Market Review WEEK ENDED APRIL 27, 2012InternationalFinancial markets managed to close the week on a positive note, despite the political developments in Europe andmixed economic news. The developments in France and Holland highlighted the growing opposition towardstough austerity measures. Helped by earnings news and a rally in key developed markets, the MSCI AC WorldIndex added around 1% and technology stocks rallied. Mixed data along with increased views that the austeritymeasures are impacting growth in Europe and S&P downgraded Spain’s sovereign rating. Expectations of moremonetary support helped bond prices move up marginally.The positive sentiment boosted commodity prices withgold moving up on news of increased central bank purchase - the Reuters CRB index moved up by 1.4%.Thedollar index fell against major currencies and high yielding currencies gained ground.• Asia-Pacific: Regional equity markets underperformed their counterparts in other regions on concerns about exports amidst a slowing global economy. Bank of Japan announced further stimulus by expanding its asset purchase programme by ¥5 trillion, extended the maturity and also increased the quantum allocated to equities. Latest data pointed towards ongoing recovery in the Japanese economy and stable domestic demand. The core inflation reading in Australia dipped, increasing hopes of monetary easing next week. The South Korean economy seems to have picked up pace after three quarters, with GDP growing by 3.7% in the previous quarter helped by manufacturing.• Europe: Despite growth concerns and political developments, key European markets closed the week on a positive note. First round results from the French presidential and the fall of the ruling government in Netherlands, highlighted the waning support for fiscal austerity measures. S&P downgraded Spain’s sovereign rating from A to BBB+, citing expanding deficits and weak growth prospects. Also the latest employment report indicated that unemployment rate rose to 24.4% in Q1 the last quarter. Economic news out of UK also was on the weaker side with GDP contracting by 0.8% in the previous quarter. On the corporate side, Nestlé won the race to acquire Pfizer’s baby-food business in a $12 bln deal and Vodafone will be acquiring Cable & Wireless, for around $1.6 bln.• Americas: Earnings news helped US markets rally during the week even as economic data remained weak.Technology stocks in particular benefited from the earnings newsflow and the NASDAQ gained. The Federal Reserve reiterated commitment to leave interest rates at low levels until 2014 and also indicated that it is ready to consider further stimulus to support the economy. The US economy grew by 2.2% in the first quarter of 2012 (slowed from 3% growth in previous quarter) helped by consumer spending. University of Michigan’s final consumer sentiment index for April showed an improvement, while durable goods orders for March witnessed a decline. Mexico’s central bank left interest rates unchanged at 4.5% and expressed increased optimism over growth prospects. Walmart’s stock was impacted after reports that Mexican government is probing bribery allegations.
Weekly Weekly change (%) change (%) MSCI AC World Index 1.13 Xetra DAX 0.76 FTSE Eurotop 100 0.41 CAC 40 2.44 MSCI AC Asia Pacific 0.07 FTSE 100 0.09 Dow Jones 1.53 Hang Seng -1.28 Nasdaq 2.29 Nikkei -0.42 S&P 500 1.80 KOSPI 0.04India - EquityMarkets were impacted by FII outflows amidst relatively weak sentiment in the Asian region. Mid and smallcap stocks witnessed relatively higher declines than their large cap counterparts. Amongst sectors, realty, powerand capital goods indices fell relatively more, while technology indices managed to close in the positiveterritory. FII flows turned negative to the tune of $314 mln in the first four trading days of the week.The telecom regulator (TRAI) has released its recommendation on spectrum auctions and this weighed ontelecom stocks. In their current form, these recommendations can result in additional capital outlay for players(especially the ones with cancelled licenses).• Monsoons: The India Meteorological Department (IMD) has predicted normal rains in the upcoming monsoon season - total rainfall is expected to be at 99% of the long term averages.While the agriculture sector’s contribution to India’s GPD has been coming down (around 17% currently), it accounts for a large chunk of employment. Given that a large part of the sector is dependent on rains (only around 45% of the cropped area is irrigated), monsoons impact food production and inflation. 45 30% All India - Net irrigated area as % of net sown Agriculture (as % of GDP) area 40 27% 24% 35 21% 30 18% 25 15% 20 12% F1990 F1991 F1992 F1993 F1994 F1995 F1996 F1997 F1998 F1999 F2000 F2001 F2002 F2003 F2004 F2005 F2006 F2007 F2008 F2009 F2010 F2011 F2012* F1978 F1979 F1980 F1981 F1982 F1983 F1984 F1985 F1986 F1987 F1988 F1989 F1990 F1991 F1992 F1993 F1994 F1995 F1996 F1997 F1998 F1999 F2000 F2001 F2002 F2003 F2004 F2005 F2006 F2007 F2008 F2009 Source: Morgan Stanley, CSO, CMIE• Outlook: The recent slowdown in FII inflows into India is in line with the global trends – the sharp rally in global markets in the first two months of 2012, has tempered over the last month or so. This is largely due to renewed fears around Europe and concerns about global growth amidst rising commodity prices.
For India, additional issues in terms of policy and changes to foreign investment taxation norms have weighed on the markets. We don’t expect the S&P change in outlook to have a significant impact and investors might focus on individual company fundamentals rather than sovereign ratings.The concerns highlighted by S&P (deficits and slowdown) are nothing new and have been largely factored into current valuations. Notwithstanding the recent issues, India continues to be one of the most attractive investment opportunities for long term investors and many of them are likely to increase exposure at attractive valuations. The important task in front of the government is to change the perception about policy inaction/uncertainty, and there are signs that we could see some progress on this front Weekly change (%) BSE Sensex -1.38 S&P CNX Nifty -1.89 S&P CNX 500 -2.25 CNX Midcap -3.38 BSE Smallcap -2.94India - DebtGovernment bond yields rose across maturities due to supply concerns while the short end yields remained flat.Importer led demand continued to weigh on the rupee and the scheduled GOI auctions received a good response.• Yield Movements: The 10-Yr Benchmark yield rose 20 bps. The 5-Yr Gilt yield rose 13 bps while the 5 –Yr AAA corporate bond yields rose 4 bps and the spreads compressed to 87 bps.Yields for 1 yr Gilt remained unchanged while the 30 yr Gilt yields rose 20 bps. Spreads between the two widened to 80 bps.• Liquidity/Borrowings: Liquidity remained tight with repos averaging Rs. 1,13,514 Crore as against Rs. 94,629 Crore last week.The overnight rates closed marginally lower at 8.35% compared to 8.40% last week. The scheduled auctions in four dated G-secs worth Rs. 16,000 crore witnessed bids of around Rs.40,000 crores and were fully accepted.• Forex: The rupee depreciated against the US dollar due to continued importer led demand and FII outflows. It closed the week at 52.55 about 1% lower compared to previous week. Forex reserves as of April 20 stood higher at $294.6 bln compared to $ 293.1 bln last week.• Macro: Latest data indicated that deposit growth (14.3%) in 2012 continued to be lower than the credit growth (18.7%). S&P’s change in outlook for India’s sovereign rating could lead to higher borrowing costs for Indian companies, which have been borrowing in overseas markets due to the high interest rates in India. The government does not borrow in overseas markets and hence there are no implications. We expect gilts to remain under pressure given the supply pressures in the first half of the fiscal.The central bank could consider additional liquidity enhancement measures including OMOs to temper the rise in gilt yields.