Market Review WEEK ENDED APRIL 06, 2013InternationalGlobal financial markets retreated this week, even as the Bank of Japan (BoJ) announced unprecedentedmeasures to boost growth and ECB maintained status quo. Investors instead focused on weak economic dataout of the US and the MSCI AC World Index closed down 1.26%. Major treasury bond markets gainedreflecting increased demand for safe havens amidst risk aversion. Crude oil prices lost ground on weakeconomic reports and sharp rise in US inventories. This alongside weakness in some of the othercommodities led the Reuters Jefferies CRB index to end down 2.74%. The International Energy Agencyindicated that it could broad-base membership to include EMs such as China. In currency markets, BoJpolicy actions pushed the Japanese yen to multi-year lows and the US dollar was under pressure followingthe data releases.• Asia-Pacific: BOJ announced a sharp shift in its policy stance by embarking on aggressive easing - it will aim to double monetary base by 2014 primarily through purchases of government bonds. This bolstered Japanese equities, but most other regional equity markets ended lower due to increased geo-political tensions in the Korean peninsula and bird flu scare in China. Economic data was largely positive - manufacturing activity gauges for many Asian economies rose. China’s official manufacturing PMI index as well as the HSBC manufacturing PMI rose in February. The BOJ’s Tankan survey suggested business sentiment has improved amongst large manufacturers. Central banks in Australia and Thailand left policy rates unchanged.• Europe: Regional markets were unsettled by economic reports at home and in the US.The Euro area unemployment rate touched all-time high of 12% and the region’s composite PMI index, combining services and manufacturing sectors, fell in March. Both ECB and BoE maintained status quo on monetary policy. Portuguese constitutional court rejected some of the government’s austerity measures, which it deemed were in breach of the country’s Constitution. Hungary’s central bank unveiled measures to ease credit flow and stimulate the economy. Central Bank of Russia kept the main policy rates unchanged. On the M&A front,Telecom Italia said it is in preliminary stages of merger discussion with Hutchison Whampoa’s Italy unit H3G.• Americas: A spate of weak economic data releases led US equity markets to snap recent gaining streak. US non-farm payrolls expanded by 88,000 in March, much less than the revised 268,000 jobs added previous month. US ISM manufacturing and non-manufacturing indices dropped to 51.3 (from 54.2) and 54.4 (56) respectively. Canada’s unemployment rate climbed up to 7.2% from 7% as the economy lost 54,500 jobs in March, erasing previous month gains of 50,700. Contraction in Canadian exports caused the trade deficit to widen to $1.01 bln from about $739 mln. On the corporate front, Nasdaq OMX offered to buy a part of the electronic trading platform eSpeed for $1.2 bln.
Weekly Weekly change (%) change (%) MSCI AC World Index -1.26 Xetra DAX -1.75 FTSE Eurotop 100 -2.15 CAC 40 -1.82 MSCI AC Asia Pacific -1.52 FTSE 100 -2.53 Dow Jones -0.09 Hang Seng -2.57 Nasdaq -1.95 Nikkei 3.51 S&P 500 -1.01 KOSPI -3.87India - EquityWeak economic data dampened sentiment and led frontline indices to close in the negative territory thisweek. Mid and small cap stocks outperformed large caps for the second week in a row. Amongst sectoralindices, healthcare and oil & gas stocks were the top gainers, while FMCG, metals and auto stocks posteddeclines. The week witnessed FII outflows to the tune of $114.3 mln.• Macro: The HSBC manufacturing and services PMIs for India declined in March signaling a slowdown in the pace of growth primarily due to deceleration in new orders and power outages.The input and output price indices eased, indicating inflation levels could ease further in coming months. At the same time, growth in the index of core infrastructure industries slipped in negative territory in February.The contraction was primarily due to fall in natural gas (down 20%yoy), electricity (down 4%yoy) and coal production (down 8%yoy).• Earnings & Outlook: Policymakers worldwide are increasingly taking note of the weak economic data and the overall policy environment is expected to remain accommodative in the coming months. India faces a different challenge in terms of slowing growth (albeit higher than global rates) and sticky inflation – hence, there needs to be a mix of growth boosters along with measures to tackle the inflation drivers. Given the political challenges, the government appears to be pushing through new measures, some of them through executive decisions. Diesel price hikes remain on track, sugar sector has been partially decontrolled and renewal of mining licenses will now not require environment clearance. Source: Morgan Stanley Research
Over the next month or so, earnings reports will be a key driver of market sentiment. In the current environment, improvement in margins could continue, however lower topline growth may limit gains in certain sectors. Despite the recent challenges, Corporate India continues to maintain lead over EM/developed peers on the earnings front. Further, as cost pressure abates and demand picks-up, we could see India’s RoE bounce back. Consolidation should further aid margin improvement across sectors. Overall, we believe earnings could rebound over the next 12 months and grow by 12-15% over the next 3 years. Weekly change (%) S&P BSE Sensex -2.05 CNX Nifty -2.28 CNX 500 -1.62 CNX Midcap 0.29 S&P BSE Smallcap 1.89India - DebtIndian bond yields eased this week as fresh economic data supported hopes of easing and the first GOIbond auction for the fiscal year witnessed strong demand.• Yield movements: Benchmark 10-year gilt yield decreased 3 bps, while that on the 1 and 5 year papers moved down 9 bps and 2 bps respectively.Yields on the 30-year paper however increased by 3 bps. As a result, spreads between 1/30 year gilts widened to 37 bps from 25 bps and the yield curve steepened.• Liquidity/borrowings: Demand for liquidity under the RBI’s LAF window decreased - repos averaged Rs. 86,803 crore vis-à-vis Rs. 164,372 crore. Overnight call money rates eased back to 7% levels. Scheduled GOI bond auctions were oversubscribed 4 times the notified amount of Rs. 15,000 crores.• Forex: FII outflows this week caused the rupee to fall, but the currency managed to cut losses at close of week on dollar weakness. As of Mar 29, Indian forex reserves stood at around $292.6 bln.• Macro: Latest data from CRISIL indicates the pace of fall in the credit ratio (ratio of upgrades to downgrades) eased in H2FY13.The ratio dipped from 0.66 to 0.62 as liquidity constraints and demand slowdown caused working capital cycles to stretch and impacted profitability. The rating agency however expects trends to improve in FY14 as interest rates ease and slowdown bottoms out. The recovery is however expected to be gradual, especially in case of companies in capital intensive sectors that have stretched balance sheets and are in need of fresh capital infusion. In contrast, companies with robust business models and prudent financial management should see accelerated improvement.• Outlook: Global markets are expected to benefit from sustained quantitative easing by leading central banks, as most countries try to boost growth. With the exception of US, most of the developed economies continue to face headwinds. In this environment, there could be increased demand for higher yielding markets such as India. After the March policy review, rate cut expectations have been scaled back.This along with the renewed bond supply in the coming months could keep markets volatile.There is a possibility of the yield curve steepening as shorter end yields ease on better liquidity and limited new supply at the short end.While near term policy direction remains uncertain, we continue to believe that the central bank needs to be accommodative over the medium term to support economic recovery.