If troubles in Europe and slowdown in reforms weren’t enough, the likelihood of a deficient monsoon is dampening investor sentiment further.
There has been a deficit of 31 per cent in rainfall so far, and market experts are talking of steering clear from some of the related sectors' stocks, such as fertiliser, automobiles and fast-moving consumer goods (FMCG).
Sudip Bandyopadhyay, managing director and chief executive officer of Destimoney Securities, says one should wait for another fortnight to get a better picture, if one already owns these stocks. “After two weeks, if there is still no recovery in sight, you should exit these stocks, even if it means at losses. Move away from fertiliser, crop protection and select FMCGs (based on exposure to rural demand),” he says.
| RISKY PROPOSITIONS Performance of monsoon-related sectors (%) | |||
| Index | 3-month returns | 6-month returns | 1-year returns |
| BSE Auto | -5.72 | 15.33 | 3.08 |
| BSE FMCG | 9.04 | 21.72 | 20.8 |
| BSE Consumer Durables | -4.76 | 17.18 | -7.11 |
| Sensex | 0.99 | 9.97 | -7.77 |
| Nifty | 0.78 | 11.22 | -6.81 |
Seems like a harsh call, especially since the FMCG sector has been doing well and has outperformed the Sensex or Nifty substantially because of its defensive nature.
Experts, however, feel these companies have been dependent on rural consumption because the urban market is already slowing. And, if there is a sense of fatigue from the rural segment, these companies will be hurt. In addition, a bad monsoon will increase their input costs, another negative.
FMCG stocks, as defensives, have run up substantially due to uncertainty in the market. In some cases, the valuations may be a little stretched. Due to the probability of a poor monsoon, there has already been some sell-off in the frontline FMCG scrips, as these were trading at high valuations.
Of course, the threat of bad monsoons would be negated to some extent by the National Rural Employment Guarantee Scheme, which provides a guarantee of 100 days of wage employment in a financial year to every rural household whose adult members volunteer to do unskilled manual work. This might help the rural consumption story.
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“But the impact will be marginal,” says Madan Sabnavis, chief economist with CARE Ratings.
What could be more impacted are the bigger spends such as on two-wheelers, jeeps, tractors and consumer durable. “With the purchasing power of farmers being impacted, they will find it hard spending on products like tractors and so on,” says Alex Mathew, head of research at Geojit BNP Paribas Financial Services.
Even the fertiliser sector could be negatively impacted. “The sector is already faced with rising input costs. If the deficit in rainfall increases, the demand will reduce. Many frontline stocks are already reeling under the pressure,” says Mathew.
Along with the fertiliser sector, one should be cautious about seed manufacturing, pesticides and automobile companies that manufacture farm equipment such as tractors.
“Investors, looking to enter the market now, should put money in sectors like pharma, mid-cap information technology and the most efficient private sector banks, which would be least impacted on account of any possible monsoon failure,” says G Chokkalingam, group chief investment officer, Centrum Wealth Management advice.
However, don’t invest your entire surplus. Invest in tranches because it will help average costs, especially if the market falls, an important requirement in uncertain conditions.