Will we get a year-end rally in African stocks?

There are signs that Africa’s stock markets are due for another rally. But will it last well into the next year?

Capital News Africa: From the trading floor – Week 48-2022

During a year marked by geopolitical tension, a surge in inflation and slower growth, African stocks have been fairly resilient. One good example: While the equity index Dow Jones Africa Titans 50 (ticker symbol: DJAFK) fell 34% between January and September, it bounced back in October and November, climbing 18%.

In developed countries, meanwhile, a recession is looking increasingly likely, especially where the euro zone is concerned. Does this point to a real turnaround? Should investors bet on a year-end rally for African stocks?

Certainty about a recession in Europe

It turns out that these recent developments are positive for stock investors. For one thing they do not like at all is uncertainty and, consequently, have prepared for a recession scenario. “The market is trying to break out of its bearish sentiment, but has yet to fully succeed,” remarks Bertrand Lamielle, CEO of the asset manager Portzamparc Gestion in Paris.

And there may be opportunities in Africa given the increasing number of positive economic signs there. For example, banks in South Africa increased their loans to the private sector by 9.3% in October, data from the country’s central bank reflect. Also, unemployment in the country, which is Africa’s second biggest economy by GDP, fell by one percentage point in the third quarter to 32.9%.

In Nigeria, central bank governor Godwin Emefiele said the country’s non-oil exports had reached USD 4.99 billion in the first nine months of this year. This compares with the USD 4.19 billion worth of non-oil exports achieved in all of 2021, Emefiele said. That is a very positive development for Africa’s biggest economy, whose wealth depends mostly on exports of oil and natural gas.

Strong earnings gains in Africa

There is also good news from listed African companies. According to the research firm African Financial, earnings from all companies based in sub-Saharan Africa but not in South Africa were up 17% in the first half of 2022 compared with the year earlier period. Breaking down the figures, corporate profits in Nigeria were up 16% in the first half and 17% In Kenya. Listed companies in Uganda posted a 12% gain in first-half earnings, while those on the island of Mauritius saw a 115% jump. All gains were calculated in US dollars.

Yet African Financial also said that, regrettably, there was a low correlation between earnings growth and share prices. “This raises the question as to whether brokers and investors are analysing companies. It appears that most companies are not getting their message through to investors”, African Financial noted.

Stock prices are not following earnings

African Financial makes an important point. Here is a telling example: In the first half, the Nigerian unit of French oil giant Total Energies, Total Energies Marketing Nigeria (ISIN: NGTOTAL00001), posted a 163% jump in earnings. However, its stock is down 13% since January. Or let us look at Nigerian palm oil producer Okomu Oil Palm Company (ISIN: NGOKOMUOIL00): Its first-half profits soared 139.9%, but the stock is only up 18% since the beginning of the year. Indeed, Okomu Oil’s share actually lost 22% in the last six months.

That stock prices for these African companies are not reflecting their strong earnings is indeed lamentable. But there is also a flip side to this: Savvy investors can take advantage of the lack of communication by finding opportunities first amid what looks to be a lasting rally in African equities.