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Monsoons have been a steady friend to the economy in the previous two years, coming in handy when an economic slowdown and then the pandemic hit growth. Rainfall was 109 percent of the long period average in 2020 and 110 percent in 2019. A hat-trick this year would be perfect and the economy needs all the support it can get, as the second wave has dealt a blow to first quarter growth. The early forecasts were optimistic.
But our Monsoon Watch tracker finds that rainfall has lagged for the second consecutive week with rainfall in the latest week falling to below 46 percent of the long period average. In the preceding week, rainfall was 30 percent below normal. Two consecutive weeks of sparse rains have negated the progress made at the beginning of the season. Rainfall as of first week of June was 5 percent below the long period average. The deficit rose to 8 percent as of yesterday i.e., July 11.
Rainfall is deficient in large parts of Gujarat, Rajasthan, Uttar Pradesh, Punjab, and Kerala. The National Capital Region, Odisha, Himachal Pradesh and a couple of states in the north-east India also received below normal rainfall. That is not an encouraging report.
The patchy progress of monsoon rains is weighing on the kharif crop sowing. Still, the reported crop acreages are better than in 2019 and 2018. Note that India had the benefit of healthy rains and early crop sowing last year. But these are early months yet and a good showing in the second half of July and August can alleviate the shortfall.
It raises the risk for investors who are invested in or looking to invest in sectors tied to agriculture. Already, the adverse impact of the second COVID-19 wave is showing. Fertiliser sales during the June quarter were down by 10.6 percent, indicating slow start to the current crop season. That is a marked change from 22.7 percent higher sales in the year ago period, when distributors, farmers stocked up crop inputs, show data compiled by Prabhudas Lilladher. Industry observers such as Bajaj Auto are also sounding cautious on whether the recovery after the second wave will be as swift and sustainable as seen after the first wave.
Incoming data, on the other hand, is indicating incremental improvement in economic activity, as seen in high frequency data tracked by our Recovery Tracker. Separately, a CII poll of top companies indicates a faster recovery than in the second wave. But these expectations are also pinned on rapid vaccination. On that front, the deceleration visible in recent weeks is not a comforting sign.
But all this doesn't seem to bother the markets at all. Today, the Sensex is up by 0.5 percent at 12pm. A Kotak Institutional Equities research note puts it aptly, "It seems the market is running a bit ahead of itself, not only in terms of valuations but also, in terms of what to discount and what not to discount." We would recommend you to read Mohammed El-Erian's take on why equity investors are not celebrating although bond yields are falling, from the Financial Times and free to read for Pro subscribers.
A positive state of mind among equity investors will also be good news for the Zomato IPO that's set to open this week. Our research team has taken a close look at how investors should approach an issue where the traditional metrics don't make a case to invest, and even on non-traditional metrics are expensive compared to global peers and what could work or not in Zomato's favour. Do read.Do check out these investing insights from our research team:
D-Mart: Will the strong earnings growth cycle resume from this fiscal?
PSU shipbuilders: COVID impact to be marginal; earnings trajectory remains strong
Shyam Metalics & Energy: Lower debt and capex will support growth
What else are we reading today?
Cairn case — End the tax tension
The Green Pivot | Ola Electric: Charged to compete, but will it be a disruptor in 2Ws?
Lower bond yields are no longer good news for stocks (Republished from the FT)Equities are the only sensible foundation for private pensions
(Republished from the FT)
GuruSpeak | Vivek Mashrani believes a blend of fundamental and technical analysis can generate consistent returns
Picks from our Technical Analysts: Polymed, Glenmark Pharmaceuticals, LIC Housing Finance and Vedanta
(These are published every trading day before markets open and can be read on the app)
R Sree Ram