How to position your portfolio in case of poor monsoon

The progress of monsoon seems to have given some relief to market participants and the government. Monsoon in the first fortnight of June is 11 per cent above normal as compared to the rainfall touching just around the normal levels in the first week of June 2015.

A SBI Ecowrap report points out that since 1950, if June rainfall is above normal, there is a 65 per cent probability of adequate monsoon for the entire season. Interestingly, Central India that produces much of the pulses has received excess rainfall of 12 per cent. Pulses were expected to be the worst hit on account of poor rainfall.

 

But that’s where the good news ends. Progress of monsoon according to a Bank of America Merrill Lynch (BoAML) report is running behind schedule. Storms delayed the arrival of monsoon to the Kerala coast by five days. But the worst part is that the three main meteorological agencies that track the El Nino phenomenon expect a far more intense El Nino. An HSBC report, which has come out with a report on El Nino says the latest round of updates from the world's principal meteorological agencies have made it clear that there are no signs of El Nino conditions subsiding, as was the case last summer.

So what does this mean for the market and the economy and what should the policy actions be to handle the situation. BoAML says that the Reserve Bank of India (RBI) would hold on to rates in 2015 and cut 50 basis points in early 2016, in view of the US Federal Reserve's actions and monsoon uncertainties. However, if monsoon is normal and the Fed delays hiking rates, then RBI can announce a 25 basis points cut in August, says the BoAML report.

They anticipate the government to use supply side measures rather than monetary policy measures to fight the deficit monsoon. Similar action was taken by the NDA government when it was in power in 1998-2004 and market expectation is that the government will use the same tool to control inflation. RBI Governor Raghuram Rajan in his recent policy also pointed out to the fact that in 2002-03, weak rains had limited impact on inflation because of government action.  Thus inflation might not be as big a concern as some are expecting.

The worry of the markets over monsoon is understandable given the impact it has on corporate India numbers, many of whom are dependent on rural demand for growth. An India Infoline report points out that though agriculture accounts for 14 per cent of the gross domestic product (GDP), over two-thirds of the nation’s population still depends on agriculture for livelihood and almost 70 per cent of the domestic economy is directly or indirectly contingent on agriculture.

Plus, rural India is one of the key target markets for a host of industries, from FMCG to consumer goods to auto. Around 17 per cent of the companies that comprise the 30-stocks BSE Sensex are dependent on monsoon, directly or indirectly.

While it is obvious that almost the entire market benefits from good monsoon, there are certain companies and sectors that gain from poor monsoon, directly or indirectly. Thermal power units witness higher generation as hydel power plants cannot operate at optimum load on account of less water in the catchment area.
 

An indirect beneficiary as far as the markets are concerned are some of the defensive sectors like pharmaceuticals which gain and fund managers increase their allocations to these stocks and withdraw it from those which have a direct relation to the rural economy. IT companies have also benefited as money moves to companies who derive their revenue outside of India.

Recent strategy reports by various broking firms points towards a shift in favour of these sectors. BNP Paribas continues to favour private banks as it feels the rural economy will remain weak and urban consumption will drive growth. Similarly, HDFC Securities have added stocks to its portfolio that are generally immune from a weak monsoon. UBS has said that it is overweight on coal, oil and gas, pharmaceuticals, telecom and media.