Share prices of companies like Hindustan Unilever, Escorts, Mahindra & Mahindra have outperformed other frontline shares represented by S&P BSE Sensex and NSE Nifty in 2018 so far. If the Sensex moved just 2.5per cent, these shares have rallied 15-20 per cent in 2018. A common thread that connects these companies is the influence of rural markets on their profit and revenue growth.
One may think that the monsoon is important only to farmers. However, a sizeable number of market participants also track the progress of the rain. A normal monsoon means a lot to the rural economy with prospects for consumer products and durables, two-wheelers and tractors.
Like we have always maintained, stock markets thrive on connecting the dots. To identify the impact of the monsoon on future share prices, markets monitor a number of data points.
Progress of the monsoon
There are several factors tracked closely by the market. The meteorological department releases a rainfall update every week. Overall, the monsoon is 8 per cent below normal up to 11 July 2018. Out of the 36 sub-divisions across
India, 24 divisions have received excess or normal rainfall. Analysts track the progress closely to predict the sowing season for farmers. While urban India is not affected by the monsoon, rural incomes are dependent on the progress of the monsoon.
Analysts also try to measure prices of key food grains to assess the immediate impact of the monsoon progress. They try to monitor wholesale prices of vegetables, cereals, edible oils and other items that matter to both rural and urban consumption. A release from the Union Ministry of Agriculture about the progress of the Kharif season sowing, helps in analysing the momentum on potential farm output. As on 6 July 2018, a ministry release suggests that total Kharif sowing is at 334 lakh hectares so far in 2018-19. This is lower than 389 lakh hectares this time last year (2017-18).
The other important aspect is the level of water in all reservoirs across India. A Ministry of Water Resources release indicates that the water stock in reservoirs across India is about 1 per cent lower than last year.
Rural consumption
A primary reason for share prices of companies selling goods and services to rural markets rallying is in the potential ahead. Clearly, investors expect rural consumption to rise as a result of a normal monsoon. There is an expectation that farmers will continue to have a bumper crop this year and would drive rural growth.
Farm loan waivers, hike in prices of minimum support prices for farmer produce of select crops are all expected to boost rural income and spending.
What does this mean to you
A normal monsoon with a strong rural consumption trend would mean a better performance by companies concentrating on rural markets. If your mutual fund is invested in sectors like automobile, retail, banking or consumer products that cater to the rural markets, you are likely to benefit. This could clearly have an impact on the performance of your mutual fund.
If food grain output remains equal to or higher than last year, food prices may remain stable. However, minimum support prices offered by the government could push prices of certain food products higher.
The Reserve Bank of India is expected to watch this space closely. Prices of food items form a significant part of the consumer price inflation. While RBI considers a normal monsoon a downside risk to inflation, minimum support price hikes would be considered as an inflationary trend. Most analysts expect overall inflation and interest rates to remain high in 2018-19 as a result.
You may want to tweak your investments towards potential winners in the rural markets. Your financial advisor can help you find that road.
Sectors that will gain
High farm production will also lower raw material costs for companies that make packaged foods, for instance, Britannia, GSK Consumer, ITC and Nestle.
(The author is a publisher and founder at Simplus Information Services Pvt. Ltd.)