Sensex nears 10,000 and the Nifty closes in on 3000 during the week

28 January 2006

Fast recovery across most global markets after last week's decline helped the Indian indices as well this week. Third quarter corporate numbers have not thrown up any major negative surprises though the growth rates have declined as compared to the pervious quarters.

The rally in oil prices are also not affecting market sentiment as inflation is still moderate. It would take a further flare up in oil prices, which looks unlikely as of now despite rising tensions with Iran, to raise inflation levels high enough to cause concern.

The RBI raised the reverse repo rate by 25 basis points during the week, surprising (See: RBI surprises with 25 bps interest rate hike) most economists and analysts. Even this did not affect stock market sentiment much as the move was widely seen as a cautionary step and further hikes in interest rates are not expected in the near future.

The Sensex gained 350 points or 3.68 per cent during the week and the Nifty added 82 points or 2.83 per cent over the week.

After remaining subdued during the previous week, mid-caps also closed the week with considerable gains. Though the larger stocks outperformed mid-caps during the early part of the week, Friday saw the mid-cap index gaining as much as 2 per cent. The CNX Mid-Cap 100 index gained 119 points or 2.82 per cent during the week.

Domestic economic and regulatory action

• The finance minister cannot be blamed for lacking in optimism. Stiff opposition from the left parties to most of the reforms proposals is yet to dishearten him. In fact, he keeps raising his future targets even though some of the earlier targets still remain unachieved.
  
  Speaking at the World Economic Forum summit in Davos, the minister said he expects to raise between $1.5 to $2 billion from disinvestment during the next financial year. He has not, and wisely so, specifically mentioned the companies in which the parts of government holdings are to be sold off.
  
  The finance minister also confirmed that the new insurance bill with 49 per cent FDI limits for the sector would be presented during the next session of the parliament.
  
  The minister believes the Indian economy can grow at 10 per cent annually from financial year 2007 onwards, if investments are stepped up. He has targeted an investment to GDP ratio of 30 to 32 per cent to achieve double-digit GDP growth rates. Hopefully, the government can manage to achieve political consensus at least on key reform proposals.

• More than anything else, it is the expectations about the budget which is driving the markets now. Traders are hopeful of another favourable budget for the stock markets this time too. While not many changes are anticipated on the direct tax front, certain sectors are widely expected to benefit from changes in indirect tax rates and higher investments in infrastructure.
  
  The strong rally in auto stocks clearly indicates that traders are expecting a reduction in excise duties on passenger cars and possibly on other segments as well. After announcing a reduction in excise duty for tractors, the finance minister had indeed mentioned that a duty cut for passenger cars would be considered later.
  
  Excise duty on larger cars is expected to come down from 24 per cent to 16 per cent. For smaller cars, the duty may be lowered to 8 per cent. The government has already indicated that it would support the development of the country as a small car hub. At the current growth rates, Indian would overtake Japan as the largest market for small cars in the near future. The export potential of smaller cars is also significant.
  
  Apart from strong quarterly numbers, expectations about accelerated investments in infrastructure are driving capital goods and engineering stocks. The order books of larger engineering companies are at record levels and at least a section of analysts believe that these companies can sustain the current growth rates for the next 3 to 5 years.
  
  The government is expected to focus more on infrastructure investments in this year's budget proposals. After having addressed its political compulsions through the job guarantee programmes and other welfare measures, the government may spend more energy and money on developing infrastructure.
  
  
• Wholesale price inflation for the week ended 14 January increased to 4.4 per cent from 4.24 per cent reported for the previous week. Prices of manufactured articles were higher during the week even as primary food prices declined.

US markets, global economy and oil

• US markets recovered from the previous week's fall, helped by god corporate numbers and guidance upgrades from companies like Microsoft. Expectations of an end to the interest rate hikes by the US Fed re-surfaced towards the latter part of the week.
  
  The Fed is widely expected to raise interest rates by 25 basis points in its meeting next week. However, most economists and analysts believe the Fed is very close to an end to the rate hikes. The rally in steel stocks helped the broad indices on Friday.
  
  The Dow gained 2.3 per cent during the week while the S&P 500 added 1.8 per cent. Technology stocks were the best performers and the NASDAQ gained around 2.5 per cent.
  
  
• October - December quarter US GDP growth declined dramatically to 1.1 per cent from as high as 4.1 per cent in the previous quarter of 2005. This is the slowest quarterly growth reported in almost 3 years. The reported growth rate was considerably lower than consensus estimates of around 2.4 per cent. The poor forth quarter growth rate has pulled down the 2005 full year growth rate to 3.5 per cent from 4.2 per cent during the previous year.
  
  Growth in consumer spending declined considerably during the last quarter of the year, reflected in considerably lower auto sales. Business spending and military spending by the government was also lower, further affecting the aggregate growth rate.
  
  However new home sales, an important indicator of consumer confidence, increased nearly 3 per cent in December. This was much higher than expectations and at least some analysts believe that the US economy would pick up during the current quarter.
  
  Ironically, lower US growth numbers are good from a stock market perspective as it would encourage the Fed to stop increasing interest rates. The fourth quarter numbers announced are preliminary estimates.
  
• The Asian Development Bank expects Asia, excluding Japan, to grow at 6.5 to 7 per cent during 2006. The bank also expects average oil prices to be ranged between $50 and $60 per barrel for the year.
  
• Crude oil had a relatively volatile week as prices reacted to conflicting signals. The commodity corrected during the early part of the week after last week's rally. Statements from senior officials in Saudi Arabia that the country is prepared to raise output to cool down prices triggered the decline. An unexpected rise in US fuel inventory put further pressure on oil prices during the middle of the week.
  
  Towards the latter part of the week, concerns about supply disruptions resurfaced and traders focussed on the Iranian nuclear issue and continuing violence in Nigeria. By Friday, oil prices went back to previous week's closing levels. March futures on the NYMEX closed at $67.76 per barrel for the week, a loss one per cent over the week.

*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.