Impact of Stock Market Development on Pension Fund Performance

Transcription

1 ISSN (Online) Impact of Stock Market Development on Pension Fund Performance Collade Ngoni Murungu Lecturer, Department of Banking and Finance, Bindura University of Science Education, Bindura, Zimbabwe Mufaro Wilster Marecha Corporate Finance Analyst, Netone, Zimbabwe Edson Vengesai Research Assistant, Department of Finance, University of Kwa Zulu Natal, School of Accounting, Economics and Finance, Durban, South Africa Abstract: This document examines the impact of stock market developments on pension funds. Other previous studies have been conducted to find the relationship between these two variables in both developed and developing countries. The main objective of the research was to find the impact of stock market development on the performance of pension funds. The previous studies suggested that pension funds financial assets have positive impacts on stock market depth and liquidity as well. This research was aimed at analysing the Zimbabwean financial market and ascertains whether such a relationship holds. Pension funds returns were analysed on a yearly basis against the total market capitalization, industrial index and value traded for the particular time under study, using the Zimbabwean stock market and pension funds data.the relationship was tested using regression analysis and graphs and the results suggest that there is a positive relationship between pension fund performance and market capitalization as well as returns on the industrial index. 1. Background to the Study When tracked back to the pre-liberalization period, Zimbabwe s Capital markets have remarkably broadened, with hordes of local and foreign participants; and financial engineering products being born out. However, the current political instabilities, poor policy structuring, early abortion of policies, hyperinflation (a record high of 500 billion %) and local and international recessions have stunted the financial sector growth and innovations. This has seen the collapse of the financial sector, through illiquid channels and incomplete markets. Such erratic macro-economic conditions have led to Zimbabwean Pension Funds accruing millions of actuarial deficits and the fall in all funding ratios measures. The ZSE continue with its bullish industrial counters reaching a record high of 213 points in 2013, whilst trading of mining counters have been subdued in face of repressive laws like Indigenisation policy and endorsing of ZimAsset blue print in August 2013.From the reopening of the ZSE in a dollarized economy in March 2009, trade has been thin, with no foreign investment for the first 4 months willing to risk trading on the market. Most stocks trade in the cent range, with at least twenty six different stocks are not trading at all. Out of sixty seven counters listed on the ZSE, only fifteen counters are currently trading positively and the rest are in the red. It is however to note that the period 2013 to 2014 has registered the highest number of delistings and suspensions largely due to viability challenges with a total of twelve delistings in one year It is clear that local pension funds face high degree of equity uncertainties domiciled in country and regulatory risks amid a severe liquidity crunch and industrial degeneration, Pension Funds face the test of time as they are being exposed to high equity risks which erodes value. Their allocation in equities portfolios continue to fight an already lost battle given the harsh economic arena, despotic legislation and incomplete capital markets 2. Objective of the Study The main objective of this study is to ascertain the impact of stock market development on pension fund performance in Zimbabwe. 3. Statement of the Problem Basing on the erratic economic conditions, a subdued trading on the local bourse, illiquidity and under developed capital markets as impediments, pension funds are at the mercy of the fragile macro-economic soundness, with thin fibres holding the already fragmented economy together. Pension funds are deemed to be ticking time bomb with catastrophic consequences if they ultimately fail. INTERNATIONAL JOURNAL OF INNOVATIVE RESEARCH & DEVELOPMENT Page 373

2 It is very essential to establish the relationship that exists between the economic developments and pension funds. Thus any development in the stock markets can have a positive or negative impact on the returns of pension funds. It is therefore important for the researcher to find the impact of stock market developments on the pension fund performance in Zimbabwe. 4. Methodology The primary source material for this paper was provided by the Zimbabwe stock exchange which gave information on stock market data for the period under study and also the Minerva consulting firm for the Pension fund returns. The relationship between the pension fund performance and market movements was analysed through regression analysis. With pension fund performance being the dependent variables the research sought to identify the relationship between the stock market movements against pension fund performance with independent variables being the industrial index return and market capitalization. Thus the research sought to identify the relationship between the stock market movements against the pension fund performance. 5. Literature Review This paper looks at the impact of stock market development on pension fund performance in Zimbabwe. The introduction of funded pension systems allows pension funds to accumulate assets that can be invested in financial market. Even in the case that pension savings crowd out other household savings such that total savings in the economy do not increase the accumulation of pension fund assets is expected to potentially promote depth and liquidity in the capital markets because of different investment behavior between households and pension funds. With accumulating assets and the longer term nature of their liabilities, pension funds have incentives to invest more in liquid and long term assets that yield higher returns and thus provide a long term supply of funds to the capital markets (Davis 1995). Goodspeed (2008) explained that pension funds activities may also include capital and financial market development through substituting and complementary roles with other financial institutions, specifically commercial and investment banks. Impavido et al (2002), noted that pension funds foster competition and may improve the efficiency of the loan and primary securities markets resulting in a lower spread between lending rates and deposit rates and lower costs to access capital markets. Also increased pension fund returns can be as a result of improvement in financial regulation, modernisation in the infrastructure of securities markets and an overall improvement in financial market efficient and transparency (Kaniel et al, 2008). Some previous studies have mainly looked at developed countries to see the relationship between these variables. Brainard (2001) also found out that countries with different levels of financial development have different financial climates that can discretely impact the role of and performance of pension funds. Thus the investment behavior and asset allocation of pension funds in countries with different levels of financial literacy are expected to be different (Davis, 1995) 6. Results and their Interpretation Regression analysis is a statistical tool for the investigation of relationships between variables. To explore such issues, regression was employed to estimate the quantitative effect of the causal variables upon the variable that they influence and assess the statistical significance of the estimated relationships. In order to establish a relationship, the researcher has to set up the hypothesis testing criteria which in this case is set as follows: H o : i = 1,2,3,4 There is no significant relationship between Independent variables to the dependent variable, Pension fund performance H o : i = 1,2,3,4 There is no significant relationship between Independent variables to the dependent variable, Pension fund performance Rejection criteria: At 5% (α=0.05) significance level, Reject H o if the P-Value <α or F test < t stat Regression Analysis Output Using regression analysis, Industrial index and market capitalisation as an independent variables exhibited a strong positive correlation to pension fund return of1 Multiple R and outstanding goodness of fit of 1 for R Square and Adjusted R Square measures. The F testof is way above the cut off, t stat of and for industrial index and market capitalisation respectively whilst P-Values of 0.007for industrial index is less than the cut off of 0.05 at 95% confidence level. However, a P-Value of 0.067is greater than the cut off of 0.05 at 95% confidence level for market capitalisation respectively are greater than the cut off of 0.05 at 95% confidence level. The observed data yields a regression equation: From the data observed, positive relationship between the industrial index and pension fund performance can be traced, where a unit increase (decrease) in return on industrial index will increase (decrease) pension funds However, negative relationship between market capitalisation and pension fund performance can be drawn, where a unit increase (decrease) in market capitalisation will decrease (increase) pension funds INTERNATIONAL JOURNAL OF INNOVATIVE RESEARCH & DEVELOPMENT Page 374

3 SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 5 ANOVA df SS MS F Significance F Regression Residual Total CoefficientsStandard Error t Stat P-value Lower 95% Upper 95%Lower 95.0%Upper 95.0% Intercept Industrial index return per annum Market capitalisation (billion) Figure 1: Regression Summary Source: Regression output From the graphs above, trend line estimates were drawn which confirms positive relationship between Industrial index to pension fund return whilst confirming a negative relationship between market capitalisation and pension fund performance. That is, as Industrial index soar (dip) by a unit, pension fund return rise (fall) by whilst a rise (dip) in market capitalisation by a unit, pension fund return fall (rise) by The graph below analysed the relationship that exists between pension fund returns and industrial index. Data collected was used to produce the graph and it clearly shows that there is a positive relationship between the two variables. These findings suggest the same with what Impavido et al (2003) discovered when they did their research in developed countries. INTERNATIONAL JOURNAL OF INNOVATIVE RESEARCH & DEVELOPMENT Page 375

4 Figure 2: Graphical Analysis Source: Secondary data 7. Conclusions The regression results clearly indicated there is a strong positive correlation between the pension fund returns and the industrial index returns after rejecting H0 in all cases and resounding goodness of fit measures. Also the market capitalization of the stock market has also a bearing on the returns of pension funds as it affects the value traded which can be used as a proxy for checking liquidity in the market.according to Impavido et al (2003) stock market depth can be measured by (market capitalization/gdp) and market liquidity can be measured by (Value traded/ GDP).So it is essential to look at these aspects as they have a direct bearing on the returns of pension funds. Basing on the regression results and graphical analysis, the researcher can conclude that there is a positive relationship between stock market performance and pension fund performance. 8. Recommendations Given the above findings the researcher has proposed the following recommendations ZSE should proceed with its demutualization proposal to stream line the local bourse to current international norms, improve corporate governance and efficiency. There bourse should be automated to increase stock marketability and efficiency, through its official website and public price boards. The ZSE should call overs per day and hence increase trading so as to increase participation and liquidity. There should be electronic statements of share ownership which will reduce transfer of share ownership to encourage trading. The ZSE can encourage listing of more entities to increase participation and liquidity. Exchange levies should be reduced to promote internal efficiency and trading volumes. SEC should facilitate listing of SME s on the local bourse and share splits of blue chip counters to increase liquidity. Regulators and government must make effort to develop regulations and engage all stakeholders so as to come up with an industry-wide accepted robust regulatory frame work SEC should set broad parameters to monitor all operations in order to foster a sound trading environment to combat problems of insider trading. The Zimbabwean economy should be liberalised for efficient development and operation of the financial sector. Pension Funds should make concerted effort to lobby regulators to enable the removal of restrictive laws and reduction of Asset Prescribed ratios The Fund should be composed of two sub-portfolios; the Core Portfolio and a Speculative Portfolio, aimed at maximising returns while simultaneously managing risk so as to avoid deterring from investment objectives towards betting. The Investment Policy guidelines should be regularly reviewed in line with market developments 9. References i. Brainard. L (2001), Pension Reforms Altering Market Dynamics for Emerging Debt, Emerging Markets Research, J.P. Morgan (December) INTERNATIONAL JOURNAL OF INNOVATIVE RESEARCH & DEVELOPMENT Page 376

5 ii. Davis, E. P. (1995), Pension Funds: Retirement Income Security, and Capital Markets An International Perspective, Oxford University Press. iii. Goodspeed I (2008), The Equity Market, South African Institute of Financial Markets iv. IH Securities (2011). Zimbabwe strategy: Equity research v. Impavido.G, Musalem, A. R, and Tressel, T(2003). The Impact of Contractual Savings Institutions on Securities Markets, World Bank Policy Research Working Paper 2948 (January) vi. Kaniel, R.G, and S. Titman (2008). Individual investor trading and stock returns. The Journal of Finance 63 (1) vii. Njanike K (2010), Derivative market: An integral part of the ZSE, Annals of the University of Petroşani, Economics, 10(1), viii. Reserve bank of Zimbabwe (2009), Bank licensing, supervision and surveillance: Guideline on derivative trading ix. Sykes O. A (2000) An Introduction to Regression Analysis, The Inaugural Course Lecture x. Zimbabwe Independent (2014), Quoted companies survey xi. xii. xiii. INTERNATIONAL JOURNAL OF INNOVATIVE RESEARCH & DEVELOPMENT Page 377