India is an agriculture-driven country, whose about 60 per cent population is dependent on the primary sector. Monsoon is one of the major factors, which drives the Indian economy. A buzz of events like El Nino and La Nina may impact the performance of Indian equity markets in the coming months.
The monsoon usually begins in the second half of June, when it enters Kerala. El Nino means India may face less than normal rains or even drought in some areas which would be a double whammy for the economy. It will not only impact rural consumption but also means that summers and heat will last longer in the major parts of the country.
Agencies across the globe forecast an up to 60 per cent probability for the occurrence of El Nino in the later part of CY23. Lower monsoon may result in less supply and a rise in food inflation amid the already high-interest regime, leaving lesser disposable income for discretionary and other expenses.
Not only the economy, a number of sectors and stocks including cement, agrochemicals, fertilizers, FMCG, and tractor players are directly related to these events.
Events like El Nino and La Nina adversely impact the agriculture scenario, and are direct threats to the country’s economy, said Motilal Oswal in its report. “Historically, El Nino events have resulted in below normal monsoon or even drought in India. This has led to a stressed Indian agriculture scenario in the form of lower crop production and surge in crop prices.”
Due to lower farm profitability, consumer companies with higher rural salience also witness muted growth during these events. Since agrochemical and fertilizer companies have a strong correlation with the monsoon, they report muted/lower revenue growth during such events, it said.
However, not every analyst is on the same page. A few others believe that it is too early to push the panic button as the monsoon is still very far and situations will improve in the weeks to come. Even if it happens, the impact might be capped. EI-Nino is a climate pattern that describes the unusual warming of surface waters in the eastern tropical Pacific Ocean.
However, due to the predictability barrier, the confirmation of this trend is more appropriate once we see the patterns around April 15, which can clarify the fear of lower monsoon, said Centrum Broking.
“Instead of worrying about below-normal monsoon, we should be thinking about the rain distribution as certain agricultural states in India are more dependent. Hence, he opined if EI –Nino arises we can expect a 15 per cent deficit in rainfall as compared to long-term averages,” it said.
Neutral conditions have not usually resulted in an extremely bad monsoon for India. The Australian Bureau of Meteorology (BoM) has further emphasised that most climate models are suggesting neutral conditions rather than an El Nino event, said Nirmal Bang Institutional Equities.
An El Nino event and a poor monsoon usually leads to a decline in Agricultural GDP in India, but the impact on food inflation is more tenuous and may depend on underlying demand, it said. “In the event of an El Nino and a poor monsoon in India, comfortable reservoir levels provide some cushion. However, eastern states like Bihar and West Bengal may face stress on the back of a poor monsoon in 2022.”
In three out of these four instances of El Nino (barring 2006) India experienced below-normal monsoon rains. At the same time, the El Nino alert issued by the Australian BoM has proven to be less fatal. In 2004 and 2014, India experienced below-normal monsoon rainfall amid alert conditions. On the other hand, neutral conditions in 2003, 2005, 2012, 2013 and 2019 led to a normal monsoon, said Nirmal Bang.
If the El Nino event in FY24 materializes into drought, it can adversely impact the Indian agriculture sector. The probabilities by the agencies and their forecasting accuracies based on historic trends suggest a possible occurrence of the event in FY24, said Motilal Oswal.
“We believe this will be an opportunity to look into fundamentally strong companies,” it said, picking PI Industries and Godrej Agrovet as its top picks from the agrochemical sector, while it prefers Coromandel International from the fertilizer space. It’s neutral on UPL.
JM Financial believes summer-23 is likely to be a healthy season for AC manufacturers, given soaring temperatures and higher probability of occurrence of heat waves across cities and normalisation of commercial activities. “Voltas remains our top pick, followed by Blue Star and Amber,” it said.
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