The markets started the week as if the Sensex was in a hurry to cross the 9000 mark ahead of the results season starting next week. The indices continued their firm rally from the previous week and raced to new lifetime highs as liquidity flows remained robust.

The Sensex scaled the 8700 mark on Monday and went on to close at 8800 on Tuesday. Nifty crossed the 2650 mark on Tuesday and posted an all time closing high of 2663. Monday's rally was fuelled by auto stocks which rallied on the back of good sales numbers for the month of September. Technology stocks took over the lead on Tuesday as expectations about good results led to buying.

Wednesday saw correction set in as global markets started weakening. Thursday turned out to be day of sharp decline as most Asian markets, led by Japan, came crashing down. The indices lost well over 2 per cent each on that day as heavyweights came down sharply.

Friday turned out to be the most volatile session in recent weeks as the markets were undecided about the direction. Global cues were mixed as some Asian markets recovered on Friday while the US remained weak during the previous day. The indices regained part of the intra-day losses, but closed the week on a weak note.

The Sensex lost 144 points or over one-and-a-half per cent during the week and the Nifty shed 27 points or three-quarters of a per cent over the week.

Mid-caps also rallied strongly on Monday and Tuesday, before losing all the gains during the last three days of the week. The momentum seen in prominent mid-cap stocks during last month almost returned early in the weak. That did not last as some of these stocks fizzled out later though select stocks continued to run up fast on trader interest. The mid-caps performed much better than the frontline indices during the week. The CNX Mid-Cap 100 index lost only 1 point during the week.

Domestic economic and regulatory action

• The government has finally called off the BHEL disinvestment programme on the face of continuing opposition from the left parties. The Left parties were boycotting the coordination committee meetings of the ruling coalition to protest against the disinvestment programme. The UPA chairperson is believed to have formally informed the Left parties about the decision.
  
  
• That leaves only the Maruti disinvestment for this financial year. The government is planning to offload part of its 18-per cent stake in the company before the end of the current financial year.
  
  
• Wholesale price inflation for the week ended 24 September increased to 3.97 per cent from 3.75 per cent for the previous week. The rise in inflation was attributed to higher prices of fuel and manufactured products. Consensus estimate of inflation was marginally over 4 per cent for the week.

Industry developments

• The oil ministry has reportedly suggested that the ownership of ONGC Videsh (OVL) be transferred to a group of oil companies. OVL is the overseas investment arm of ONGC and is currently fully owned by the exploration major. Over the last few years, OVL has made large investments in oil fields across the globe including Sakhalin in Russia, which started commercial production recently. The company had also formed a JV with the LN Mittal group for acquiring oil and gas assets globally.
  
  The ministry is said to be disappointed with the recent failures of ONGC in acquiring assets of significant size; CNPC of China outbid the consortium led by ONGC in the race to acquire Petro Kazakhstan. Chinese companies are widely seen to be winning all the battles with huge financial resources and diplomatic manoeuvring. Hence, the ministry says it wants to create a more focussed company with better resources at its disposal.
  
  The ministry wants OVL to be jointly owned by ONGC, Indian Oil, GAIL and HPCL. Such a shareholding structure, the ministry believes, would provide OVL with more financial muscle and experience across the entire oil value chain. Naturally, ONGC is resisting the move.
  
  Are these arguments sound enough? OVL is funded mostly through an interest free loan of around Rs15,000 crore from ONGC. If ONGC is not fully committed to OVL, it is only logical that this amount should be returned. OVL cannot raise resources on its own and the proposed new set of promoters or the government would have to pump in capital. Considering the state of the government finances, its ability to pump in billion of dollars is doubtful.
  
  Indian Oil and HPCL are not in great financial shape because of the huge under-recoveries in retail fuel prices. Both these companies have already stated that their own expansion plans are being affected by the negative cash flow from retailing. GAIL has large plans of its own, including exploration, and being the only large pipeline company it should be allowed to focus more on its core business.
  
  The second argument is experience across the entire value chain. Is this really required? Large Chinese companies are all integrated players and the argument is that this gives them a huge advantage over Indian companies. It is true that if the acquisition targets are integrated companies, this would indeed be an advantage. But are Indian companies really planning to bid for integrated companies, like the recent unsuccessful bid for US company Unocal by CNOOC of China?
  
  Indian companies are more interested in exploration and production blocks and rightly so because the stated objective of the overseas acquisitions is to ensure energy security. We don't need large downstream operations in overseas locations to ensure domestic energy security. We need secure crude and natural gas supplies, nothing more.
  
  Then why is the ministry pushing such a proposal, which in all probability would make OVL weaker rather than stronger? The reason may the recent spats between the ministry and ONGC management on a host of issues. It is well known that, unlike other oil PSU's, the ministry's orders are not the final word for ONGC. The company management has often stood up against the wishes of politicians and bureaucrats to protect its autonomy. Faced with a challenge from a professional management, the politician-bureaucrat team has come up with the obvious solution - break up the company and show the management its place.

• September monthly sales of auto companies, including two-wheelers, are very encouraging. All major companies reported good growth in volumes, which emboldened them to announce moderate price hikes ahead of the festival season.
  
  Passenger car sales were sluggish after the onset of monsoons because of a variety of reasons. September sales data shows that volume growth is back on track. This momentum should sustain for the next few months, which are historically the best months for auto companies because of the various festivals. Tata Motors may be in for a bit of struggle in the medium term as its passenger car models are ageing and new models are at least two years away.
  
  The more encouraging data is that sales of utility vehicles have also recovered. Both Tata Motors and Ashok Leyland have reported good volume growth for September. The performance of Ashok Leyland, growth of over 22 per cent as compared to the previous year, was commendable.
  
  Most analysts have been pessimistic about continued volume growth in commercial vehicles for the last many months. They believe that the large base, built through good growth over the last few years, would result in lower percentage growth going forward. However a revival in spending on highways, evidenced by the number of highway projects awarded in recent months, could keep the growth momentum going.
  
  Growth in the two-wheeler sector continues to chug along at a nice pace. Motorcycle sales have kept a rapid pace as new models are being introduced at increasingly shorter intervals. The best performer in this segment has been Bajaj Auto with volume growth of over 50 per cent. Market leader Hero Honda launched its first scooter model this week. Interestingly, Honda Motors is present in both scooters and motorcycles on its own.

US markets, global economy and oil

• US markets slipped for most of the week as hopes of decent quarterly results were overcome by fears of a continuing rise in interest rates. The frequent statements from US Fed officials about the rise in inflationary pressures kept the markets worried during the latter part of the week. Even a sharp decline in crude oil prices could not help the markets. In fact, falling crude prices affected heavily weighted oil stocks and pulled down the indices further. The frontline indices lost around 3 per cent each during the week till Thursday.
  
  The IMF has supported the view that the US Fed would continue to raise short-term interest rates as well. IMF feels that inflationary pressures are creeping up in the US and the Fed would prefer to keep increasing the rate. The fund maintained its global economic growth forecast at 4.3 per cent for the current year despite higher oil prices. The fund expects global growth to exceed 4 per cent for next year as well.
  
  
• The International Organisation of Securities Commissions, a global forum of market regulators from different countries, has reportedly initiated a study to assess the risks faced by hedge fund investors. The global body would study various aspects of hedge fund regulation to bring in better transparency.
  
  Hedge funds have mushroomed in recent years and it is estimated that there are more than 8,000 such funds globally at present. These funds have in excess of $1 trillion in assets under management. Large commercial banks in western countries are also believed to have sizeable exposure in hedge funds. These banks earn huge income from the hedge fund industry by providing back office services like document handling, depository and treasury services.
  
  Hedge funds have been traditionally sold only to large investors and were generally not open to general investors. Hence in most countries, regulatory controls on such funds were low. Unlike mutual funds, which have to make a host of disclosures to ensure transparency, hedge funds were required to reveal very little about their operations and investment strategies. Since the investors were mostly wealthy individuals, who are presumed to understand the risks involved, regulatory bodies were also not worried much about controls.
  
  In recent years, hedge funds have started selling to ordinary investors as well. This has forced market regulators in many countries to try and impose more controls on such funds. However, the hedge fund industry has protested against most of these efforts claiming that a large part of their clientele still remain wealthy individuals.
  
  As global equity and commodity markets, especially in emerging countries, have been rising for some time now, concerns about the destabilising impact of hedge funds are being raised. Hedge funds were blamed along with currency traders for the East Asian crisis of late '90s. Hedge funds typically take large positions and move very fast between positions, which can lead to sharp market movements, either way.
  
  However, there is another view that the hedge fund industry has become very diverse with a large number of players having different strategies. Hence, the possibility that a majority of the funds would move in one direction and cause instability is limited.
  
  
• Crude prices tumbled to a two-month low during the week amid reports of slowing US demand. The commodity hit the lowest level of below $62 for the week on Thursday. Crude futures for November delivery declined on all 4 days till Thursday and lost over 6 per cent from the previous week's closing levels.
  

*Disclaimer: The author doesn't have any position in the stocks specifically 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.