Innsight Pro Monsoon 2019

The” Monsoon “hit the door in Kerala on 8th June 2019, this time it delayed by 7-10 days but as expected by IMD there be near normal rain fall across the country.

IMD predicted 96% rain fall the year, earlier SKYMET the private agency predicated below normal monsoon which means low rain fall for this year. Below normal or reduced rainfall is something that does not augur well for the economy because it leads to a rise in inflation and affects earnings but later IMD predicated near normal rainfall which cheer up the sentiments of investor towards economic growth.

The IMD recently has pegged overall countrywide rainfall at 96 percent of the LPA with a model error of +/-5 percent. However, data shows that in most of the last 11 years, the IMD has been off marks.

MONSOON (June-Sep) Year	IMD’s April forecast (% of LPA+/-5%)	IMD’s June forecast (% of LPA+/-4%)	Actual rainfall (% of LPA)
2008	99	100	98
2009	96	93	77
2010	98	102	98
2011	98	95	102
2012	99	95	93
2013	98	98	105
2014	95	93	88
2015	93	88	86
2016	106	106	97
2017	96	98	95
2018	97	97	91
2019	96	?	?

Why Monsoon is Important for Economy and Equity Market-

Monsoon is an important factor for economic growth, as we know our agriculture is still dependent on monsoon rains. The agricultural sector is the most vulnerable to the changing rain. Good monsoon improves the rural demand for products, increasing the purchasing power and companies such as HUL, Dabur, Godrej Consumer, and ITC benefit a lot. Demand of two wheelers, low cost cars, and tractors also increase during a good monsoon, which is helpful for M&M, Escorts, Eicher, Maruti, and Bajaj Auto. High farm production also lowers raw material costs for companies that make packaged foods, for instance, Britannia, GSK Consumer, ITC, and Nestle. Data shows a close link between rains and fortunes of FMCG companies. Fertilizer and irrigation companies such as Chambal, RCF, Jain Irrigation, etc. get a direct boost due to better rainfall. Once the rains support better agricultural output, the windfall gains are witnessed automatically in the manufacturing and services sector as well.

When we talk about equity market there is negative correction with equity market, although good monsoon impacts demand of rural and improves purchasing power of customers. But the stock market behavior is different, for example, above normal rainfall in 2011 (98 per cent of long-period average predicted, actual was 102 per cent) coincided with a 24.6 per cent calendar year decline in the S&P BSE Sensex. A shortfall in rains in 2014 (95 per cent predicted, actual was 88 per cent) coincided with a 29.9 per cent gain in the index.

Equity Market Behavior During and after the Monsoon –

In past 10 years equity market responded in exact opposite in good monsoon as data suggest that there is negative correlation the affect of rain fall will not impact the equity return but it will enhance productivity and liquidity in market and control the food inflation.

Year	IMD’s April predication	Actual rainfall ( as% of LPA)	Sensex returns for calendar year (in %)
2004	100	87	13.08
2005	98	99	42.33
2006	93	99	46.70
2007	95	105	47.15
2008	99	98	-52.45
2009	96	77	81.03
2010	98	102	17.43
2011	98	102	-24.64
2012	99	93	25.70
2013	98	106	8.98
2014	95	88	29.89
2015	93	86	-5.03
2016	106	97	1.95
2017	96	95	27.91
2018	97	91	5.91
2019	96	?

Important Sector should be in Watch List –

Important sectors mean the sector which can give you the highest return. As we know, every sector is important to develop a country but then too we would like to select that sector in which impact of monsoon is high.

1. Agriculture Sector- The sector which highly affected by monsoon is agriculture sectors includes fertilizer stocks, seeds stocks and irrigation stocks. Investor and trader focus should be on agriculture, as good rain fall will definitely increase their sales volume and productivity.

2. Auto Sector- This sector should also be in focus because good rain impacts the demands of tractor and other equipments used in agriculture space. If the monsoon remains on track, it would put more disposable income in the hands of farmers that would, in turn, increase demand for autos, consumption sector.

3. Banking and NBFC: This is one of the important sectors because the stock which engages rural financing services will definitely provide good return to investor and trader and also The monsoon rains have a direct relation with the inflation rate and hence to the monetary policy. A plentiful monsoon creates a positive perception about the economy among investors

4. FMGC Sector- This sector should be on focus because agriculture products are the source of raw material for FMCG stocks if rain fall arrived as expected then we can expect a good return on FMGC stocks.

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Innsight Pro Monsoon 2019