Monsoon seems to be on the edge in India as we head towards the mid of June 2022. Indian equities are now in the cycle of rate hikes, volatile crude oil prices, fluctuating rupee, mixed corporate earnings, and fear of the Russia & Ukraine war have been the only themes till now. However, a good monsoon might bring good tidings, at least from the sentimental point of view as a good part of the economic growth depends on monsoon movement which in turn decides the fate of the agriculture output. The South-west monsoon plays a key role in Indian economic growth as more than 70% of the agricultural output depends on the monsoon rains which contribute most to the GDP.
The rains of monsoon in India and the movement of the Nifty – both are unpredictable in the general context. But what is predictable is how the monsoon will impact certain sectors and stocks and it becomes important for investors to have the right type of investment from June to September month of every year. For becoming a successful investor, we have to pre-plan our investment and wait for the correct opportunity and choose the right stocks depending on market dynamics.
From the equity market perspective, there are few sectors that have a direct and indirect effect on their earnings during the monsoon rains. A large part of companies whose dependence is on rural India will have a close watch on the monsoon developments as it will impact the purchasing power of their products.
Whenever there is a prediction of the normal monsoon, the first sector to react positively will be the FMCG companies as their major chunk of market share comes from Rural India. Due to good rains, there will be high cultivation which in return will increase the household income among the rural population. Companies with a wide rural footprint such as Hindustan Unilever, Colgate Palmolive, and Godrej Consumer Products will benefit the most.
A normal monsoon usually increases the demand for fertilizers. The sales of the fertilizers companies usually see a boom near the monsoon season amid good demand from the rural area. The government has also taken various steps in this sector to fulfill the high demand for Urea and other related important fertilizers to boost agricultural activities.
The improvement in consumer sentiment in rural areas will benefit two-wheeler and low-cost four-wheelers as well. On the other hand, tractor sales will also hold goods that are broadly used for harvesting activities in rural areas. Companies like HEROMOTOCO, BAJAJ-AUTO, MARUTI, M&M, and TVS MOTOR are expected to get benefited.
Micro Finance and NBFCs:
A good monsoon means better agricultural productivity. For this sector, the normal rains come as expansion in credit, improvement in timely repayment of loans, and asset quality improvement. Auto loans may see an uptick if more automobile units are sold due to increase in disposable income amid a better monsoon. Stocks like M&MFIN, SRTRANSFIN and are likely to get sentimental benefits in the medium-term period.
Apart from Monsoon, markets are also expected to focus on other key issues related to the war situation in Europe global commodity-currency volatility, and the global equity markets. On the other hand, markets will have close on the ongoing rate hike cycles by global central banks and RBIs steps to tackle higher inflation and the central government’s moves to revive the economy from the global slowdown.
We expect the market to remain range bound in the near-term period and will wait for further triggers to take a decisive move in one direction. Development of the Monsoon and the Ukraine war outcome can provide the trigger to the domestic equities. The rupee will also hold the key for the markets as it is currently trading around historical lows against the dollar.