1. Market Review
WEEK ENDING OCTOBER 25, 2013
International
Global equity markets exhibited divergent trends this week. Expectations that the Federal Reserve will
maintain stimulus helped equity markets in the West extend gains. Sentiment in Emerging Markets was
however dampened by liquidity tightening in China and mixed earnings news flow. As a result, the MSCI
AC World Index ended the week only 0.4% higher. Benchmark treasury bond yields eased in key markets
as weaker than expected economic data out of the US fuelled expectations that Federal Reserve will defer
tapering. Decline in crude oil and other key commodity prices led the Reuters Jefferies CRB index to
close down 1.52%. In currency markets, the US dollar was weighed down by lower than expected economic
data. The sterling strengthened as latest GDP estimates showed UK economic growth accelerated last
quarter.
• Asia-Pacific: Regional equity markets underperformed global counterparts led by sharp declines in China
and Japan markets. The former came under pressure as the People Bank of China refrained from cash
injections and short term borrowing costs spiked. Besides, Beijing authorities unveiled measures to check
sustained rise in property prices. China’s flash manufacturing PMI increased to 50.9 from 50.2. Japan trade
deficit rose to record highs as imports increased by 3.8% while exports declined 0.3%. Malaysian government
said it will introduce a 6% general sales tax from April 2015 to boost government revenues and aid fiscal
consolidation. Helped by strong growth in domestic consumption and investment, South Korea GDP growth
accelerated to 3.3%yoy from 2.3%yoy in June quarter.
• Europe / Africa: Except France, most regional markets recorded strong gains on hopes of delay in Fed
Tapering. The ECB said it will initiate a review of European bank balance sheets in November. On the
economic front, Eurozone flash PMI composite index eased to 52.2 from 51.4, suggesting moderation in
the pace of growth. Spain preliminary GDP estimates showed the economy has turned the corner with
GDP expanding by 0.1% in September quarter. UK GDP growth accelerated to 0.8% (from 0.7%) led by
expansion in services sector and business confidence rose. Central banks in Sweden, Norway and Turkey
kept policy on hold. South Africa government reduced 2013 growth estimates to 2.1% from 2.7% due to
labour unrest and power supply issues.
• Americas: US equity markets closed week near record highs as investors bet QE tapering will be pushed back due
to soft economic data. Canadian markets also recorded sharp gains led by rally in mining and energy producer stocks.
The Thomson Reuters/University of Michigan consumer sentiment index fell and the Markit flash manufacturing
PMI was down to 51.1 from 55.3. US non-farm payrolls expanded by 148,000, less than monthly average of about
180000 in 2013YTD. US durable goods orders posted strong gains. Elsewhere in the region, central banks in Canada
and Colombia left policy rates unchanged. Mexico’s central bank reduced the inter-banking rate by 25 bps to 3.5%
and indicated that policy rates will not be reduced further in the near future.
2. Weekly
change (%)
Weekly
change (%)
MSCI AC World Index
0.39
Xetra DAX
1.36
FTSE Eurotop 100
0.60
CAC 40
-0.32
MSCI AC Asia Pacific
-1.49
FTSE 100
1.49
Dow Jones
1.11
Hang Seng
-2.75
Nasdaq
0.74
Nikkei
-3.25
S&P 500
0.88
KOSPI
-0.88
India - Equity
While frontline equity indices edged lower this week amidst profit-booking, mid and small cap indices posted
strong gains. Trends were divergent in sectoral indices – capital goods witnessed a sharp rally while real estate,
FMCG and healthcare underperformed broad markets. FIIs bought equities to the tune of $558 mln in the first
four trading days of the week.
• Policy: This week, the government approved capital infusion to the tune of Rs. 14,000 crore in Indian public
sector banks.The funding is expected to boost these banks’ capital adequacy and help meet credit demand. In
addition, comments from Indian policymakers indicated they are keen to take steps that can possibly safeguard
the economy from adverse impact of a shift in global liquidity trends. Measures proposed include augmenting
foreign investment flows, streamlining procedures and implementing financial sector reforms to shore up
global investor confidence. The latter will be based on recommendations made by the Financial Sector
Legislative Reforms Commission earlier this year.These include a complete overhaul of the financial legal &
institutional structure, including unified regulator, tightening consumer protection framework and a separate
public debt management agency. Focus will be on boosting governance and operational efficiency, where
measures can be pushed through executive route, and can help boost foreign investor confidence.
BSE Sensex 1-year forward PE levels
Source: CLSA Asia-Pacific Markets
• Outlook: The global environment has turned positive with the resolution of the US budget impasse and there
are increased expectations that any Fed tapering will be pushed back further. As mentioned in the past, we
believe it is important that policymakers utilize this window to make adequate changes to prepare for the
eventuality of lower global liquidity. Besides, measures to improve the confidence of the business sector and
reduce policy clearance delays will go a long way in boosting economic activity. We feel that the current
pessimism around future economic growth has been overdone and investors should take advantage of current
pessimism to get exposure to long term stories.
3. Ç
Weekly change (%)
S&P BSE Sensex
CNX Nifty
CNX 500
CNX Midcap
S&P BSE Smallcap
-0.95
-0.72
-0.29
0.29
1.53
India - Debt
Bond yields were range bound this week, ahead of RBI’s quarterly monetary policy meet next week. FIIs
pulled out nearly $800 mln from bond markets in the first four trading days of the week.
• Yield movements: Treasury bond yields closed the week slightly lower - yields on the 10-yr
benchmark gilts increased 1 bp, while yields on 5-year gilts decreased by 3 bps. 1 yr gilt yields decreased
by 6 bps, while those on 30 year GOI papers dipped 3 bps.
• Liquidity/borrowings: Systemic liquidity conditions were largely stable and overnight call money
rates hovered around the 9% mark. There were no scheduled GOI bond auctions for this week.The
Indian rupee closed slightly lower than last week levels on concerns of monetary tightening. As of
October 18, India’s forex reserves stood at $281 bln, up $1.8 bln from previous week levels.
• Forex: Latest data pointed towards increased inflationary pressures with both WPI (wholesale) and CPI
(consumer) moving up in September to 6.46% and 9.84%, respectively. Unlike recent trends of food prices
pushing inflation, there has been a rise in non-food and core inflation.This probably reflects the pass through
impact of the weak rupee in terms of import prices.
• Policy: In the recent monetary reviews, the focus has been on restoring repo as the key rate (instead of MSF)
and containing inflationary pressures in the economy. Given the recent decline in trade deficit and positive
response to forex swap window ($10.1 bln), concerns around the BoP situation appear to have receded.Against
the backdrop of a possible delay in Fed tapering, temporary measures may be unwound.
On the other hand, inflationary pressures remain a challenge - incremental data, following RBI’s repo rate hike
last month, indicates rise in both food and non-food items. Credit growth also remains well ahead of deposit
growth.The policy review will throw light on how RBI weighs the growth-inflation trade-off.
