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Wednesday, July 4, 2012

Are Poor Monsoons good for Indian Stock Markets?


Poor Monsoons definitely are bad for overall economy of a country, especially India. Sale of 2-Wheelers, 4-Wheelers, rural spending on FMCG & Consumer products etc goes down after a Bad Monsoon. About 50% of Indian population still draws their livelihood from Agriculture, which is highly Monsoon dependent in India. Poor Monsoon results in poor crops, less cultivated area, cultivation of crops which need lesser water, and all these factors result in lesser spending by bulk of Indian population from rural India. Additionally, many firms top-line growth are dependent on Rural sales penetration as they have already penetrated urban areas, and their overall growth plans are affected as well. All in all, bad monsoon spells nothing but problems for Indian economy.

But what about Stock Markets? Do Bad Monsoon in an year necessarily mean crash in markets, or does it actually go bullish in years when monsoon has been bad? Is this as crazy as it sounds? We need to look at historical Monsoon data and derive our conclusions, which may be shocking to say the least!


Indian Institute of Tropical Meteorology publishes the All-India area-weighted mean summer monsoon rainfall, based on a homogeneous rainfall data set of 306 rain-gauges in India. This rainfall index is widely considered as a reliable index of summer monsoon activity over the Indian region. Below is the chart for All India Summer Monsoon Rainfall from year 1871 to year 2009.



During the period 1871-2009, there were 24 major drought years, and in the recent past droughts have been in year 1987, 2002, 2004 and 2009. In 2004, the start of the 5 year Bull-Run in India, Monsoon was 10% below the Mean rainfall and in 2009, when the 3 year V-shaped Bull-Run started, Monsoon was a whooping 20% below the long term Mean Summer Rainfall.   

Stock Charts would reveal that in 2004, year of drought and poor Monsoon, Indian Markets actually went up by 11% and in 2009, Markets went up by whooping 70%, thus creating huge bull runs. Although this is just a set of two data points and not enough to create a generic inverse relationship, but it is enough to point-out that common wisdom that Markets must crash in periods of low rainfall and lower rural spending is obviously incorrect.



So what causes Market surge in periods of Drought and Poor Economic conditions. There are several reasons for that. Primarily, there has been fundamental change in relationship between Economy and Stock Markets world over. Markets used to lag economy and were understood as lagging indicators, but liberal monetary policies have inverted this logic. Markets are actually now leading indicator of Economy.  Take a while to digest this fact, read the paragraph twice if you have to. This is a key learning.

As a corollary of above fact, Governments loosen their purse strings in period of low growth and Capital Markets are the first place where this onslaught of loose money hits and creates financial boom. This financial boom then translates into wealth effect in general population and helps tide over effects of poor monsoon and lesser rural spending.

Thirdly, in modern economies, agriculture is not a powerful percentage of overall economic ecosystem as it used to be. E.g. for India, supposedly a agro-economy, agriculture directly contributes to only 15% of GDP, hence minor slowdown in this 15% pie, does not affect the overall GDP to the extent imagined.
With the above factors and charts in mind, rest assured that poor Monsoon does not necessarily means a crash as is propounded by Television Analysts and Armchair economists. In fact, it may end up giving you a sizeable bulging portfolio and trading profits. Keep writing to us at query@stockfundoo.com  

1 comment:

  1. Does gold add any value to growth (real wealth creation)? People fond of precious metal, and locking their money illiquid. Sadly, very less people dare to book their profits in gold. I have seen only one family was ready to sell their gold for their new house down payment.

    Except agriculture purpose, none of the lending institutions (against gold) offering better interest rates to pledge gold. They are as high as 14% to 28% (where as agri loans range 7% to 12%). Infact, loan against property wins here, at better interest rates of 12% to 15%.

    Are we not loosing valuable Forex reserves? Would you suggest to buy gold at these levels? I am expecting when equity rallies gold will head downwards.

    Countries like Canada are gaining Indian money due to their gold reserves.

    ReplyDelete

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