Monsoon Forecasts Spring A Pleasant Surprise For Markets

After two long and excruciating years of drought that burdened the rural economy, predictions of a better than normal monsoon revived stock market sentiments beyond expectations. Stocks across the board witnessed smart gains as foreign and domestic investors turned trigger happy buyers.

The BSE Sensex zoomed 952.91 points or 3.86 per cent last week, and recovered most of the lost ground of calendar. Since the Budget 2016 stocks zoomed 13.7 per cent; and if the monsoon forecasts do indeed materialize, the bottoming out phase may be over, indeed. The BSE Sensex dipped to a sub-23,000 levels in February 2016, when it formed a crucial double-bottom pattern, a major reversal pattern on the technical charts. 2016’s high is 26,000. Now when it is trading 25,262.75 chances of it trending higher on the rising has been gaining currency.

As the Indian Meteorological Department has announced a 106 per cent chance of an above-normal monsoon, and a revival in the rural economic growth could boost domestic consumption even higher. Demand for cars, oil and gas, cement, and construction material has been on the rise lately.

While the rural economy contributes just 15 per cent of India’s GDP, it employs more than 50 per cent of India’s workforce. Hence, a further improvement in demand conditions is good for the markets.

Though foreign investors are still net buyers in the Indian economy, domestic investors have yet to warm up to Indian stocks. Retail investors have redeemed some funds from domestic funds lately, but a revival in the markets could see them make a comeback to the stock market. On the last trading, domestic investors purchased stocks worth Rs 269 crore as per provisional figures suggesting that a revival of this key market segment is on the cards.
Of course, a lot still hinges on the economic recovery. The market is looking forward to a rise in domestic consumption as the 7th Pay Commission and OROP remunerations are likely to be released from July onwards.

While too much good should not be read about the IIP numbers, its mild recovery has been like a break of spring for the markets. IIP data has risen to 2 per cent in February this year since trending lower the last few months. Inflation has eased to 4.8 per cent in March ’16 signaling a twin-benefit in the growth-inflation mix. A high growth and low inflation is an economist’s delight.

In the coming weeks, a revival in cyclical sectors is a sign to watch. Domestic cement, oil and gas, and construction sectors are looking up due to the infrastructure push. A rural recovery has driven consumption, autos, fertilizers, agri-related stocks and rural NBFCs into higher trajectory.

All this is showing that the stock markets are finally beginning to come out of the long, slow growing cold slowdown and into the sunshine of growth.

Internationally, China seems to be reversing as export growth has picked up. The US Fed may continue to be accommodative as the US economy is expected to face a slack in its growth rates.

Elsewhere in the globe, such as Europe and Japan, the economic growth is still sluggish, and therefore efforts to revive economies will continue.

Investors should continue to keep an eye out for a pickup in earnings, and at the same time perhaps look to build up positions in companies that are showing good cash earnings. A combination of high cash earnings and low valuations in the longer run is the key for investor returns