Maintaining the momentum built up over the previous two weeks, the indices scales their previous lifetime highs during the week. Firm global markets and continued FII inflows, even though more modest than September and early October, helped the markets this week.
Volatility was expected to increase during the week as the derivatives settlement was due on Thursday. At higher levels, the indices were expected to lose momentum especially since mid-caps had not participated much in this month's rally.
After losing nearly 2 per cent each on the first two days of the week, the Sensex gained more than 100 points on each of the following three days. The Nifty also followed a similar pattern.
Contrary to expectations, there was not much volatility on Thursday or the day before. The indices maintained a clear up trend as traders built up positions in the December derivatives series.
The Sensex went past the previous high of 8822 on Friday and managed to close above that level. Nifty went close to its high of 2569 on that day, but could not go past those levels.
The Nifty went past the previous highs today, during a short weekend session conducted to test some systems at the NSE. The Sensex went past the 8900 levels, though it could not close above those levels.
The Sensex added 202 points or 2.33 per cent during the week and the Nifty went up by 63 points or 2.4 per cent over the week.
Mid-caps also went through a correction during the first two days of the week. They recovered on Wednesday along with the frontline stocks, but the momentum was absent on Thursday as well. Trading interest heightened in mid-caps as the large indices scaled their peaks on Friday and Saturday.
Many of the more visible mid-cap stocks saw considerable activity. Stocks were surging even on minor news flows indicating heavy trading interest. The rally towards the end of the week helped the mid-cap index to reduce the gap in gains when compared to the frontline indices. The CNX Mid-Cap 100 index gained 66 points or 1.75 per cent during the week.
Domestic economic and regulatory action
- Wholesale price inflation for the week ended 12 November rose marginally to 4.2 per cent from 4.14 per cent for the previous week. Prices of minerals and textiles went up even as food prices declined marginally. Prices of manufactured goods were steady during the week.
- The best performing sector during the week were engineering and capital goods. Stocks in the sector received a big boost when Siemens India announced its annual results, which were much better than expected. Siemens gained over 15 per cent in just two sessions on Friday and Saturday. BHEL, ABB and L&T also saw considerable gains during the week.
The sector has been witnessing large order flows for the last couple of years. Order books of all the large companies are at very comfortable levels, helped by the rise in industrial investment. The current order books of these companies are enough to maintain robust topline growth for the next few years. As their capacities have peaked out, companies like L&T are considering expansion plans.
The fall in steel prices would help the sector to expand margins. The effect of lower metal prices was already visible in the last quarter results of these companies. Margins are expected to rise further in the coming quarters as steel prices may remain at these levels, if not fall further. This has acted as a trigger to the most of these stocks.
Industrial investments are seeing no signs of a slow down and even the government is getting more aggressive in building infrastructure. The investments being planned by the steel industry alone, including foreign players like Posco and Mittal Steel, would easily exceed $50 billion over the next five to seven years. Other metal industries are also building up capacities. Oil refiners are expected to nearly double their refining capacity in the next 7 years.
The government is also getting more serious in infrastructure sector, in airports, seaports, power generation, etc. Companies like Siemens and L&T have joined hands to build airports like the proposed new Bangalore Airport. L&T is planning to get into seaport management for which it is holding discussions with international companies. Companies like BHEL would have significant opportunities in the power sector as the government has recently announced plans to set up 4 new mega power plants.
Finally, like cement and steel companies, engineering companies are in a position to capitalise on the significant investment boom happening in the Middle East. Siemens has announced some significant orders from that region, helped by the strong presence of its German parent. L&T has already stated that the Middle East is the fastest growing region in terms of business. Even BHEL is getting aggressive in project exports and is implementing power projects in Africa.
The single most significant risk for this sector would be a dramatic rise in interest rates which would cut down industrial investments. Interest rates have started rising globally and India would be no exception. However, the question is whether rates will rise as much to affect new investments.
The answer is an optimistic, unlikely. Even though the RBI has increased rates recently and the markets are expecting another 25 basis points hike early next year, it is unlikely that cost of borrowings would change much for the corporate sector. The larger companies would be more insulated as they have much more avenues to raise funds for investments.
US markets, global economy and oil
- US markets had their fifth consecutive week of gains as a host of positive developments and news flows sustained the uptrend. Expectations of an end to monetary tightening by the US Fed and higher consumer spending during the holiday season helped the indices to maintain their gains. Oil prices remained around the $58 per barrel mark helping the sentiment further.
The Dow is inching towards the 11000 mark while the NASDAQ and the S&P 500 index are at nearly 5-year highs. For the week, the Dow added 1.5 per cent while both NASDAQ and S&P 500 gained 1.6 per cent each.
- Most economists and analysts are waiting for retail sales data for yesterday and coming Monday to give a clear verdict on whether US consumer confidence is still robust. The Friday following the Thanksgiving Day holiday is traditionally a day of record sales for retail stores. Most consumers flock to the stores and start their holiday season shopping. Surprisingly, the day is known as 'Black Friday' among US retailers as if it is a day of great tragedy or despair!
The following Monday is the Black Friday equivalent for online retailers in the US. Consumers return to work after a long weekend and log into online stores. Many studies have shown that consumers make most of their online purchases not from home but from their offices. Retailers have started calling the day as 'Cyber Monday' and this year online sales are expected to considerably exceed the $15 billion recorded on that day last year.
Consumption growth in the US is very important in the global context as it has been one of the prime drivers of global economic growth in recent years. It would remain so till domestic consumption revives in a major way in other large economies like Japan and Europe. US consumer confidence had taken a beating following the hurricane damages. Rising interest rates were also expected to pull down consumer spending.
Retail sales in November had allayed part of the fears about slowing retail sales. If the US Fed does indeed stop increasing interest rates it would help sustain consumer demand. However, a recovery in oil prices or continued rise in US real estate prices would force the Fed to focus more on inflation and abandon any move to stop interest rate hikes.
- Crude prices recovered during the week, helped by rising demand for heating oil. The commodity found buyers at lower levels after the significant fall in recent weeks. Weekly US inventory data showed higher stocks of crude oil, which capped the upside. January futures on the NYMEX closed the week with gains at $58.71 per barrel.
*Disclaimer: The author may have positions in the stocks mentioned above at the time of writing this article. This analysis/report is only for the purpose of information and is not an investment advice. Readers are advised to consult a certified financial advisor before taking any investment decisions. While efforts have been made to ensure the accuracy of the information provided in the content the author or publisher shall not be held responsible for any loss caused to any person whatsoever.