Tuesday, April 11, 2023

What has Nature got to do with the stock market or equity share prices? example

What has Nature got to do with the stock market or equity share prices? example

Well, let me explain.

Any market is based on 2 basic aspects-

1- Human behavior
2- Liquidity

Let us take this practical latest report as example.

As per latest report, it is expected that this year there are only 25% chances of normal rain, 20% chances of drought and 40% chances of just about less than normal rain (comfortable).

When there is no or less rain or for that matter not well spread rain, the crop expected does not come and because of this the prices of food items rise.

Food is one major component in inflation counting and if food prices rise inflation will rise.

RBI Governer and MPC members know this and hence they are pressing on a statement saying this pause decision is for this meeting and that we are closely watching the situation with accomodative stance. (apart from other events)

If inflation rises, there will be 2 major impact -

1- people will have to pay more for the same food items, hence less liquidity or cash in hand and so demand for necessity will rise and avoidable expenses will be kept aside - like luxury purchases, etc., so slowdown in economy and demand.

2- RBI will have to balance the M3 i.e. liquidity position in the hands of consumers and also may even have to raise interest rate (so pause may stay longer or until May end MET report at least) (of course apart from other factors like US data, geopolilitical situations, war situation and other aspects).

If rain is below normal or as expected 20% drought, and if RBI increases rates

1- FD and new bond issuances come at higher interest rates (possibly good for safe investors, but not good for loan seekers and people who are already paying EMIs as their rates will also increase, again cash flow and less purchasing power)

2- This will negatively impact equity markets, as with cost rising (raw material cost and cost of loans-both), profitability and sales (because of less purchasing power of consumer) and so profitability will be negatively impacted.

There are multiple other aspects, but this is how Nature impacts markets - in this example negatively, but think reverese and the impact in that case turns positive.

This helps?

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image credit - can stock


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