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Monsoon vs stock markets
Monsoon vs stock markets. In general, stock market always discounts future earnings. The factors that trigger the markets include general elections, budgets, corporate earnings and monsoons.
IMD says there will be deficit rainfall this year
True monsoon situation will only be known by mid-July, when the sowing season will be in full swing. Only by that time will the markets show some correction. The present weakness in stock markets has nothing to do with the monsoon forecast
In general, stock market always discounts future earnings. The factors that trigger the markets include general elections, budgets, corporate earnings and monsoons. The latest IMD weather forecast suggests that there would be deficient rainfall this year. Indian stock markets started showing downward after the weather forecast was out. However, analysts claim that the correction is not due to monsoon forecast, but the markets entered overbought zone and a correction is overdue.
Market fared better in bad times
Historically it is proved that markets fare better even during bad conditions. For instance, stock markets have fared amazingly in the years 2004, 2009 and 2014 in spite of bad monsoon and low agriculture productivity In 2004, there is no correction till June. Once the news that India would receive deficient rainfall came out, then only market discounted and followed with a bull-run which continued for four years.
Again in 2009, the market received some correction only in the month of July, but later it moved upward to register years’ high. Even in 2014, when the Indian agriculture economy suffered due to below normal rains and unseasonal rains, the markets registered higher with Sensex crossing 28,000-mark. This amply proves that the weather conditions normally get discounted and market searches for new triggers for growth. However, the weather scientists assume bad monsoon for two continuous years will cripple agriculture and so will surely affect the stock markets.
Worrisome scenario
They argue that during 2014, the ground water was not much affected and farmers could continue with agriculture operations as per the agriculture calendar. Even hydel power was generated as there was enough water available in the dams. But the situation is different now, as the ground water table is very low and water in dams may be sufficient for drinking purposes.
El Nino worries
Another research agency Nomura said, ''The IMD assigns only a 28 per cent probability to rains being normal, while the probability of below-normal or deficient rains is high at 69 per cent (36 per cent below normal + 33 per cent deficient). Historically, the IMD's monsoon predictions have often diverged from actual rainfall, but we view this forecast as relatively realistic, considering the rising risk of an El Nino''.
In fact, the international weather scientists predict that there is likelihood of El Nino conditions (unfavourable for rains) developing in 2015 is “at least 70 per cent.” And if El Nino affects the agriculture operations, largely rural economy gets disturbed which accounts for over 60 per cent of the Indian GDP. IMD had forecast that the southwest monsoon, between June and September in 2015, is expected to be below normal at 93 per cent of the Long Period Average (LPA), meaning weak monsoon this year also. On the contrary, Skymet, the private weather forecasting agency, predicts that the rains would be normal at 102 per cent of LPA. It further said the rains in the four months expected to be over 50 per cent.
Interestingly, both the agencies have different opinions on El Nino effect. Skymet says like in 2014, El Nino may not impact monsoon. But IMD says El Nino conditions will prevail in 2015 and it is one of the reasons for its below-normal forecast. Considering huge losses to the standing crops during rabi due to hailstorm, below normal rains would further aggravate the situation and food prices would escalate. In fact, the prices of agriculture commodities have already factored the low productivity in the coming kharif season. Looking at the commodity futures, soybean has risen by 3.2 per cent, chana 2.3 per cent, sugar 1.45 per cent, and others would also take the upward course, market analysts feel. The price rise would slowly trickle down to spot market also.
In agricultural ministry’s estimates, over 9 million hectares of rabi crops got damaged due to unseasonal rains, thus 5 per cent wheat output get reduced this year. As per the CRISIL estimates, if the deficient monsoon is reality, it will cut 50 basis points from GDP forecast of 7.9 per cent for the fiscal 2016, as southwest monsoon will directly impact kharif crop. However, the true monsoon situation will only be known by mid-July, when the sowing season will be in full swing. Only by that time the markets will show correction and present fall is nothing to do with the monsoon news but the market is at overbought level.
By KVVV Charya
