How El Nino Conditions in Monsoon May Affect Your Investment Portfolio

July 20, 2023 Mutual Fund

The monsoon season brings a cold breeze, luscious greenery, and challenges. Similar to this, economic downturns may make the atmosphere of your investment portfolio turbulent. But don’t worry! We can manage the choppy seas of economic downturns and emerge stronger, just as nature adjusts and flourishes during the monsoon.

In my previous article, I have mentioned the 5 Important Investment Lessons to Learn Amidst the Monsoon Season! Now let us understand how the effects of monsoon can impact the performance of your investment portfolio.

The world is currently battling with challenges like extreme climate changes, unpredictable rainfall and irregular weather patterns. In its monthly economic report for April 2023, the Department of Economic Affairs warned that inclement weather might threaten India’s economic growth and inflation in addition to external issues. Climate pattern El Nino is thought to be the main culprit behind these disruptions.

What is El Nino?

El Nino is a Spanish word which is the talk of the town when discussing factors affecting the nation’s economic growth. El Nino is a meteorological phenomenon that alters ocean currents, temperatures, and weather patterns all across the world. As a result, some places experience longer, colder winters than others and changes in the global atmospheric circulation.

A collection of associated weather and ocean-related events are referred to as the El-Nino-Southern Oscillation (ENSO). Additionally, variations in air pressure are a defining feature. La Nina is the ENSO’s “cold phase,” whereas El Nino is its “warm phase.” El-Nino occurrences, which come in waves that last between two and seven years, are followed by La Nina events. However, El Nino tends to occur more frequently than La Nina.

El-Nino is a climate pattern (increased temperature) witnessed in the Pacific Ocean, which impacts weather conditions globally and affects the pressure conditions over the Indian Ocean. El-Nino typically leads to hotter and dryer summers, warmer winters and a deficit in rainfall during the monsoon.

How the phenomenon of El-Nino affects the monsoon season in India

In India, the El-Nino phenomenon is usually associated with impacting monsoons, leading to below-normal rainfall, bringing severe droughts and inadequate crop yield. The Indian Meteorological Department estimates that there is a 70% chance that this year’s monsoon season in June, July, and August will be affected by El-Nino. India saw seven El-Nino years between 2001 and 2022. Out of them, four years had droughts, and at this time, the yield of summer crops decreased. The biggest effects of the phenomena were observed between 2009 and 2010 when El-Nino caused severe drought in the southern and western areas and markedly delayed rains.

Time series of rainfall departure over the country as a whole (2000 – 2022)
(Source: IMD) 

The above data reflects that the weak monsoon is clearly attributed to the El-Nino event. Rainfall departure during moderate to strong El-Nino events of 2002, 2009 & 2016 was down by 20.6%, 22.5% & 14.5%, respectively. Of these, 2009 was a disaster year, as the Southwest monsoon rainfall was drastically below the Long Period Average (LPA). Even though India had a great monsoon in 2022, the expectation of El-Nino in 2023 may severely impact the rainfall.

Data of state wise rainfall departure for cumulative (01-06-2023 to 18-07-2023)
(Source: IMD) 

The majority of the central and southern areas, including Maharashtra, Madhya Pradesh, Uttar Pradesh, Andhra Pradesh, Tamil Nadu, and the east coast, West Bengal, and Orissa, have seen normal rainfall in 2023, according to IMD statistics so far. Himachal Pradesh, Haryana, Rajasthan, and Gujarat are among the states that have seen above-average amounts of surplus rainfall. While certain areas, like Karnataka, Bihar, Jharkhand, and Arunachal Pradesh, are experiencing a rainfall deficiency.

According to the IMD, the transition from the La Nina phase to the El Nino phase has already started. This year, from July to September, the second half of the monsoon season will be when the consequences become apparent. Since the Indian agricultural economy depends significantly on the monsoon for beneficial yields, the existence of El-Nino might influence the country’s weather patterns and, therefore, the agriculture industry.

How El Nino conditions may affect the market performance?

The possible impact of El-Nino on this year’s monsoon is a threat looming all over our country at present. While El Nino conditions certainly affect the country’s agricultural and economic prospects, it may also have an impact on the broad market performance in the coming months.

Lower monsoon may result in less supply and a rise in food inflation amid the already high-interest regime, leaving lesser disposable income for discretionary and other expenses. Not only the economy, a number of sectors and stocks related, including cement, agrochemicals, fertilisers, FMCG, and tractor players, are directly related to these events. As a result, a buzz of events like El-Nino and La Nina may influence the performance of Indian equity markets.

However, IMD director general Mr M Mohapatra said that not all El-Nino years resulted in poor rains and that there was normal to above-normal rainfall in 40% of such years. The 2023 monsoon season is likely to be normal, as per the forecast, despite evolving El-Nino conditions (unusual warming of surface waters in the Eastern Pacific Ocean) that is generally linked to weak monsoon rains.

You see, there is nothing more certain than the eventuality of change. Unexpected political events and such environmental changes are ever-present, but recent months have given an extra dose to the possibility of El Nino’s impact. However, prudent planning can help investors achieve investment success, regardless of fluctuating market conditions.

So what strategies should you implement to protect your investment portfolio against any such uncertainty? This article will explore strategies to empower you to survive and thrive amid the stormy seas of economic downturns.

1. Portfolio Diversification

A well-diversified portfolio containing a broad mix of asset classes like equity, debt, and gold. With portfolio diversification, the idea is to invest in a range of different assets and securities that do not have a similar relationship with the market and market volatility. In an all-weather portfolio, losses in one asset class tend to be offset by gains in other areas. So, if you want to mitigate the level of volatility in your portfolio, diversification is the key.

[Read:  Indian Equities Near a Lifetime High! Why Investing in Multi-Asset Funds Now Makes Sense]

Diversification offers simple and lucrative opportunities, allowing you to spread risk and ring-fence your portfolio from disruptors. Diversifying your portfolio is the most important measure that you can take to protect your investments during volatile market conditions.

2. Preserving Liquidity

You see, while one considers investing money into market-linked instruments, one needs to ensure that their liquidity needs are also met. Considering the macroeconomic uncertainty, investors must maintain liquidity in their portfolios to sustain the effects of any economic downturn.

[Read:  5 Best Low-Risk Mutual Funds to Invest in 2023]

Liquidity in an investment instrument is its ability to be converted into cash immediately, and liquid funds serve this purpose. Thus parking some money into liquid funds helps maintain liquidity in an investor’s portfolio and takes care of any exigencies. The concept of an emergency fund as the first step in financial planning arises from these liquidity concerns. It works as a safety net for you and prevents any impact on your financial stability.

3. Periodic Portfolio Review

You must remain put and maintain patience with your portfolio despite the erratic market and uncertain events. Avoid making any panic redemptions; more importantly, staying invested in the long run is how you may generate a high return on investment. However, on the contrary, you should consider reviewing your portfolio periodically to eliminate the existing holdings that are consistently underperforming and derailing your portfolio returns.

[Read: How to Analyse Your Mutual Fund Portfolio?]

A periodic review of your portfolio helps to make necessary changes to keep the strategic asset allocation in place and keeps investors on track with their envisioned goals. However, one must consider various factors while reviewing the portfolio, as some holdings may underperform owing to the prevailing turbulent market conditions but are good performers in the long run. This strategy helps one comprehend the functioning of their portfolio and take required actions.

4. Rebalancing the Portfolio

Once you have reviewed your investment portfolio, you could identify the problematic areas, such as the asset allocation that is not aligned to your current circumstances. Asset allocation is an integral part of having a fool-proof investment portfolio. Ideally, your funds are divided and invested in different asset classes and securities. However, this must be done in tandem with investment portfolio rebalancing strategies.

Rebalancing the portfolio is a protection strategy that involves fine-tuning the portfolio at least once a year if required. You may evaluate your portfolio, finances, risk profile, and investing objectives based on the full year’s events and realign your portfolio as necessary. This might aid in locating the areas that call for trimming or an increase in investment.

5. Harness the Power of Financial Awareness

Having a clear investment strategy can help ride market uncertainty. If you know your objectives, desired rewards and your tolerance for risk, you can better identify the right assets for your portfolio.

Stay attuned to market fluctuations, inflationary trends, and make necessary adjustments to your investment allocations. Expand your understanding of factors affecting economic growth and influencing market performance and its potential implications on investments. Being financially aware will also prevent falling prey to behavioural biases and making hasty decisions.

Also, financial awareness will help you better comprehend the above-mentioned strategies and make well-informed investment decisions to protect and grow your wealth significantly.

This article first appeared on PersonalFN here