Why the monsoon is a big deal for your equity portfolio

Is the idea of a dry monsoon beginning to parch your appetite for investing?

May 31, 2016 12:00 am | Updated 07:36 am IST

And there is no better time than now to plan your investment—Photo: Ritu Raj Konwar

And there is no better time than now to plan your investment—Photo: Ritu Raj Konwar

The monsoon season. Does it evoke the idea of planning your finances? No, right?

When you talk about the monsoon, what likely comes to mind is gushing rain, bumper harvests, and flooded streets. Perhaps even a romantic song sequence in a Bollywood movie. The idea of planning your equity portfolio is probably not on your mind. But, the monsoon is a big deal for investing in stocks. And there is no better time than now, during these pre-monsoon moments, to plan your investment horizon over the next few months. This year is especially key.

The perspective

The last couple of years were a disaster from a monsoon point of view. Rainfall was 13-14 per cent below normal. This year there is general optimism about a successful monsoon but it remains to be seen how it will pan out.

Right now, a bunch of states are already experiencing a severe drought. Many of our reservoirs are about to go dry, and cities across the country are rationing water supplies. You are probably thinking then that agriculture will be affected. Absolutely, but it goes well beyond that.

A delay in rain will inevitably delay farmers’ planting activities, which will in turn delay the harvest. This is the immediate effect, which translates to a smaller yield of food crops such as rice, wheat and sugarcane. Basic laws of economics tell you that the lower the supply of a commodity, the higher will be its price. So naturally, the next thing you will see is higher food prices.

Food inflation has been a problem since late 2009. Even though its current level of 6.3 per cent is lower than the double-digit numbers of 2012 and 2013, it is still uncomfortably high and exceeds the headline consumer price index (CPI) inflation. In fact, this nagging inflation is keeping the central bank on its toes. The Reserve Bank of India lowered the benchmark repurchase rate to a five-year-low of 6.5 per cent in April and said it would look for more room to ease as it watches the monsoon rains. Lower interest rates of course means lower borrowing costs for businesses, a good thing for economic growth.

A.K. Prabhakar, the Head of Research at IDBI Capital, says a bad monsoon directly translates to delays or even defaults in loan repayments by farmers to banks and non-banking finance corporations (NBFCs), a situation that would unduly stress the financial sector. A good monsoon on the other hand positively affects recovery and credit growth. Mr. Prabhakar also points out that rural sales dominate growth in the fast moving consumer goods (FMCG) sector. “A favourable monsoon can boost FMCG volume growth by 10-12 per cent, most of this impacting the sales of autos. In fact, two-wheeler and tractor sales volume can be affected by 15 per cent.”

And then let’s not forget the dire effect that power cuts have on businesses. Production can be brought down significantly if not to a complete halt.

Is the idea of a dry monsoon beginning to parch your appetite for investing? Consider this before you set about to implore the blessings of Lord Indra: the overall view this year is that we will have plenty of rain.

“Given this we are advising clients to buy auto, agro-chemical, banks and NBFC stocks,” says Mr. Prabhakar.

Too much diversity for your portfolio?

Well, Pranab Mukherjee put it appropriately in his 2011 budget speech as finance minister: “While, like last year, I seek the blessings of Lord Indra to bestow on us timely and bountiful monsoons, I would pray to Goddess Lakshmi as well. I think it is a good strategy to diversify one’s risks.”

The writer is a financial journalist and author of Money Smart: The Indian Woman’s Guide to Managing Wealth.

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