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Fed spoils the party - Views on News from Equitymaster
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  • Jan 8, 2005

    Fed spoils the party

    The first week of the new calendar year 2005 was something that Indian investors would want to get off their minds as soon as possible. This is because; the opening week of 2005 was in sharp contrast to the final quarter of 2004 (BSE-Sensex gain of 18%) and final week of 2004 (Sensex gain of 1.6%) as they ended the week with near 3% losses. However, the scenario on the bourses was much harsher than that indicated by the 3% losses on the indices.

    In line with the overall optimistic mood that spilled into the New Year, the indices opened on a buoyant note on Monday on the back of across the board buying. However, Tuesday was somewhat different for the markets. The indices barely managed to see the light of the positive territory, as they traded in the negative territory for almost the entire session. Though the Sensex did manage to open at higher levels and nudge the 6,700 levels by making an intra-day high of 6,696, it failed to sustain the same. Consistent efforts by the bulls to pull the indices out from the trough yielded no results as at every rise, selling pressure was witnessed, which pushed the indices back to lower levels, finally ending the day in the red.

    However, things took a real bad turn on Tuesday night, which was reflected in the following day's trade. The markets on Wednesday opened rather weak on the back of negative cues from the global markets that prompted investors to book profits. Metal stocks were the worst hit over the next couple of trading sessions as metal prices collapsed on the London Metal Exchange (LME) on Tuesday night (on expectations of a stronger dollar) affecting investor sentiments towards aluminium, steel, zinc and other metal stocks. Further, the Fed statement of a sharper rise in interest rates going forward to keep a check on inflationary pressures citing stronger US economic growth, increased speculation about Foreign Institutional Investors (FIIs) inflows slowing down, which might get diverted to relatively safer US bonds. This led to the Sensex fall of over 300 points during intra-day trades, finally ending the day with near 200-point losses. The after shocks of this were felt on Thursday also with the indices crashing by another 90 points amidst immense volatility.

    However, markets stabilised on the final trading day of the week as investors opted to do some bottom fishing. It must be noted that in the current week, if we consider the highs and lows of the Sensex, it witnessed a fall of near 375-points (5.6%) within two trading sessions thus providing investors an opportunity to bargain hunt at lower levels. This seemingly led to the buying in Friday's trade, helping curtail the index losses for the week. Further, below than expected inflation numbers at 6.39%, which would ease the concerns of a faster rise in domestic interest rates and the Finance Minister's statement that the market fall was orderly and was in the nature of a correction may have also helped investor sentiments.

    Some key gainers over the week (NSE-50)
    COMPANY Price on Dec 31 (Rs) Price on Jan 7 (Rs) % CHANGE 52-WEEK H/L (Rs)
    BSE-SENSEX 6,603 6,420 -2.8% 6,696 / 4,228
    S&P CNX NIFTY 2,081 2,016 -3.1% 2,120 / 1,292
    GUJARAT AMBUJA 403 427 6.0% 440 / 231
    TATA TEA 473 494 4.3% 522 / 251
    ACC 339 351 3.5% 359 / 221
    VSNL 232 237 1.9% 252 / 110
    GAIL 231 235 1.6% 295 / 101

    Among some sector/stock specific activities witnessed on the bourses this week:

    • Cement stocks stood relatively rock solid in the face of tumbling stock markets during the week. Expectations of higher demand in the second half (growth expected at over 6%) combined with better pricing environment is likely to boost-operating margins of cement majors. With no new capacity additions in sight in the next 12-18 months, pricing scenario remains favorable. However, while we believe that the larger beneficiaries from such industry trend will be the western and northern oriented players; higher input and logistics costs will limit the scope for margin improvement.

    • The big news of the week was the announcement of a reduction in access deficit charge (ADC) by the telecom regulator, TRAI. ADC is a levy paid by private operators to state-owned BSNL as compensation or providing telecom services to rural areas. However, calculations have revealed that this benefit, which will be passed onto consumers, will be primarily applicable to the international and national long distance calls, while their local tariffs will not be affected. Telecom stocks ended the week in the red in line with overall markets sentiments.

      Some key losers over the week (NSE-50)
      COMPANY Price on Dec 31 (Rs) Price on Jan 7 (Rs) % CHANGE 52-WEEK H/L (Rs)
      NALCO 202 180 -10.5% 209 / 95
      SUN PHARMA 556 506 -8.9% 575 / 278
      CIPLA 318 292 -8.2% 322 / 194
      MTNL 155 143 -7.7% 170 / 92
      GLAXO 770 717 -6.8% 799 / 500

    • Metals stocks took a hammering this week on the back of the crash witnessed in aluminium, copper, zinc and other metal prices on the London Metal Exchange (LME). While aluminium prices corrected by near 8% during the week, copper and zinc prices also fell by about 6% each. The cause of this could be attributed to the re-emergence of fears of a Chinese slowdown affecting the rally witnessed in commodity prices since the last couple of years. The key losers this week included Nalco (11%), Hindalco (7%) and Hindustan Zinc (8%). Since the impact of a Chinese slowdown will also affect steel prices, steel stocks were also out of favour during the week.

    Next week onwards, we shall be entering into the results season and the markets have substantial expectations from India Inc. Some results lined up for next week include MphasiS BFL, Infosys, Punjab Tractors and Neyveli Lignite. Further, it must be noted that markets are already at their historic highs and we would like to re-iterate the fact that from hereon, any 'sustained' upsurge in the markets has to be sustained by deliverables from India Inc. Since expectations (both return on equities as well as earnings of corporate India) are rising each day, on the eventuality of earnings growth not meeting these expectations, there could be a sharp correction in valuations. Investors, in this context, should take the risk-return perspective into consideration before investing in equities at the current levels. Happy investing!



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