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Wednesday, August 15, 2012

Will a poor monsoon affect your portfolio? – a guest post

This year, monsoon rains have been conspicuous by their absence. While a few parts of the country have received excess rainfall, that has been the exception than the rule. Drought-like conditions are prevailing in many parts. In other parts, rainfall has been scanty to mediocre.

By all accounts, rainfall will be below average this year. What will be the effect of a poor monsoon on your investment portfolio? In this month’s guest post, Nishit looks at a few sectors that may get negatively affected by a poor monsoon and a few that may not do too badly.

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The monsoon this year is likely to be deficient. Which sectors and stocks will feel the impact? This is a burning question in the minds of investors. Let us try and analyse the impact of a poor monsoon.

The rainfall deficit has shrunk to about 15% from 22% a couple of weeks earlier. Also, the reservoirs are filling up. They are now 96% filled as compared to the last 10 years’ average and 80% filled as compared to last year at this point of time.

With steady rains falling across the country, there should not be any drinking water problem. Agriculture output will be hit, but there will not be food shortages - thanks to the surplus food grains of the previous years.

Having said all this, what will be the impact? The hardest hit will be the farmer. He will have less produce to sell in the markets and consequently less money to spend. All the rural focused sectors will be hit. The hit will not be immediate but come during the harvest season, a few months down the line.

The farmers will not be celebrating the festive season by buying new motorbikes. Thus, the 2 wheeler segment may face the biggest hit. When the times are down, farmers will also not invest in new tractors and farm equipment. This also means tractor manufacturers will face lean times.

In recent times, FMCG majors like HUL and ITC have risen to new all time highs based on uncertainty in the markets. They may take a major hit if the rural population cuts down on spending. Less colas and chips will be consumed. Sectors like IT (Information Technology) will be neutral to a poor monsoon. The banks may take a hit in the form of NPAs in case loans to farmers turn bad.

Amidst all this gloom, the sugar sector - especially the sugar mills having previous stock - will flourish. The farmers may not get much, but the sugar mills will benefit from higher realisations thanks to surplus inventory.

Overall, Indian GDP may come down by 0.6% or so. Surprisingly, in previous years of scanty rainfall, the stock markets have actually done well. The fiscal deficit may increase if the government comes up with any populist schemes. Higher food grain prices may lead to higher inflation forcing the RBI to go slow on interest rate cuts.

In the current scenario, it pays to focus on sectors like sugar and also sectors which may not get impacted much by a poor monsoon. PSU banks with their good dividend yields offer one area where folks with expectations of moderate returns may park their funds.

Cyclical sectors like steel and infrastructure, which are currently beaten down, can be nibbled at. Also, this may be the last chance to lock in at relatively high rate of interests. Bank FDs (ICICI Bank is still offering 10% to Sr Citizens for a period of 4.9 years and Bank of India 9.7%), NCDs (Shriram Transport offered 11.4%), some stocks would be a good mix to be invested in right now.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan).

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