>MARKET STRATEGY (CLSA)

Just a drizzle

The delay in the onset of the monsoon and rising El Nino risks has revived memories of the market selloff during the drought of 2002. Water reservoir levels are already low and a poor monsoon season could hurt farm incomes and impose additional fiscal burden. Whether this scenario plays out will, however, depend on the progress in July. Autos, consumers and cement stocks are vulnerable, but a fall in consumer stocks would provide attractive entry opportunities in our view.

2009 season starts on a bad note
■ Overall rainfall for the season until Jun 17 has been 45% below normal, with 28/36 metrological divisions receiving rainfall below the long-term average.
■ Water levels in reservoirs are at 10% of capacity (vs norm of 14% for Jun).
■ According to Australia’s Bureau of Meteorology, the signs of a developing El Niño, which usually lead to drought in Asia, have strengthened during the past fortnight.

India’s gearing to monsoon now lower, but rural boom can be hit
■ The share of the monsoon-dependent kharif crop has declined. Since 1987, agri output fell in only 5/8 years when monsoon rainfall was +5% below average.
■ The area under irrigation (now 43%) has been rising steadily, albeit gradually.
■ With agriculture now accounting for only 18% of GDP (versus 33% even in the early 1990s), the Indian economy is far more resilient to a poor monsoon season.
■However, a poor crop will deflate the current buoyancy in farm incomes. At a time of +10% fiscal deficit, there is little room for further fiscal support.

Domestic plays –autos, cement, consumers are vulnerable
■ Linkage of monsoon with market performance is weak. However, in 2002, the Sensex fell 10% in the six weeks to end-July as the drought was established.
■ Autos (BSE Auto Index -16%), cement stocks ACC, Ambuja, India Cement (down 14-30%) were hit. Among consumers, HUL fell 13%, but Nestle, ITC outperformed.
■ Cement initially saw a rise in despatches, but supply concerns started to dominate.
■ Earnings for consumers, autos held up well, while cement was hit by rise in supply.
■ While stocks in all three sectors are vulnerable to correction, we would see a lower price points in consumers as attractive entry opportunities.
■ Soft commodities could be beneficiaries with prices moving up due to lower supply.
■ Tea output is already forecast to be 5% lower.

Jury not out – wait until July
■ The month of June accounts for just 20% of sowing activity for foodgrains.
■ 35% of the season’s rainfall, 50% of sowing takes place in July. Watch for updates on El-Nino, trends in spatial distribution of rainfall (more critical than total rainfall).

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