The festive spirit really seemed to have caught up with the markets this holiday shortened week. All major indices across the world saw gains this week. India too found itself amongst the gainers. It was, infact, one of the top gainers, second only to the United Kingdom. India’s benchmark index, the BSE-Sensex ended the week higher by 3.8%. This, after a dismal performance last week when the index saw a decline to the tune of 2.3%.
As far as global markets are concerned, the general optimism that the global economic recovery is strengthening seems to have spilled over to markets across the world. The UK markets led the gains this week, with its index ending higher by about 4%. After India, next in line were Japan and France, which ended higher by about 3.5% and 3.1% respectively. Most markets were propped up by technology and commodity stocks, which rose on the perception of a better outlook for a recovery. After last week’s dismal performance, the Chinese and Brazilian markets once again found themselves at the bottom of the heap, rising only 0.9% and 1.2% each.
Source: Yahoo Finance
Coming to the performance of BSE indices, metal stocks were in favour this week as the BSE-Metal index ended higher by an awesome 6.8%. It was followed by the BSE-Oil & Gas index which recorded gains of about 4.8% after losing 4.1% in the previous week. The BSE Power index gained 4.6% this week. This was closely followed by banking and PSU stocks which notched gains of 4.5% and 4.1% respectively. After last week's hammering, banking stocks were back in the positive this week. The BSE-Bankex closed 4.5% up. Soothing comments from the finance ministry that sort of doused the fear of higher interest rates in the near future seemingly benefited these stocks. Dr. Montek Singh Ahluwalia, the deputy head of India's Planning Commission, said during the week, "The sharp surge in Indian food prices reflects the impact of the drought and inefficient distribution, which could not be addressed by monetary policy." Pharma stocks were the only losers this week as the BSE Healthcare index saw a marginal decline of 0.1%.
Moving on to the key corporate developments during the week, the Oil & Gas sector seemed to be in favour during the week on reports that the oil ministry has requested the Prime Minister to immediately issue oil bonds to the tune of Rs 209 bn to public sector oil marketing companies - Indian Oil, BPCL and HPCL- to compensate for their under recoveries on the sale of petroleum products. It may be noted that no oil bonds have been issued in the last three quarters even though the three firms currently lose Rs 3.5 per litre on petrol, Rs 2.4 per litre on diesel, Rs 18.1 per litre on kerosene and Rs 250.7 per LPG cylinder. In fact, they are projected to lose Rs 450 bn in revenues during FY10. This sorry state of affairs stems from the fact that fuel prices in India are kept artificially low due to socio political reasons. In our view, as long as this root cause remains, someone has to bear the brunt. The candidates by default are the oil marketing companies.
Reports suggested that consumer goods companies are cutting quantities in their standard packs to protect their margins. Especially in the packaged foods category. Given that food prices have hit a decade's high, branded biscuits, chips and namkeens are 20% to 25% lighter while chocolates are 10% lighter at the same price. Interestingly, companies are not keen to tinker with the price points as they fear that consumers may move to regional brands. As a result companies such as Britannia, ITC, Cadbury and Nestle have increased their focus on price points of Rs 2, 3, 5 and 10 over the past six months in order to push volumes. In our view, the companies have little choice given that the unorganised sector is almost as big as the organised sector in this category and has deeper penetration in the key regional markets.
Cement prices are firming up in many parts of the country. However, the increase seems to be more due to logistical constraints resulting from a shortage of railway wagons. Prices have especially firmed up in the western and southern regions of the country since the start of December and could move up by another Rs 5 per bag in some regions. Further, cement prices in the southern market of Andhra Pradesh have registered a slight increase of Rs 10 to Rs 15 per bag. Prices in the southern markets are currently ruling in the range of Rs 135 to Rs 180 a bag. In the western regions, including Mumbai and Gujarat, cement prices have seen an increase of Rs 8 to Rs 10 a bag since December beginning. Apart from the shortage of railway wagons, reports suggest that there has also been some increase in demand for cement due to construction work for the 2010 Commonwealth Games. Fuel costs have also risen. These factors together have prompted cement companies to raise prices.
According to a leading business daily, experts from the IT industry are expecting the sector to grow in double digits in the next fiscal. TCS' vice-chairman, Mr Ramadorai seconds this view. He hints of a robust deals pipeline both, in the domestic as well as the international market. The condition in the US, the major market for almost all Indian IT companies, is also stabilising. TCS has begun to see renewed traction and opportunities, albeit slower growth in FY10.
We believe positive momentum in the IT industry is evident from the job market scenario which appears to be reviving after a lull of over a year. As for TCS, the company like its peers has a renewed focus on the domestic IT market as the new growth driver. It is already running pilot projects for a crop advisory service to rural farmers on mobile phones.
On the back of the improving outlook for the Indian economy, the Indian Finance Minister Mr. Pranab Mukherjee offered his view that India could grow at a much faster pace during the current fiscal. In fact, the FM believes that the GDP growth rate could be between the 7.5% to 8% mark for FY10. Also, he expects the economy to touch a growth rate of 9% to 10% within the next two to three years. However, he also added that the high level of inflation and fiscal deficit will remain a major challenge for the government.
In addition, the FM added that the sustained economic growth is a high priority for the government. And as such, the government will not withdraw the fiscal stimulus, despite the faster growth in the economy. It is believed that the government will wait until the annual budget to consider withdrawing some of the fiscal stimulus measures.
And so, the jinx finally seems to have been broken. The Sensex finally managed to go past its previous highest closing of the year. Something it had been trying in vain for more than two months now. Frankly speaking, until a couple of days back, very few people would have seen this coming. After all, days when the Sensex scales nearly 700 points in two days flat are very rare indeed. But the week gone by was witness to this very spectacle.
And it wasn't just greater liquidity that was driving the index. Investors seemed to be enthused with the announcement by India's Finance Minister that the economy could end the year with a growth rate of 8%, an upgrade of important magnitude from the earlier projection of 7% or thereabouts. Furthermore, worries that RBI would hike interest rates have also died down a bit after assurances from the government that food prices, the main reason RBI was contemplating hiking rates, would start easing from January 2010 onwards. However, if inflation in other items also starts getting out of hand, then the RBI may have to step in and this in effect, poses one of the biggest risks to the current rally. Hence, investors need to be cautious to that extent.