Market Review WEEK ENDED APRIL 6, 2012InternationalGlobal equity markets finished the week lower amidst renewed concerns about Europe and on signs that USFederal Reserve is less likely to take up further quantitative easing over the near term.The MSCI AC World Indexdeclined 1.58% after euro-area economic data came in below market expectations and lackluster demand forSpanish bonds. Major Treasury bond yields were broadly trading lower as economic data came in lower thanexpectations in key economies. Prices of commodities including crude oil, industrial & precious metals correctedthis week and the Reuters Jefferies CRB Index closed 0.64% lower.The US dollar pared weekly gains after slowerthan expected expansion in jobs weighed on the currency.• Asia-Pacific: Chinese stocks rebounded this week after China Securities Regulatory Commission increased the amount qualified foreign institutional investors can invest in equities, bonds and bank deposits to $80 bln from $30 bln. China PMI data indicated divergent trends – the official PMI index moved up to 53.1 from 51, in contrast to the HSBC PMI index that edged lower.The variance may be due to the latter’s bias towards export-oriented industries vis-à-vis the former.The Bank of Japan’s Tankan survey showed that business sentiment remained cautious – the large manufacturers business sentiment index remained unchanged. Economic data out of South Korea was mixed with manufacturing PMI improving and inflation falling, while exports fell. Reserve Bank of Australia left the cash rate unchanged at 4.25%. On the M&A front, DBS is acquiring 67% stake in Indonesia’s Bank Danamon for $4.9 bln.• Europe: A weak Spanish debt auction and dismal economic data weighed on regional equity market sentiment. Euro Area Markit final PMI was confirmed at 47.7, down from 49 in February as France and Germany recorded significant decline in activity. In contrast periphery nations reported improvement. German factory orders and industrial production data was lackluster (up 0.3%mom), but the country’s unemployment rate continued to ease and business confidence touched multi-month highs. Both Bank of England and ECB left policy rates unchanged. Turkeys central bank increased funding to alleviate liquidity pressures, but indicated that it will continue to support Lira and target inflation curbing. Economic reports out of the UK were mixed – services PMI and business optimism index climbed higher while the manufacturing activity index fell by 1%. Illumina’s board rejected Roche’s takeover offer.• Americas: US equity indices finished lower this week as investors speculated the US Federal Reserve will not pursue further quantitative easing and concerns about euro-zone resurfaced. On the economic front, non-farm payrolls expanded by 120,000 and the unemployment rate fell by one tick to 8.2%. However, the expansion was much lesser than market expectations.While the ISM manufacturing index rose, the services index slid to 56 from 57.3. Elsewhere in the region, Canada added 82,300 jobs following a 2,300 decline in February. Consequently the jobless rate dipped to 7.2% from 7.4%. The Brazilian government announced a wide range of measures as part of its fiscal stimulus package and to beef up domestic industry - around $60 billion or 1.5% of its GDP. On the corporate front, Avon rejected Coty’s $10 bln offer stating it substantially undervalued the company. Burger King sold 29% stake for $1.4 bln to Justice Holdings, which plans to take the company public again.
Weekly Weekly change (%) change (%) MSCI AC World Index -1.58 Xetra DAX* -2.47 FTSE Eurotop 100* -1.49 CAC 40* -3.04 MSCI AC Asia Pacific -1.34 FTSE 100* -0.78 Dow Jones* -1.15 Hang Seng* 0.18 Nasdaq* -0.36 Nikkei -3.92 S&P 500* -0.74 KOSPI 0.74 *As of April 5, 2012India - EquityFrontline indices were range-bound but managed to close the holiday shortened week on a positive note. Gainsin mid and small cap stocks outpaced large caps by a significant margin. Consumer durables, capital goods andpower sectors outperformed broad markets while healthcare stocks fell. FII flows for the first two days of theweek amounted to $73 mln. On the macro front, the latest HSBC PMI release for India indicates industrialactivity moderated reflecting a drop in both the current and forward looking indicators. The index howeverremains above 50 (in expansion mode).• Foreign flows: FII inflows have been quite healthy in 2012 helped by increased risk appetite (equity markets) and also the search for higher yields (debt markets). Compared to last year’s FII outflows of $495 mln in equity and $8.5 bln inflows in debt, we have witnessed YTD positive flows of $8.9 bln in equity and $3.9 bln in debt respectively. However, recent changes proposed in the Union Budget with respect to offshore transactions and tax havens, once notified, are likely to impact short term flows. Foreign investors are seeking clarity on various issues to ensure compliance. At this stage, it appears that long term investors in equity might not be impacted (no long term capital gains tax in India) too much, but debt flows might be affected, depending on the final clarifications.Source: FactSet, IBES Estimates, Morgan Stanley Research
• Corporate Earnings: Over the last few quarters, Corporate India has been able to register reasonable revenue growth in a challenging environment, but cost pressures have weighed on profitability. While headline inflation has tapered in the recent quarter, Indian companies continue to face pressures on account of high borrowing rates and rising commodity prices. This trend could continue into FY13 as interest rates are unlikely to come down in a hurry and a mix of decent growth in US/supply issues can keep input costs at higher levels. The weak rupee can help exporters but will exacerbate import cost pressures. While markets have rallied in 2012, valuations are still below long term averages and earnings challenges along with short term issues such as GAAR can impact foreign flows. Downward revisions to earnings growth have slowed over the last couple of months and we expect earnings trend across sectors/ companies to be disparate. Companies with strong positions (superior products/services, healthy balance sheets, strong and reliable cash flows) are to stand out for their capability to weather adversity and defend their market/ competitive positions. Hence, we continue to believe that this environment is ideal for bottom up stock pickers. Weekly change (%) BSE Sensex 0.47 S&P CNX Nifty 0.52 S&P CNX 500 0.96 CNX Midcap 1.28 BSE Smallcap 3.25India - DebtLingering supply woes led Indian bond markets to extend declines this holiday shortened week. The RBI cut backthe t-bill borrowings this week, after the governments first FY13 auction partially devolved on primary dealers.• Yield Movements: Yields on the 10-year and 5-year benchmark bond yields rose 12 bps each.Yields on 5- year AAA rated corporate bond increased 9 bps and consequently spreads over gilts narrowed to 91 bps from 95 bps last week.Yields on the 1 year paper firmed up 7 bps while those on the 30-year g-sec paper increased 10 bps. As a result, spreads between the long (30-year) & short end (1-year) of the curve expanded to 45 bps.• Liquidity/ Borrowings: Overnight call money rates eased back to 8.75% levels and demand for liquidity under the RBI’s LAF window averaged much lower as year-end pressures faded. Scheduled bond auctions for four GOI securities – 8.19% GOI 2020, 9.15% GOI 2024, 8.97% GOI 2030 and 8.83% GOI 2041 – worth Rs. 18,000 crores were subscribed 1.6 times, but the 2020 and 2030 paper auctions devolved partially on primary dealers due to pricing issues.• Forex: Relative strength in US dollar post FOMC minutes led the Indian rupee to weaken 0.4% against the US dollar. As of Mar 30, forex reserves aggregated to $294.4 bln, down $742.5 mln over last week levels.