of investors as a response to the current stellar performance of the Ghanaian equities market, well ahead of its peers in the sub-region.

“Investors want to get in when the market is going up. Having seen the market rally, it has struck interest in equities among pension funds. The market is already up by 37 percent; so, if you are a fund manager with no equity allocation in your portfolio and you see such a rally in the market, you are naturally forced to buy equities even if equities weren’t in your sight in the first place,” Boamah said.

However, he remains doubtful of the stake from pension funds on the equities market possibly rising above 3%.

Explaining, Mr. Boamah said: “If you check, the current pension funds allocation to equities was about 1.2% in 2019 while in 2020 nothing much happened – largely due to flight to the quality stance of fund managers. The 7% percent of trade recorded as of June 2021 will not take us anywhere; you will realise that only a single pension fund, Axis Pensions, is investing about 60% of this 7% of trades by local pension funds”.

He suggested that to ensure increase investment in the local bourse, the National Pensions Regulatory Authority (NPRA) needs to set an investment minimum benchmark for fund managers that will compel them into equities.