Increased chances of La Nina good news for farm GDP, sector stocks – Economic Times

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ET Intelligence Group: International weather forecasters have joined the Indian weatherman to come out with encouraging commentary on monsoon predictions — that are supporting stocks focused on rural themes.

Weather forecasters, from Japan to the US, Australia to Indonesia, have predicted a higher possibility of La Nina — a weather phenomenon that could result in more rainfall in Asia and Australia.

Over the past four weeks, weather forecasting agencies in Australia and the US have issued a ‘La Nina watch’ for 2016. A La Nina watch means a 50% chance of the particular weather pattern developing in 2016, which is about twice the average likelihood.

Historical data show that La Nina leads to above-average increase in farm GDP growth for India and gross fixed capital formation.

Increased chances of La Nina good news for farm GDP, sector stocks Average annual rainfall in La Nina years has been 5.3% above the long-term average as against 4.6% below long-term average in non- La Nina years. Also, agricultural GDP on an average increased by 7.8%, compared with 2.3% in non-La Nina years. As a result, average GDP grew 8.9% in La Nina years against 5.8% in a non- La Nina years. Thus, expectations of a La Nina event revives hopes of higher consumption, investment and GDP growth.

La Nina years have been favourable for stocks of companies whose revenues are linked to rural consumption. This is the reason for stocks such as Hero MotoCorp, M&M, Maruti, Dabur, HUL, Jain Irrigation and ACC outperforming the Sensex in the past three La Nina years.

But, a considerable part of the gain in these stocks comes typically between April and September as share prices surge in anticipation of good rainfall. For instance, shares of India’s largest tractor maker M&M gained 25% during the three-months in the La Nina years, but fell 4% from October to March. Similarly, the Hero MotoCorp stock generated an average return of 16% in the first-half, but lost 15% in the second-half of the La Nina years.