>INDIA EQUITY STRATEGY (JP MORGAN)

MONSOON WOES

• Monsoon – off to a weak start: YTD seasonal rainfall is 45% below normal. The Met department has indicated that the weakness could continue over the next week. It is early days yet, as June typically accounts for only 20% of the total south west monsoon. But a recovery over the next month is critical, in our view.

• Economic significance has decreased, but is still meaningful: Structurally the importance of agriculture as a percentage of GDP has decreased over the past few decades, from nearly 50% in the early 1970s to about 17% now. But the monsoon is still important for the farm sector, as nearly 60% of India’s agriculture is rainfall-dependent.

• Adverse impact on sentiment: Nearly 60% of India’s population lives in rural areas. Although they do not derive their entire livelihood from agriculture, the sentiment impact of the monsoon on private sector consumption cannot be underestimated. Also, in the recent past, rural India has been driving consumption growth on the back of various government stimuli. This segment is vulnerable to a pull back.

• Consumption underperforms: An analysis of weak monsoons over the past indicates that the earnings impact has been mixed due to various offsetting factors. But consumption-related sectors, i.e. staples, discretionary and telecom, typically underperform both over the July-Sept quarter and the fiscal year in which the monsoon has been weak. We have been cautious on the telecom sector since the beginning of the year and have had an underweight stance on the staples sector over the
last two months. Our overweight stance on the discretionary sector would, however, be vulnerable if the monsoon weakness persists.

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