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Weekly market review - April 20, 2012

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  • 1. Market Review WEEK ENDED APRIL 20, 2012InternationalGlobal equity markets closed the week on a positive note helped by earnings news even as select markets lostground on regional concerns. The MSCI AC World Index added 0.8%, notwithstanding the weakness intechnology stocks and key Asian markets. Europe continued to be the focus as yields in Spain and Italy remainedelevated and upcoming elections in France and Greece weighed on investor sentiment. The G-20 pledged toinject an additional $430 bln into IMF, thereby doubling the institution’s current lending capacity and reiteratedconcerns about Europe.There was also agreement about implementing the 2010 Governance and Quota Reformof IMF in the latter part of 2012, which will lead to increased representation of the EM economies. The IMFrevised upwards its growth forecast for global economy, taking into account the recent improvement in underlyingdata – it now expects 3.5% global growth (earlier 3.3%) in 2012 and 4.1% (earlier 4%) in 2013. The ReutersJefferies CRB lost 0.55% mainly due to fall in energy prices. In currency markets, the euro got a boost from theexpansion of IMF lending capacity and the yen fell on speculation that the central bank might announce furtherstimulus to boost the economy.• Asia-Pacific: Decline in Taiwan, South Korea and Japanese markets more than offset gains in China, Hong Kong and India, and led regional indices lower this week. Equity markets in export-driven economies fell on concerns the ongoing signs of slowing recovery in the US will impact trade. Japan’s trade balance slid into deficit in March as imports growth outpaced exports. Data suggested volumes rose to the US while demand from China weakened. Philippines central bank left rates unchanged while India reduced its key policy rate by 50 bps. IMF left EM Asia growth estimates unchanged at 7.3% for 2012 and revised 2013 estimates upwards by 0.1% to 7.9%. On the corporate front, China’s Haitong Securities raised $1.7 bln through an IPO in Hong Kong.• Europe/MENA: French equities closed marginally lower ahead of elections over the weekend, while leading indices Germany and UK finished in the positive territory. On the economic front, the euro- zone trade gap swung to a surplus in February following fourth consecutive monthly increase in exports. The German ZEW survey indicated economic expectations increased slightly in April. UK labour markets also showed improvement – the unemployment rate fell from 8.4% to 8.3% for the three months to February. IMF said it expects Euro-zone economy to contract by 0.3% in 2012, less than the -0.5% before and grow by 0.9% in 2013 (0.8% earlier). On the corporate front, Qatar Investment Authority bought 5% stake in Tiffany, marking its first major investment in a US public company. News reports indicate Danone and Nestle are contesting for Pfizer’s infant nutrition business.• Americas: US equities mostly rose this week, barring tech stocks that were impacted by earnings- related concerns. On the economic front, US retail sales data was stronger than expectations. However, initial jobless claims data indicated slowdown in the pace of expansion, industrial production was flat and housing sector numbers were mixed. IMF revised US growth estimates upwards for 2012 and 2013 to 2.1% and 2.4% from 1.8% and 2.2% respectively. Elsewhere in the region, Brazil’s Monetary Policy Committee cut the Selic rate by 75 bps to 9% and indicated there may be more easing to come - in line with its recent efforts to boost economic growth. Bank of Canada left rates unchanged at 1% but
  • 2. policy statements indicated it may look to start withdrawing stimulus. This pushed up the Canadian loonie sharply against the US dollar. On the corporate front, YPF stock slumped as Argentina government said it will nationalize the company – the move was condemned by EU. Weekly Weekly change (%) change (%) MSCI AC World Index 0.84 Xetra DAX 2.52 FTSE Eurotop 100 2.08 CAC 40 -0.02 MSCI AC Asia Pacific -0.66 FTSE 100 2.13 Dow Jones 1.40 Hang Seng 1.50 Nasdaq -0.36 Nikkei -0.80 S&P 500 0.60 KOSPI -1.71India - EquityA higher-than-expected policy rate cut lifted market sentiment and helped Indian equity markets close theweek on a positive note even as FII flows were weak. However, gains were pared on Friday due to profit-booking. Expectations that the fall in interest rates will boost demand for automotives helped auto stocksemerge as top gainers. In contrast, oil & gas, power and capital goods stocks finished lower this week. On theM&A front, Piramal Healthcare acquired the molecule imaging portfolio of Bayer AG, which includes apotential Alzheimer’s tracer drug with possible revenues of $1.5 bln. Exports Growth (%yoy, 3 months moving average) 65% YoY% YoY%, 3MMA 45% 25% 5% -15% -35% Jun-91 Jun-92 Jun-93 Jun-94 Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Source: Ministry of Commerce, Morgan Stanley Research• Macro/Policy: As per provisional trade data, India’s exports (in US dollar terms) fell by 7.1%yoy in March, the first monthly decline in over 2 years, compared with growth of 4.2%yoy in February 2012. In contrast, imports growth remained steady at 24.2% yoy in March and the trade deficit stood at $13.9 bln, less than
  • 3. the $15.16 bln recorded in February. Cumulative exports for FY12 were 21% higher than last year to $303.7 bln while imports grew by 32.1% resulting in a trade gap of $184.9 bln, 56% higher than last year. RBI’s move to cut policy rates by 50 bps took markets by surprise and raised hopes of revival in capex cycle. However the bank’s tone was not dovish – it remains concerned about inflation and fiscal pressures and possibility of further rate cuts is limited in the near term. The various measures announced as part of its efforts to reduce systemic risks are positive, given the sharp rise in gold related lending activities. Other policy measures such as reducing variance on retail/bulk deposits could lead to higher costs for banks and increased volatility in the last quarter of every fiscal year.Waiver of pre-payment penalty on housing loans could also weigh on banking sector margins in the near term. Weekly change (%) BSE Sensex 1.63 S&P CNX Nifty 1.60 S&P CNX 500 1.36 CNX Midcap 0.62 BSE Smallcap 1.49India - DebtIndian bond markets rallied as RBI delivered a larger-than-expected rate cut, pushing yields lower across maturitieslower. However, markets pared gains last few days on supply worries and limited potential for easing ahead.• Markets: Yield on 10-year benchmark paper declined by 8 bps to 8.48% while 1-year benchmark yields decreased by 9 bps to 8.11%. Corporate bond yields on AAA 5-year paper eased 5 bps to close the week at 9.39%. Scheduled government bond auctions for four securities of Rs. 16000 crore proceeded well.The Indian rupee surrendered gains clocked earlier in the week following RBI rate cut decision.The currency closed the week down 1.49%.• Monetary Measures & Key Indicators: - Repo rate cut by 50 bps to 8% - Consequently the reverse repo and the MSF rate stand revised to 7% and 9% respectively - In order to provide additional liquidity cushion to banks, the cap on borrowings under MSF has been raised to 2% of NDTL from 1% earlier - Cash Reserve Ratio (CRR) is unchanged at 4.75% - Bank rate has been adjusted downwards to 9%, in line with MSF rate - Economy forecasted to expand by 7.3% in FY13 (baseline growth), assuming normal monsoons - Expects inflation to be range-bound during the year on account of impact from possible pass-through of global commodity price rise being offset by fall in core inflation - pegs WPI at 6.5% for March 2013. - M3 growth is pegged at 15%, with a view that deposit base will expand by 16% and non-food credit will grow by 17%
  • 4. • Views on Annual Policy and Outlook: The quantum of rate cuts took the market by surprise given the cloudy outlook on inflation and recent RBI views that growth moderation has been modest.The recent weak economic data along with soft headline inflation numbers (especially manufacturing goods inflation) may have prompted RBI to cut rates in order to prevent any sharp slowdown in growth. Instead of any further CRR cuts, the central bank opted for an increase in the borrowings cap under the Marginal Standing Facility (MSF). At the same time, the central bank maintained a very cautious stance about future rate actions and highlighted concerns on various fronts – inflation and twin deficits. RBI expects inflation to remain at current levels as the recent high global commodity and energy prices impact input costs and domestic fuel prices, offsetting any benefits from moderation in demand side pressures. RBI has ensured that it does not release any animal spirits by the aggressive rate cut through its qualifying comments and cautious tone regarding the future. It has clearly indicated that the probability of further rate cuts over the near term is low, until unless the economic data flows provide comfort. Now the focus shifts to trends in inflation as well as the twin deficits. Given the moderation in economic growth, there remain concerns about government’s borrowings and the fiscal deficit that can contribute to inflation. On the other hand, a transparent and conducive policy environment can help in attracting further capital flows, and reducing the pressure on current account.We expect short term rates to move down in line with the repo rate, but continue to be cautious about the long end of the curve due to the various reasons mentioned above. 20.04.2012 13.04.2012 Exchange rate (Rs./$) 52.07 51.31 Average repos (Rs. Cr) 94,629 88,552 1-yr gilt yield (%) 8.11 8.20 5-yr gilt yield (%) 8.43 8.54 10-yr gilt yield (%) 8.48 8.56 Source: Reuters, BloombergThe information contained in this commentary is not a complete presentation of every material fact regarding any industry, security or the fund andis neither an offer for units nor an invitation to invest.This communication is meant for use by the recipient and not for circulation/reproductionwithout prior approval.The views expressed by the portfolio managers are based on current market conditions and information available to themand do not constitute investment advice.Risk Factors: All investments in mutual funds and securities are subject to market risks and the NAVs of the schemes may go up or down dependingupon the factors and forces affecting the securities market.The past performance of the mutual funds managed by the Franklin Templeton Groupand its affiliates is not necessarily indicative of future performance of the schemes. Please refer to the Scheme Information Documentcarefully before investing. Statutory Details: Franklin Templeton Mutual Fund in India has been set up as a trust by Templeton InternationalInc. (liability restricted to the seed corpus of Rs.1 lac) with Franklin Templeton Trustee Services Pvt. Ltd. as the trustee (Trustee under the IndianTrust Act 1882) and with Franklin Templeton Asset Management (India) Pvt. Ltd. as the Investment Manager.Copyright © 2012 Franklin Templeton Investments. All rights reserved