Markets seem to be bent on breaking conventional theories and expectations. They kept their upward momentum comfortably this week, despite a 10-per cent rise in the frontline indices without any correction during the previous two weeks.

More cautious investors were expecting a deeper correction after the 1000 point fall in the Sensex in October. They remained in the sidelines and resolutely waited for the next wave of correction. A majority of the market participants belong to this category and they missed out a 12-per cent jump in the large indices in just three weeks.

The short-sellers were the worse off as the more than 800 point pull back rally on the Sensex came with hardly a pause. Every time the indices showed some signs of fatigue, fresh buying emerged. Global markets have also remained strong during this week with the fall in oil prices helping the year-end rally.

Markets opened the week with moderate gains as bank stocks helped the indices to recover from a mid-session weakness. Wednesday belonged to Reliance Industries and Infosys as both stocks closed with strong gains. The Sensex crossed the 8600 mark in intra-day trades.

Heavyweights came to the rescue once again on Thursday as the markets recovered from early weakness and closed higher. Friday saw the indices opening with good gains. Though they turned volatile in late trades, the indices closed with gains of close to half a per cent each.

The Sensex added 216 points or 2.55 per cent during the week and the Nifty went up by 71 points or 2.79 per cent over the week.

Mid-caps also maintained their up trend though the overall gains were lower than frontline stocks during the week. Some of the momentum stocks in the mid-cap sector returned to action though the frenzy of September and early October is still missing. Trading volumes in some of the stocks which had slumped following SEBI action have gone up which is a worrying factor. The CNX Mid-Cap 100 index gained 79 points or 2.14 per cent during the week.

Domestic economic and regulatory action

• The finance minister's attempt to re-start the discussion on disinvestment of profitable PSU's have once again struck down by the Left parties. The Left leaders categorically stated that there is no agreement with the government on this issue, clearly contradicting the finance minister's claim. They said the only discussion so far has been on the need to raise additional resources for government programmes.

  The Left's favoured routes for resource mobilisation are well known. They include higher rates of taxation for the corporate sector and wealthy individuals, surcharges on so-called luxury goods, etc. Disinvestment figures nowhere in their scheme of things. There is no urgent reason for them to change their views, even in the case on smaller PSU's.

  As assembly elections are due both in West Bengal and Kerala next year, it would be politically suicidal for the Left to change any of its views. Instead, the Left can be expected to turn more aggressive. Left leaders have been very vocal in criticising the central government during their recent visits to these two states. They seem to be really enjoying their days as backseat drivers without any responsibilities.

• There was good news on the inflation front as the wholesale price inflation for the week ended November 2005 declined to 4.14 per cent from 4.75 per cent for the previous week. Prices of metals declined though food prices were higher during the week.

Industry developments

• Stocks of oil marketing companies were among the better performers in recent weeks as crude oil prices have dropped more than 20 per cent from the record highs of over $70 per barrel. Average prices of the crude oil basket purchased by Indian companies have declined to around $55 per barrel as Indian refineries consume more of cheap heavier crude.

  The fall in crude prices would help the marketing companies to return to positive margins. During the first two quarters marketing margins had turned negative because of the delay in hiking retail prices. Most oil companies had slipped into the red, despite higher refining margins during this period.

  Margins are believed to have improved to Re1 per litre of petrol and close to 40 paise in the case of diesel as compared to a negative margin of more than Rs3 for petrol in the second quarter. Under-recovery on kerosene has also declined considerably to around Rs10 per litre from Rs13 per litre earlier.

  International oil prices are expected to cool further over the next two years, though short term spikes are not ruled out. Most analysts believe that crude prices have entered a bearish phase. Interestingly, this view is shared by oil industry leaders like Lord Brown of British Petroleum. He has stated publicly that current oil prices are unsustainable and expects prices to be around $40 to $50 per barrel in the medium term.

  However, upsides in the prices of oil stocks may be limited as a further decline in crude prices would invite calls for lower retail prices. The government in its enthusiasm to curb inflation would be a keen listener to such demands. Given the high volatility in crude prices, investments in oil stocks may not be advisable for cautious investors. As the disinvestment programme in large companies is clearly out of the agenda, there are no other triggers which could lead to a re-rating of the sector.

• Cement stocks were the best performers this week as industry leaders like Gujarat Ambuja and ACC rose sharply. The former added more than 5 per cent on a single session on Friday while ACC gained over 4 per cent. The appreciation in mid-cap cement stocks was considerably higher during the week at between 10 and 20 per cent.

  The sector is on a roll helped by sustained strong demand which has pushed prices higher. Cement companies had raised prices by more than Rs5 per bag of 50 kg a few weeks back. They are talking of a similar hike within the next few weeks to pass on higher transportation costs. The recent Supreme Court order banning overloading of trucks would push up costs.

  Infrastructure investments have maintained the momentum and are expected to pick up further next year if the government takes up the next stage of the national highway development programme. After a gap, the National Highways Authority had awarded more contracts for highway construction in recent months. Construction on these stretches is due to start shortly. The government is also considering a proposal to widen the Golden Quadrilateral to 6-lane from the current 4-lane.

  Exports to the Middle East are also expected to pick up substantially in the current and next quarters. Companies based in the western part of the country like Gujarat Ambuja are large suppliers of bulk cement to the Middle East. However, exports were affected in the second quarter because of rough seas during the monsoon which made ship movement difficult.

  The Middle East is in the middle of a construction boom, helped by high crude oil prices. Countries in the region are expected to earn more than $200 billion in additional revenues from high oil prices this year. Governments in the region are keen to invest a significant part of this windfall on infrastructure development. This could lead to higher demand for commodities like cement and Indian companies are well positioned to take advantage.

US markets, global economy and oil

• US markets sustained the uptrend, helped by lower oil prices and a number of large corporate deals. Most analysts are confident of a revival in consumer confidence after the recent slump. Some of the large corporations like GE and HP raised their earnings forecast during the week. Internet stocks like Google and Yahoo surged on hopes of increased spending on internet advertising.

  The NASDAQ is trading at its highest levels since 2001 and the S&P 500 index is at a 5-year high. For the week, the Dow added more than three-quarters of a per cent while both NASDAQ and S&P 500 gained more than a per cent each.

• Economic growth in the Euro area accelerated to 0.6 per cent during the third quarter ended September as compared to 0.3 per cent in the second quarter. Though it is too early for a prognosis, this could well be the first sign that Europe may follow Japan and shake off its economic slumber. Germany, the region's largest economy, recorded a growth of 0.6 per cent helped by higher export of capital goods to emerging markets.

  The European Central Bank has turned hawkish at the first sign of a revival. The bank president has already declared that it is ready to increase interest rates, which are currently at a more than 50-year low of 2 per cent. Analysts expect the bank to raise interest rates by at least 25 basis points in the near future.

  The ECB's hands are tied because it has a pre-set inflation target of 2 per cent. Inflation levels in many countries in the region are already above the target level and the bank is worried that a revival in growth would push up price levels further.

  Most economists and European governments, however, disagree with the ECB that a rate hike is necessary now. They argue that higher interest rates would kill the economic expansion before it has really started. Most European economies are struggling to grow because of market and regulatory rigidities. Labour markets in Europe are particularly inflexible, leading to higher costs for the corporate sector.

  The Euro area needs to sustain export growth for some more time as it would in turn assist a recovery in domestic consumption. Sustained growth in Europe, even if the growth rate is small, would help global economy considerably.

• Crude prices maintained their downtrend during the week as financial investors kept on exiting their long positions. News flow and data released during the week did not have anything in particular to stem the declining trend. Even the recovery on Wednesday following an unexpected drop in US crude inventory was short-lived. The present inventory position is believed to be comfortable even though temperatures are expected to drop further as winter progresses, pushing up demand for heating oil. December futures on the NYMEX closed the week with losses of well over 2 per cent at $56.14 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.