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Good Monsoons, No Panacea For Bad Economics

Monday, May 07, 2012

While good monsoons will undoubtedly help the nation in a number of ways, the bad news is that, a good monsoon is not a sufficient cure for all of the economic woes that India is currently facing and may not help to boost equity values, reports Manik K. Malakar reflecting the views of market experts

In a month or so we in India will be showered with blessings from Lord Varuna our Rain God. And the nation will be watching for the Lord’s munificence: To ensure that crops are good, that inflation comes down, that hot (pun not intended) commodity prices cool down and all-in-all things are in good cheer.

So while good monsoons will undoubtedly help us in a number of ways, the bad news is that mere good rainfall is not sufficient to cure all of the economic woes that India is currently facing, or even boost equities.

“A good monsoon will ensure that equity markets do not go down significantly from the current levels,” says Sudip Bandyopadhyay, MD & CEO Destimoney Securities. Bandyopadhyay was speaking about the effects that a good monsoons would have on India’s equity markets. Reports to date indicate that the monsoons should be good. (See Box 1)

So even if monsoons are good analyst note that there will be a time lag before the good news affects markets. “Being an agrarian economy, good monsoons usually means higher investible income, and that may apparently be reflected in a rise in equity markets during the second half of the calendar year,” says Anand James, Assistant General Manager of Geojit BNP Paribas Financial Services.

So the rains could move markets. “In a nutshell the monsoons would take some time to affect the stock markets.” says Nilesh Dedhia, Equity Strategist. Remember that monsoon flows are erratic. “The effects of a good monsoon would be felt around the first week of October,” he concludes.

But other experts are under-whelmed about the monsoons ability to move the equity markets vis-à-vis other factors and feel that other important issues will take priority. “If the provisions of the GAAR (General Anti Avoidance Rule) are diluted then the markets will fare well,” says Gul Teckchandani, an investment expert.

So are the monsoons going to be a damper? “That we will have a good monsoon is already factored in,” says Bandyopadhyay. He adds that if the monsoons do disappoint, then the markets will react adversely.

Thinking positive thoughts though, in the event of a good monsoon, which are the sectors that will benefit? “A good monsoon will benefit the FMCG (Fast Moving Consumer Goods) sector, both durables and non-durables,” says Bandyopadhyay. Two wheelers will also benefit.

The October period apparently will benefit two-wheelers either which way. “Two wheelers will fare well in that period, not only because of the monsoons, but also due to the festive season,” says Dedhia.

“A good monsoon usually rejuvenates fertilizer industries,” says James. He cites National Fertilizers, Deepak Fertilizers Rashtriya Chemicals, Chambal Fertilizers and Rallis India in context. “An increase in farm output would also help farm and irrigation equipment companies, such as Mahindra & Mahindra,” he continues.  

So what is the flip side of the monsoons on the various sectors of the Indian economy?  “Infrastructure slows down during the monsoon and thus infrastructure, cement and capital goods companies do face a slowdown, if the monsoon is good,” says Bandyopadhyay.  This slowdown in demand is only temporary, however.  “The buoyancy in the economy, generated post a good monsoon does help every sector eventually,” he continues.

“Traditionally heavy monsoons also slow down activity of the reality and automobile sectors and its ancillary industries,” says James. He does however caveat that the auto sector has been firm lately, even amidst the present growth concerns, suggesting that the consumer demand is largely firm.

Is there any historical linkage between the monsoons and equities, one that can be used as a guide to equity movements these monsoons? “The trends over the past ten years have been similar to what I have mentioned earlier. Markets may be boosted by news that the monsoons are good, but then again only for a day or so,” says Dedhia.

In effect, at the end of the day, it is a series of factors both domestic as well as global that will affect equity sentiments. “However, to the extent that FII (Foreign Institutional Investor) investment sets the trend for major rise or fall in Indian equities, the prospects for such rise or fall would thus depend on how attractive Indian equities are, vis-à-vis other global asset classes / equities. To that end, the investment environment in India would be highly important, and brings to focus, the recent retrospective taxation related ruling,” says James of Geojit BNP Paribas Financial Services.

As such the monsoons may not wash away the generally gloomy scenario that pervades India currently. “Presently, there are many uncertainties looming around the Indian economy. Sentiments of domestic and foreign investors are gloomy. “A good monsoon may not revive that sentiment, but a bad monsoon at this juncture will certainly spoil it further,” says Vijay Kedia, Director, Kedia Securities. 

In conclusion “Global factors will continue to impact Indian markets over the next three to six months in the absence of any major positive domestic trigger,” says Bandyopadhyay of Destimoney.

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