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Sensex rallies for the week; gains 47 per cent for 2006news
By Rex Mathew
30 December 2006


Markets started the week on an extremely strong note as both frontline indices surged close to 2 per cent each. Technology stocks led from the front and ended with impressive gains while ONGC and select banking stocks provided good support. The rally was very broad-based and 9 out of 10 Nifty stocks ended higher.

The up trend was sustained on Tuesday as banking stocks rallied ahead on interest rate hike announcements. Select technology and telecom stocks also ended with very good gains. The up trend was once again broad-based with gainers far outnumbering the losers and the indices ended with gains of over a per cent each.

On the last day of December F&O settlement on Thursday, the indices were subdued but were not as volatile as expected. The indices closed marginally lower, mostly in account of losses in Reliance Industries, SBI and select engineering and capital goods stocks.

On Friday, the last day of trading for 2006, the indices started on a positive note before drifting downwards. Profit booking in banking stocks and weakness in FMCG stocks led to a decline in the indices in afternoon trades.

The Sensex gained 316 points or 2.35 per cent during the week and the Nifty added 94 points or 2.43 per cent over the week.

For the year, the Sensex gained 4,389 points or 46.7 per cent while the Nifty added 1,130 points or nearly 40 per cent. This is the best annual gains for the frontline indices since 2003, as both indices extended their winning streak to the fifth straight year.

However, the indices saw considerable volatility during the year. After a sharp drop in May and June, they recovered and conquered their previous highs later in the year. The indices survived another bout of volatility this month to take total 5-year returns on the Sensex to over 10,000 points.

Mid-caps and small-caps did much better than the large caps for the second the week. After rallying around a per cent each during the first two days, the mid-caps sustained the momentum for the rest of the week. Even on Thursday and Friday when the frontline large caps were subdued, the smaller stocks continued their up trend.

The CNX Mid-Cap 100 index closed the week with gains of 183 points or 3.65 per cent for the week.

Domestic economic and regulatory action

  • Trade deficit for the first half of the current fiscal worsened to $35.1 billion from $27.1 billion during the same period of previous year on account of rising oil imports and a deceleration in export growth. Invisibles like IT and other service exports and remittances from Indians working abroad helped rein in the current account deficit at $11.68 billion as compared to $7.16 billion for the year ago period.

    For the second quarter, current account deficit nearly doubled to $6.9 billion from $3.6 billion a year ago – despite an $11 billion surplus in invisibles.

    Net capital inflows increased to $19.33 billion during the first half as compared to $13.07 billion for the previous year period, mostly on account of higher commercial borrowings and an increase in NRI deposits with domestic banks.

  • During the second quarter of this fiscal year, total external debt of the country went up to $136.5 billion from $132.2 billion as at the end of first quarter. Of this, long-term debt contributed $125.9 billion while the balance $10.6 billion was short-term debt. Deposits of NRI's with domestic banks constituted nearly 27 per cent of total debt while commercial borrowings formed 24 per cent. Total government borrowings, including both multi-lateral and bilateral debt, constituted 26 per cent of total external debt.

  • FDI inflows into the country for the year 2006-07 are expected to cross $11 billion, a 100 per cent increase over $5.5 billion achieved for the previous year. If re-invested earnings of foreign companies already operating in India are also included, total FDI inflows for the current year are expected to touch $14 billion as against $7.7 billion for last year. Most of these investments are coming into IT services, manufacturing and financial services.

  • After launching the railway freight corridor project between Delhi and Mumbai, the government has become more ambitious. The next proposal is to build a massive 1,450 km long industrial corridor along this line, which would run parallel to the Delhi-Mumbai leg of the Golden Quadrilateral highway system. The project would cover the states of Uttar Pradesh, Haryana, Rajasthan, Gujarat and Maharashtra.

    The infrastructure package for the corridor includes new ports and expansion of existing ports, roads to provide port connectivity, new power projects, etc. The government of Japan has already pledged its support for the project and Japanese companies are reportedly keen to invest in the corridor.

  • This week, the government formally signed the agreements to set up ultra-mega power projects of 4,000 MW each in the states of Madhya Pradesh and Gujarat. The one in Madhya Pradesh, to be set up by Lanco Infratech and a Singapore-based company, would use coal from captive mines. The Gujarat project awarded to Tata Power would use imported coal to fuel the plant. Each of these projects would see investments of between Rs16,000 crore and Rs20,000 crore.

    Encouraged by the response for the first two projects, the power ministry is now planning seven more such projects. While two projects would be awarded in 2007, the remaining would take another year or so to reach agreement stage. The unique model of these projects has attracted a lot of attention and should act as a model for all large infrastructure projects.

    The government floated shell companies for each of these projects, which did all the preliminary work and got all necessary approvals. Bids were invited from interested private players and the winner was selected on the basis of lowest final tariff quoted.

    The shell companies would now be handed over to the winning bidders who can finalise the financing and start implementing the project without the usual initial hassles associated with such projects. The transparency in the entire process has helped build the confidence of private investors and, unlike most such initiatives, there have been hardly any controversies.

  • Wholesale price inflation for the week ended 16 December increased to 5.43 per cent from 5.32 per cent reported for the pervious week. The increase was mostly on account of higher prices of manufactured products even as prices of primary food articles were marginally lower. Inflation was at 4.62 per cent during the same week of previous year.

US markets, global economy and oil

  • US markets gained during the week, helped by lower crude oil prices and signs of resilience in the US economy. Data released during the week showed improved consumer confidence while measures of both producer price and consumer price inflation were lower than expectations.

    The Dow set new lifetime highs earlier this week but gave up part of the gains towards the end of the week to end a per cent higher. The S&P 500 gained 0.5 per cent for the week. Technology stocks also recovered from last week's fall and the NASDAQ ended 0.6 per cent higher for the week. US markets would remain closed till next Wednesday.

    2006 has been a very good year for the US markets as all major indices ended with gains much better than expectations. For the year, the Dow rallied 16 per cent while the S&P 500 ended nearly 14 per cent higher. Technology stocks underperformed and the NASDAQ's annual gains were limited to 10 per cent.

  • Crude oil prices continued to decline during the week on forecasts of warm weather in the US and higher than expected US fuel inventory. After trying to stabilise during the earlier part of the week, oil prices declined nearly 2 per cent as the inventory data was released.

    After a modest recovery on Thursday, oil prices opened weak and slipped below $60 per barrel on Friday on fresh forecasts of higher temperatures across US during the early part of next year. Prices recovered on Friday afternoon on fears that the imminent execution of former Iraqi president Saddam Hussein may lead to fresh violence in the Middle East and affect supplies. Near month futures on the NYMEX lost $1.26 per barrel for the week and settled at $61.05 per barrel on Friday. For the year 2006, crude oil prices were almost unchanged.

*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.

 

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Sensex rallies for the week; gains 47 per cent for 2006