Dividends, optimism seen fueling stock market in Q4’24 — Cowry Asset
- Suggests short-term fixed income strategy
- Cautious approach to equities
- Diversify portfolios with FX denominated assets
Agwunobi Joy
Johnson Chukwu, founder/CEO, Cowry Asset Management Ltd.
Analysts at Cowry Asset Management Limited are projecting a robust rebound for Nigeria’s equities market in the remaining months of 2024, with the market expected to witness a significant recovery driven by impressive interim dividend declarations and renewed optimism, particularly in the oil and gas, and financial services sectors.
The Nigerian equities market ended the month of September on a positive note, as the banking sector experienced strong buying interest in response to the release of big banks’ H1-2024 audited financial reports, observed the analysts.
The positive momentum, Cowry Asset noted, was further strengthened by impressive earnings results across the banking sector, with companies demonstrating significant growth in both revenue and profits.
Moreover, the interim dividend announcements made by these banks were particularly noteworthy, setting new records for dividends in the sector.
Cowry Asset Management’s projections for the Nigerian equities market were presented in a recent webinar titled, “A Comprehensive Analysis of Nigeria’s Economy in Q3 2024: Challenges and Emerging Opportunities.”
Johnson Chukwu, founder and chief executive officer of the investment banking group, shared valuable insights on the current state of Nigeria’s economy.
Chukwu highlighted the challenges that have persisted in the economy throughout the third quarter of 2024, while also identifying the emerging opportunities that can be leveraged to drive economic growth and recovery.
According to him, Nigeria’s GDP growth rate had modestly improved to 3.91 percent in Q3 2024, a slight increase from 2.98 percent in the first quarter of the same year. This positive development, however, was not uniformly reflected across the economy, as only 10 sectors recorded growth while a staggering 36 sectors contracted.
“The GDP growth was not balanced in the sense that only 10 sectors grew while 36 sectors contracted. That should signal to the government the challenges that the Nigerian economy is going through, because we can’t say the Nigerian economy has grown to 3.91 percent but fail to recognise that out of the 46 sectors we have in the economy, 36 contracted, which is an indication of what Nigerians are feeling,” he stated.
Chukwu identified the service sector as the primary driver of the Q3 GDP growth, with telecommunications and financial services accounting for 58.76 percent of the total contribution. He attributed the telecommunications sector’s robust expansion to the implementation of forward-looking policies that nurtured it from its infancy to one of the largest contributors to Nigeria’s economy.
The Cowry Asset chief continued his analysis by pointing out that the oil sector experienced a 10.2 percent rebound in Q3 2024, providing a much-needed boost to the overall GDP growth. The recovery in the sector, he explained, helped to mitigate the negative impact of the naira’s depreciation on the industrial sector.
“However, when the Q2 2024 volume is compared with the Q1 2024 average production volume of 1.57 barrels a day, the oil sector’s performance indicates a quarter-on-quarter decline in oil sector productive activity, and that also shows the reason for why the pressures have sustained in our foreign exchange because this is basically the source of our foreign exchange earnings,” he noted.
Chukwu also observed that the agricultural sector, despite contributing a significant 22.61 percent to the GDP, experienced an anaemic growth rate of only 1.41 percent, falling short of the 1.50 percent recorded in Q2 2023. He expressed concern over the sector’s sluggish performance, asserting that it was the main reason for the high rate of food poverty in the country.
Moreover, Chukwu identified the reliance on subsistence farming as a major factor behind the agricultural sector’s stagnation, adding that the displacement of farmers from their homes and farms due to insecurity was further exacerbating the situation.
“We are seeing reduction in agricultural activities because these farmers are still dealing with subsistence farming and those who have industrial farms cannot go to their farmers principally as a result of insecurity,” he stated.
Chukwu also discussed Nigeria’s foreign trade report for Q2 2024, which revealed a total trade figure of N31.89 trillion. While imports amounted to N12.47 trillion, exports reached N19.42 trillion, resulting in a positive balance of trade of N6.95 trillion, according to the National Bureau of Statistics (NBS).
Chukwu explained that this trade balance was driven by the slowdown in local consumption as Nigerian consumers’ purchasing power had been weakened by inflationary pressures. He noted that many households were struggling to afford imported goods and maintain their previous consumption levels, leading to a reduction in imports.
In his analysis of the foreign trade data, Chukwu highlighted that while the total value of trade, exports, and imports increased significantly between Q2 2024 and Q2 2023, this growth was largely a reflection of changes in the value of the naira rather than an increase in trade volumes. He explained that when measured in terms of volume, trade actually declined due to the weakening purchasing power of consumers, but the naira’s devaluation resulted in an artificial inflation of the total trade value.
Chukwu observed a slight moderation in Nigeria’s consumer price inflation (CPI) from 33.40 percent in July to 32.15 percent in August 2024. He attributed this decline to the decline in food prices during the harvest season, which reduced pressure on food inflation.
The Cowry Asset chief executive emphasised that this moderation in CPI was primarily driven by the reduction in food prices, as the harvest season led to increased supply and consequently lower prices for food products. He also suggested that the decline in food inflation was a temporary reprieve, as inflationary pressures are likely to resurface once the harvest season ends and food supply dwindles.
Chukwu opined that the recent increase in the MPR by the Central Bank of Nigeria (CBN) was a move to curb the persistent rise in core inflation, which has been significantly impacted by increasing energy prices and the continuous growth of money supply. According to him, the CBN’s decision was largely reactive to the trend of inflation, as the impact of the recent increase in pump prices would exacerbate inflationary pressures in the coming months.
Chukwu added that the CBN’s aggressive monetary policy tightening approach to taming inflation, which included hikes in the MPR, the CRR, and higher yields on fixed-income securities, would inevitably lead to a high-interest rate environment for depositors.
He further noted, “This aggressive stance appears to have positively impacted investment inflows into Nigeria, as higher interest rates typically attract foreign capital seeking better returns.
“We predict that the CBN will likely maintain this hawkish posture in the short term, especially with expectations of rising inflation in the months ahead.”
Regarding the needed investment strategy for investors, Cowry Asset suggested investments in short-term fixed income instruments with strong liquidity to ride the benefits of the current high interest rates and position for the opportunities of possible further increase in rates in Q1 2024.
In addition to suggesting a short-term fixed income strategy, the investment banking firm also recommended a cautious approach to investing in equities, particularly in sectors such as financial services, oil and gas, and agriculture.
The analysts advised investors to consider diversifying their portfolios with foreign currency denominated assets, enabling them to hedge against potential currency fluctuations and reducing exposure to the risks associated with the weakening Naira.
Investors were also encouraged to limit Commercial Paper risk exposure to only blue-chip companies with very strong cash flow and balance sheet.