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In answering this, it is good to draw inference from past events. The last major economic shocks Nigeria faced were the 2008-9 global financial crisis and the 2014-15 oil price collapse. In 2008, crude oil prices fell 51 percent and domestic investors including pension funds experienced a loss in portfolio value with pension funds returning 0.3 percent. Fast forward to 2014-15 era where despite significant oil price declines which pushed Nigeria into a recession, pension fund returns held up much better in the face of an over 30 percent drop in stock prices over the period. Figure 1: Annual Oil prices changes and Aggregate Pension Fund Returns
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So what changed between the two episodes?
Firstly, following the 2009 financial crisis, pension funds moderated their involvement in the Nigerian stock market as equity share of pension assets declined from a 20 percent in 2008 to 14 percent ahead of the (2014-16) crisis. This helped reduce the impact of the equity market decline on pension returns. What this suggests is that pension returns should be less volatile in 2020 as an equity share of total assets stood at 5 percent at the end of 2019. In addition, following a rise in bond yields over the 2014-16 period, pension funds rotated into fixed income instruments which helped support investment returns. Overall, pension funds have fewer holdings of volatile instruments heading to this crisis than previously. Figure 2: Pension Fund Equity Holdings.![](https://i0.wp.com/connectnigeria.com/articles/wp-content/uploads/2020/09/Picture1-2.png?resize=517%2C289&ssl=1)
Could this year be different?
Two things make this year different from prior episodes: first, the Covid-19 shock is still evolving and many countries, including Nigeria, are yet to flatten the Covid-19 curve which means the duration of measures such as lockdowns and social distancing is uncertain. Under this atmosphere, the economic outlook is even more highly uncertain and looking at financial market history could be a poor indicator of the future. Secondly, unlike in 2014-15, interest rates are much lower with Treasury bill yields between 1-3 percent and bond yields between 6-12 percent (vs 13-15 percent between 2014-15) reflective of significant Naira liquidity held by domestic non-bank institutional investors following the CBN’s decision banning participation in its high-yielding sterilization securities (OMO securities).Find our comprehensive listings of businesses in Nigeria here https://businesses.connectnigeria.com/
This excess liquidity could drive significant dislocation in asset prices across both stock and bond markets which could support bullish trends as we have seen recently. For example, Nigeria’s bond and equity markets have rallied strongly since the March sell offs 2020 with key indices up over 20 percent, partly spurred by local investors deploying liquidity into these markets. These two points suggest that 2020 could be the most uncertain year in investing history. However, recent policy actions which seek to plug the financing gap facing Nigeria such as the recent USD3.4billion loan from the IMF, as well as plans to tap domestic debt markets, could help ameliorate concerns over outlook. Figure 3: Trends in Pension Assets
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