Cash held by pension funds surged by 40%
Deposit rates come down
Influx of funds sparks new investment ideas
As at December 2023, domestic cash held by pension funds surged by about 40% compared to the same period in 2022, as reported by the Botswana Economic and Financial Statistics for January 2024.
This notable increase in cash holdings, typically considered one of the least investment forms, stems from the repatriation of pension funds’ assets, aligning with the new pension fund regulations mandating a 50% investment within Botswana. The influx of funds in the previous year has already enabled the pension industry to meet its 2024 target of 41%, as regulators implement a phased approach to compliance, extending until 2027.
But in the short term, the surge in cash poses a challenge, according to Leano Babitse, Analyst at NinetyOne, who shared insights during a panel discussion at the Botswana Pension Society Conference 2024. Babitse pointed out that “cash yields have historically been lower than if you had deployed that cash to other asset classes,” highlighting the opportunity cost associated with holding cash reserves.
In the course of the panel discussion, Ntsoaki Rampa, Investment Analyst at Allan Gray, turned her mind to a trend observed in bank deposit rates, stating, “Deposit rates offered by banks have started to come down.”
Adding to this sentiment, Ati Monnathoko, CEO of Ipro Botswana, noted, “Cash rates have come down 400 basis points over the last 3 or 4 months in anticipation that cash is coming back.”
The sentiments during the conference underscored the anticipation and adjustment in cash rates in response to the influx of cash into the market.
From an infrastructure standpoint, reports indicate that many property firms, particularly those not listed, are presently inflating prices due to an abundance of capital pursuing the same assets. Rampa cautioned that this phenomenon might extend to the equities market as well. With significant capital flow towards the same assets, she foresees elevated valuations across equities, real estate, and bonds. Consequently, yields offered by the government and other issuers are expected to decrease. Already the 12-months Treasury bill was down.
However, there is a silver lining to this situation. Looking towards the longer term and adopting a more positive outlook, some asset managers have reported engaging in discussions with financial structural corporate specialists who are presenting new investment opportunities. These specialists are offering innovative products for asset managers to consider investing in. In essence, the influx of funds has sparked creativity and generated new investment ideas within the industry.
Babitse thinks the challenge in the short term is that predominantly “we have been placing money in plain vanilla instruments”. She emphasised the importance for asset managers to assess the level of risk associated with structural products and understand their implications for portfolios. Anticipating an enhanced learning curve, she expects to see an increase in the adoption of these products.
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