Markets opened the week on a steady note with the
indices holding ground on Tuesday after a long weekend.
The exuberance was back in full flow on Wednesday as oil
and technology stocks powered the indices to new lifetime
highs. The Nifty managed to close above the 2400 level
for the first time ever.
The
surge on Wednesday was led by ONGC, which rallied well
over 4 per cent on heavy institutional buying. Reliance
Industries, Infosys and TCS were the other significant
gainers among the large caps.
The
last two days saw some profit booking and the indices
declined. The correction was measured and there was no
panic despite some volatility. It was more like the markets
searching for a clear direction following the lacklustre
performance of global markets, record crude prices and
confusing signals from the government on further reforms
including disinvestment.
The
frontline indices closed the week with marginal gains.
Nifty could not close the week above the 2400 mark and
the Sensex too drifted below the 7800 levels by Friday.
Mid-caps more or less tracked the movements in frontline
stocks. The first two days of the trading week saw the
mid-cap index closing with gains, part of which were given
up on profit booking during the last two days. The CNX
Mid-Cap 100 index managed to close with gains for the
week and well above the 3600 mark.
Domestic
economic and regulatory action
- The
government has formally cancelled the disinvestment
process in 14 PSU's through the strategic stake sale
route. These include Nalco, Rashtriya Chemicals, HPCL
and Shipping Corporation. These companies were among
a group selected by the previous government for disinvestment,
but the process was delayed after some early successes
like Maruti, VSNL and IPCL.
The
finance minister keep on insisting that this is not
the end of the disinvestment programme. He also stated
that the strategic stake sale route has been proved
to be inappropriate, as it has raised more questions
than answers. Neither the minister nor any other pro-reform
face in the government has offered any alternate methods
or strategies so far.
The
government says it is continuing the discussions with
the left parties on stake sales through the public issue
route. These statements don't even pass as posturing
as the left has categorically stated that they will
not allow any kind of stake sales in PSU companies.
Unlike
the central government, the Congress government in Punjab
firmly believes in divesting its stake in state PSU's
even if they are profit making. The state government
is planning to sell its 44-per cent stake in Punjab
Alkalies within the next one month through the strategic
stake sale route. Evidently, the union finance minister
has so far not passed on his thoughts about the relative
de-merits of strategic stake sales to his party men
in Punjab!
- The
Bombay Stock Exchange, Asia's oldest, started a new
chapter as a limited company yesterday, after 130 years
of existence as an association of persons. The memberships
of brokers have been converted into equity shares along
with a grand of trading rights. Trading rights will
no longer be connected to shareholding in the exchange.
The
new company would have to dilute the total equity holdings
of brokers to at least 49 per cent from the current
100 per cent as per SEBI guidelines. The exchange said
it is evaluating various options including sale of strategic
stake to large investors. The exchange would also consider
an IPO, which would make it the first listed stock exchange
in the country.
The
corporatisation of the BSE would hopefully bring in
much needed professionalism and transparency. Despite
being the older exchange, volumes on the BSE are much
lower than that on the NSE though the number of shares
listed on the latter is only one fifth of that on the
BSE. Till a few years back, the BSE was more like a
broker's club with scant regard to investor protection.
Even
now, the disclosure and governance standards imposed
by the BSE on listed companies are more lenient than
the NSE. Majority of the companies listed on the BSE
are very small with hardly any analyst tracking them.
These stocks often see suspicious price movements as
a few operators can manipulate the shares with low floating
stock. Even this week, hundreds of such small stocks
listed on the BSE were hitting the upper circuit limits
almost on a daily basis.
- As
per media reports, a member on the board of market regulator
SEBI got carried away during the launch of the new BSE
and gave his own take on the potential upside to the
Sensex. This gentleman is confident that the index can
double from the current levels and touch 16,000! To
make it more incredible, he expects this to happen not
in the long term but over the next one year!! The statement
would have surprised even the brokers present at the
ceremony.
The
honourable SEBI member also assured 'all help' from
SEBI to the BSE in 'achieving' this target. Yes, according
to SEBI, the primary business target of the corporatised
BSE should be to take the index to 16,000 within a year!
Maybe SEBI should start a hedge fund with such proactive
bulls on its board!
Since
when has the market regulator got into the business
of giving index forecasts? Do these worthies, for at
least a moment, think about the consequences of such
irresponsible statements? Instead of spending their
energies on enforcing better disclosure norms and investigating
unusual stock price movements, senior officials of SEBI
are adding more fuel to the fire. Does the SEBI chairman
endorse the views of his colleague or does he have his
own forecast to make? Maybe, Sensex 20,000 is a target
worthy of a chairman since a mere member has already
predicted 16,000!
- Inflation
has dropped further as per the latest data available.
Wholesale price inflation for the week ended 30 July
declined to 3.35 per cent from 3.84 per cent for the
previous week. While food prices declined by a per cent
because of cheaper vegetables and marine products, prices
of non-food primary articles was lower after a 5 per
cent decline in prices of natural rubber. Prices of
manufactured articles remained steady. Energy prices
also declined because of a drop in furnace oil, cheaper
by 5 per cent.
Industry
update
- Doubts
were raised about the preparedness of the Indian textile
industry to take advantage of the post quota regime
on the face of intense competition from China. These
concerns became stronger after textile exports from
the country to global markets declined by 12 per cent
during the first three months of the calendar year.
There
are clear signs that the industry is learning its ropes
in the new world order after the initial difficulties.
Textile exports to the US has jumped 24 per cent during
the first six months of the calendar year. Restrictions
imposed by the US on Chinese imports of garments may
have been a positive factor for Indian exporters.
Though
growth in Chinese textile exports to the US have been
far higher at over 45 per cent, unit realisations on
Chinese products have fallen. In contrast, unit realisations
of Indian exports have actually increased by close to
10 per cent. This was made possible by focussing more
on value added products. Though margins have come down
as compared to the previous year, the additional volumes
would definitely help the major textile exporters to
post healthy numbers this year.
The
strong growth in textile output during the April-June
quarter also points to robust order flow for textile
firms. Output growth for textiles have been the strongest
among all manufacturing sectors at over 30 per cent
for June as compared to the previous year. Analysts
expect export growth to sustain at around 25 per cent
for the rest of the year.
However,
structural problems may prevent the industry from achieving
its full potential. Textile manufacturing is highly
fragmented with large mills accounting for only under
5 per cent of total output. India's share in the global
textile share is a meagre 3 per cent.
The
government's moves to set up textile parks of global
standards across the country should help the organised
players to ramp up production capacities in a more organised
environment. With some more help from the government,
the target of $50 billion from exports by 2010 can easily
be achieved. By then, the total industry size, including
domestic sales, could easily cross $100 billion.
- There
are reports that the ministry of finance has sent a
very strange advice to all PSU banks this week. The
ministry wants all advertisements by the state- owned
banks to be routed through the publicity wing of the
government, called DAVP. This department has so far
handled only tender notices and commemorative advertisements
on anniversaries and special occasions with smiling
mug shots of politicians.
When
the PSU banks have to compete with the aggressive private
sector players and large foreign banks, does the ministry
really believe that the DAVP can provide marketing support
and brand management? Or is this an attempt to bring
the 'lofty' PSU standards to the advertisement industry
as well? Thankfully, the attempt at 'in-sourcing', or
meeting all PSU requirements for services by other PSU's
or government departments, has not gone down well with
most bank managements.
Surprisingly,
such hare-brained ideas keep coming at regular intervals
from a ministry headed by a pro-reform mascot. Very
often, the ministry forgets the basic concepts of reforms
and governance all too easily for a few rupees of additional
revenue.
US
markets, economy and oil
- US
markets closed lower during the week on worries of slowdown
in consumer spending. Sales growth at major retails
stores for the month of July was less than expected
and most retail companies have given a cautious outlook.
Higher oil prices led to a surge in consumer price inflation,
even though the rise in core inflation adjusted for
energy prices was lower than expected.
Better
than expected results from frontline companies like
HP and earnings upgrades for stocks like Coca Cola and
IBM did help the markets from further losses. Judicial
verdict and possible regulatory action against pharma
major Merck saw the US indices giving up most of its
early gains and closing flat on Friday.
After
setting a record high of $67.1 per barrel last week,
crude oil declined during the early part of this week.
Crude futures for September delivery fell over 4 per
cent to around $63 on Wednesday after US government
data showed a decline in US consumption.
The
commodity recovered on Friday after reports of a rocket
attack on US war ships in the Middle East and Iran's
decision to resist western pressure to cap its nuclear
programme. A sharp decline in oil production by Ecuador,
a small producer exporting mostly to the US, following
protests also led to the firming up of prices. Crude
closed the week at $65.35 per barrel on the NYMEX.
The
IMF said the dangers to global economic growth from
high crude prices have become greater. The fund has
increased its forecast for average crude prices for
the current year to $51 per barrel from the earlier
$46.5. Oil prices have averaged $53 per barrel so far
this year. IMF has also increased its forecast for 2006
to $53 to a barrel.
Goldman
Sachs has raised its 2006 forecast for average crude
prices to $68 per barrel from $55. The firm said it
expects average oil prices to be around $60 per barrel
over the next five years, higher by $15 per barrel as
compared to its earlier forecast. Goldman is incidentally
one of the largest traders in crude futures and earns
a significant part of its profits from commodity trading.
Merrill
Lynch also expects oil to hover around the $60 mark
for
the rest of the year. The firm has raised its 2006 average
price forecast to $56 from $50 earlier. However, it
expects oil prices to decline to $42 towards the end
of this decade as more capacities come on stream.
*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.
Other
articles by Rex Mathew
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of general reports on markets
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of general reports on finance
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