Will Monsoon 2023 be a Spoilsport?

Even after 77 years of gaining independence, our nation’s economic fortunes remain intricately intertwined with the capriciousness of the monsoon. This connection persists, even though the agricultural sector’s contribution to the overall economy has dwindled from 50 per cent during the early years of independence to its current standing at approximately 20 per cent. The significance of this link can be attributed to two critical factors. Firstly, a substantial portion of India’s population – nearly half – relies on the agricultural sector. 

A favourable monsoon season is intrinsically linked to elevated rural incomes, subsequently fostering robust demand and augmenting rural economic growth. Conversely, insufficient rainfall not only hampers rural income but also triggers demand-supply disparities with far-reaching consequences on various economic metrics, including inflation, growth, demand patterns and employment levels, among others.

As of the end of August 2023, there was a significant rainfall deficit of 36 per cent, marking the most severe such deficit in the past 122 years. According to the India Meteorological Department (IMD), the monsoon rainfall for 2023 is expected to be categorised as ‘below normal’ or potentially on the lower side of what’s considered ‘normal’. This has naturally raised concerns about the yield of kharif crops and the prospects for sowing during the subsequent rabi season.

The overall rainfall deficit until September 3 stood at 11 per cent below the normal levels. To provide context, in the year 2021, we experienced an overall below-normal rainfall (between June and September), during which the Nifty 500, representing the Indian equity market, saw a gain of 13.8 per cent. Conversely, in 2019, which also witnessed below-average rainfall, the Nifty 500 fell by 2.14 per cent. Similarly, in 2014, a year with below-normal rainfall, the Nifty 500 managed to rise by 10.56 per cent in the three months ending in September 2014. 

Over the past decade, there have been seven instances of below normal monsoon rainfall, with the Nifty 500 delivering positive returns in most of these cases, including a couple of instances of double-digit returns. However, there are also cases, like in 2019, when there was ‘above normal’ monsoon rainfall, but the Nifty 500 recorded a negative return of 4.7 per cent. This clearly illustrates that the relationship between monsoon patterns and equity market returns is not a straightforward one. 

Numerous other influential factors come into play when determining equity market performance. While it’s true that a deficient monsoon can potentially exacerbate certain economic challenges, particularly in the context of rising crude oil prices, it is not the sole determinant of market outcomes. Therefore, we hold the opinion that the monsoon alone is unlikely to spoil the overall market scenario.

The Mid-Cap segment is undeniably the life of the financial party right now. Remarkably, out of the 150 stocks that constitute the Nifty Mid-Cap 150 index, only five companies have found themselves in the red over the past six months. Furthermore, a couple of these mid-cap stocks have experienced meteoric rises, reaching the coveted multi-bagger status. To delve into this phenomenon in greater detail, this issue of ours features an in-depth analysis of the factors underpinning the impressive performance of mid-cap stocks and the sustainability of this trend. 

Our diligent research team has conducted an extensive examination and concluded that we are not currently at the level of a market bubble. While the one-year forward price-to-earnings (PE) ratio for mid-cap companies is indeed trading above the long-term average, it remains comfortably below the bubble territory. Therefore, for those considering joining this prosperous financial celebration, a staggered entry approach continues to be a prudent choice.

RAJESH V PADODE
Managing Director & Editor