Don't bank on good monsoon to lift your stock fortunes

Agri, consumption and rural-related stocks saw up to 30% surge after the India Meteorological Department (IMD) last month forecast that southwest monsoon would be normal this year.

Analysts fell heels over head recommending stocks that would shine this year after IMD prediction.

However, the party on the bourses may be too early.

There has been little correlation between the market performance and bountiful rains, going by the Sensex movement in the last ten years.

For the five times rainfall was normal in the ten-year period since 2008, Sensex, a market barometer, fell two times and gave lacklusture returns for two times, and substantial gains just once.

For the five times of deficient monsoon in the last ten years, Sensex rose for four times, giving 81% return for one time, more than 25% returns for three times, while it gave negative returns only once.

"Historically, the monsoon's impact was around 40-50% on the stock markets. But now it has come down. Earlier, agriculture used to contribute 50% to GDP growth, which has now decreased to 17-18%. If the monsoon is disrupted for more than two years continuously, markets will see the effect. Rainfall data directly results in the inflation rate," G Chokalingam, founder and managing director of Equinomics Research and Advisory, said.

IMD on April 16 forecast the southwest monsoon to be 97% of long period average (LPA) this year with a model error of plus-minus five.

According to IMD, if the total quantum of rainfall is less than 90% of the LPA, it is a drought. About 90-96% of the LPA is considered below normal rainfall, 96-104% of the LPA is considered as near-normal while 104-110% of LPA implies excessive rainfall.

In 2008, the onset of global financial crisis, the Sensex fell 52.45% when the monsoon LPA was 98%.

However, the next year in 2009, which saw an El Nino phenomenon and a severe drought, the Sensex gave a huge 81.03% returns.

"Good monsoon is a favourable news for the markets but there are other factors too which will impact the equity market. State and central elections next year, rising crude oil prices will also affect the market performance this year. This financial year Nifty has given almost 12% returns. Monsoon is not only the single factor which will impact the market," Rakesh Tarwar, head of research at Reliance Securities, said.

Southwest monsoon, which arrives in June and continues till September is a very important source of water supply and plays a pivotal role in agriculture, industry and households in the country. More than 75% of India's annual rainfall happens during this time.

"We are expecting the equity markets to correct in the next six months and could rebound ahead of the next year's general elections. Currently, valuations appear to be a bit stretched after the sharp upsurge in recent months. Also, rising crude prices is a concern as it will raise the import bill and weigh on current account numbers. With several state elections lined up in the current year, traders may cut down their exposure to equities," said A K Prabhakar, head of research at IDBI Capital.

Last year the monsoon was deficient, but the Sensex gave 27% returns.