Making sense of markets that don't move in sync with the monsoons

The Sensex has often risen despite poor rainfall, and fallen even when monsoons are good

Robust monsoons have helped to buoy the rural economy even though they have earlier had a tenuous link with the overall market performance.  Years with good monsoons have often seen high returns and vice-versa.

An analysis of the monsoon data with the calendar year market returns shows a correlation of minus 0.27. The correlation is one when two variables move in sync. It is minus 1 when they move in the opposite direction.

The data looked at actual monsoon rainfall between June and September. It fell short by 10 per cent of the long-term average in 2014 and 2015.

The S&P BSE Sensex was up 29.89 per cent in 2014. Prime Minister Narendra Modi came to power with a thumping mandate in 2014. Stock markets rose in anticipation of economic reforms. It was down 5.03 per cent the following year.  

The stock market is down 6.4 per cent so far this year. The Covid-19 pandemic is said to be taking a toll on both the earnings of listed companies and the economy at large.

 

 

Gross domestic product, which is the value of goods and services produced in a country, is expected to drop 20 per cent in the three months ended June and 6 per cent for the current financial year, according to an August 14 India Economic Watch report authored by global financial services group BofA Securities India economists Indranil Sen Gupta and Aastha Gudwani.

“Our India activity indicator also points to large-scale contraction in June,” stated the report.
 

Analysts have said that global central banks making money available at very low interest rates have helped keep stock markets elevated. Many foreign investors borrow at low interest rates and invest in higher yielding assets like the stock market, especially in pockets where growth is expected to be healthy.  

A robust monsoon is expected to help some companies more than others. A favourable monsoon and government support to a rural economy are among the reasons that agrochemical companies, including makers of pesticides and fertilisers, have done well, noted an August 18 Agri Inputs report from analysts Rohan Gupta, Nihal Mahesh Jham, and Bharat Gupta of domestic financial services firm Edelweiss Securities.

“Early start to the kharif season, driven by good water levels across reservoirs, along with normal progression of monsoon, helped domestic agrochemical companies deliver robust performance,” it said.