Weekly Market Review - August 16, 2013


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Weekly Market Review - August 16, 2013

  1. 1. International Global liquidity concerns continued to weigh on financial markets, especially in US, as fresh economic data heightened expectations of ‘Fed Tapering’. Bond yields rose in key markets and the MSCI AC World Index fell by 0.98%, led by declines in the US (European and EM markets gained). Yields rose in US, Europe and Japan, as economic data out of Developed Markets pointed towards increased growth momentum and the long end of the curve witnessed relatively sharper increase in yields. Notwithstanding the increased risk aversion, the Reuters CRB index gained 2.5%, helped by sharp gains in gold and precious metals.The UK sterling registered gains against major currencies and the US dollar managed to close higher against the Euro and the Yen. • Asia-Pacific: Markets in Hong Kong, South Korea and Australia did well, while those in India and Singapore declined. Japan’s GDP grew by 2.6% in Q2, a fall from the healthy growth in the previous quarter due to lower private investment.The JapaneseYen lost ground against major currencies. On the other hand, despite the fall in June, the core machinery orders (indicator of capex) closed Q2 on a strong note. There was also speculation about a potential reduction in corporate sales tax, to counter the expected rise in consumption tax next year. China’s Everbright Securities indicated that it is probing trading errors that led to sharp volatility in the Chinese markets on Friday.While the central bank of Indonesia kept its policy rate unchanged at 6.5%, it announced measures to tighten liquidity and support the Rupiah. L’Oreal is planning to acquire China’s Magic Holdings International for around $843 million. • Europe & Africa: European equity markets got a boost from signs of further economic expansion and bond yields moved up. With the exception of UK, all major equity markets notched up gains. Latest data pointed towards the Euro area economy returning to growth in the second quarter - GDP increased by 1.1% bouncing back from the declines in the previous quarters (Germany and France leading the region). In addition, the region’s industrial production increased 0.7% in June and July inflation data was benign. The economic numbers out of UK were also positive with July inflation declining marginally (2.8%) and retail sales increasing (1.1% m-o-m). Poland’s A- rating with a stable outlook was affirmed by S&P due to the fiscal consolidation focus. Egyptian markets came under pressure due to the on-going domestic tensions. • Americas: Regional equity markets witnessed mixed trends, with those in Brazil and Canada outperforming. US equity markets came under pressure as latest data increased expectations that the Federal Reserve will start reducing its bond purchases, effectively initiating a reversal of its quantitative easing programme (Treasury yields also moved up sharply). On the economic front, US retail sales rose marginally in July and core consumer price growth was in line with expectations. However, manufacturing data was on the weaker side.The central bank of Chile kept its policy rate unchanged at 5%. The Mexican government unveiled an energy reform plan that proposes a profit-sharing scheme (resources remain state property) and allows private sector participation in in downstream activities. BlackBerry is considering a sale of the company as part of various strategic alternatives. Market Review WEEK ENDED AUGUST 16, 2013
  2. 2. Weekly Weekly change (%) change (%) MSCI AC World Index -0.98 Xetra DAX 0.64 FTSE Eurotop 100 0.26 CAC 40 1.16 MSCI AC Asia Pacific 0.34 FTSE 100 -1.27 Dow Jones -2.23 Hang Seng 3.26 Nasdaq -1.57 Nikkei 0.26 S&P 500 -2.10 KOSPI 2.09 India - Equity A sharp fall on Friday meant that Indian equity markets closed the week in the negative underperforming other EM indices. Mid and small cap stocks managed to post gains, as the selling was concentrated in the large cap space. Consumer durables, capital goods and banking stocks underperformed, while Auto and metal stocks managed to post gains. FII flows for the first three trading days were around $129 mln. • Economy: Industrial production fell in June as well - 2.2% (May reading was revised downwards to - 2.8%). The decline was led by deceleration in mining and manufacturing sectors (growth in the electricity sector was flat).In terms of use-based classification,capital goods and consumer durables posted decline with upside seen in the consumer non-durables. For FY 13, IIP has declined by 0.3%, compared to the 7% rise in FY 12.The fall in activity in both capital goods as well as consumer sectors is disconcerting and there is a clear need to boost economic confidence through tangible policy measures. Source: Citigroup, CSO Source:CEIC, Ministry of Commerce, Morgan Stanley Research On the other hand, helped by improved global demand, the trade deficit remained largely unchanged in July at $12.3 bln.There was sharp rise in exports (11.6%) and this combined with a fall in imports (6.2%), helped the overall deficit trends. Gold imports saw a marginal increase in July. If the trends in exports/imports continue, the Balance of Payments situation should be under control. • Markets: There have been renewed concerns about global liquidity, as the FedTapering concerns resurfaced this week. The relatively positive economic news flow in the developed world has led to increased expectations of stimulus withdrawal by leading central banks.Whilst the Federal Reserve is unlikely to make any significant changes, given the impact on global financial markets, it could initiate symbolic moves in the form of marginal reduction in bond purchases. However, we might see increased risk aversion weighing on foreign flows into India (especially short term investors changing allocation). Given the attractive market -10.0 -5.0 0.0 5.0 10.0 15.0 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 %YoY, 3mma Factory output contracts, trends continue to disappoint -16% -14% -12% -10% -8% -6% -4% Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Trade Deficit (3-months Trailing, as % of GDP annualized) Trade Deficit (Monthly, as % of GDP annualized)
  3. 3. valuations, we believe any sharp corrections should be viewed as long term buying opportunities. The government needs to focus on enhancing investor confidence about the policy environment. Weekly change (%) S&P BSE Sensex -1.02 CNX Nifty -1.04 CNX 500 -0.61 CNX Midcap 0.37 S&P BSE Smallcap 0.67 India - Debt Domestic debt markets came under pressure on the weakening rupee and latest inflation data.There are increased concerns that the temporary measures to support the rupee might be in place for an extended period of time and weigh on economic growth. RBI set cut off yields at higher levels in the scheduled auctions and FII flows into the debt markets were around $103 mln. • Yield Movements: The 10-Yr benchmark yield rose by 46 bps.The 5-yr Gilt yield rose 45 bps while the 5 – yr AAA corporate bond yields rose by 65 bps and the spread expanded to 116 bps.Yields for 1 yr gilts rose by 54 bps, while 30 yr Gilts rose 42 bps and the yield curve remained negative. • Liquidity/Borrowings: Liquidity remained tight with repos averaging around Rs. 38,000 crore and the overnight rates remained around 10.2% levels.The central bank had to set higher cut-off yields and some of the auctions partially devolved on the primary dealers. Four securities were auctioned, but competitive bids were received for only Rs. 14,500 crs against the Rs.16,000 crs. • Forex: The rupee fell to a record low before recovering on Friday to close at 61.65 against the US dollar. Forex reserves as of August 9th were lower at around $279 bln. • Macro: Inflation data for the month of July showed mixed trends.The headline wholesale inflation (WPI) rose to 5.79% in July (4.86% in June), consumer price inflation levels eased to 9.64% in July (9.87% in June). The rise in WPI was primarily due to higher food prices. The combination of a higher WPI and weak rupee would make RBI’s policy making relatively more difficult, as the latter could lead to higher imported inflation as well Source: CEIC, CLSA 4 5 6 7 8 9 10 11 12 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 (% YoY) CPI-new WPI
  4. 4. • Policy : The government announced its roadmap for the Balance of Payments and indicated that it would contain current account deficit at $70 bln (around 3.7% of GDP) for FY 14. It also unveiled several measures address the CAD issue and improve its funding - • Increasing the import and excise duties on precious metals, especially gold. • Liberalizing ECB norms and NRI account deposit schemes – PSU financial institutions and oil companies have been given additional flexibility to raise overseas funds. In addition to the government’s measures, RBI imposed restrictions on capital outflows - • Corporate FDI reduced to 100% of the net worth under the automatic route with exemptions to PSUs • Reduced the individual overseas remittances from $200,000 per financial year to $75,000 and also prohibited realty transactions under this scheme. • Markets : The central bank and the government have made their intentions clear about tackling rupee pressures. However, this has led to increased concerns about the impact of the various measures on the already weak economic environment. At this stage, investors are concerned that the various liquidity tightening measures could remain in place for an extended period of time and hence, yields have moved up across the curve. The short term outlook remains uncertain as a lot depends on the global environment and foreign flows. However, we are very clear that given macroeconomic environment, lower interest rates are a must. In that sense, investors with a relatively longer investment horizon can take exposure to long dated portfolios, whilst those with an intermediate horizon can benefit from corporate bond focused funds. 16.08.2013 08.08.2013 Exchange rate (Rs./$) 61.65 60.88 Average repos (Rs. Cr) 38,671 37,518 1-yr gilt yield (%) 10.43 9.89 5-yr gilt yield (%) 9.13 8.68 10-yr gilt yield (%) 8.96 8.50 Source: Reuters, CCIL. The information contained in this commentary is not a complete presentation of every material fact regarding any industry,security or the fund and is neither an offer for units nor an invitation to invest.This communication is meant for use by the recipient and not for circulation/reproduction without prior approval.The views expressed by the portfolio managers are based on current market conditions and information available to them and 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 depending upon the factors and forces affecting the securities market.The past performance of the mutual funds managed by the Franklin Templeton Group and its affiliates is not necessarily indicative of future performance of the schemes. Please refer to the Scheme Information Document carefully before investing. Statutory Details: Franklin Templeton Mutual Fund in India has been set up as a trust by Templeton International Inc. (liability restricted to the seed corpus of Rs.1 lac) with Franklin Templeton Trustee Services Pvt. Ltd. as the trustee (Trustee under the Indian Trust Act 1882) and with Franklin Templeton Asset Management (India) Pvt. Ltd. as the Investment Manager. Copyright © 2012 Franklin Templeton Investments.All rights reserved