Financial markets remained under the influence of global reallocation between markets and asset classes, as
investors looked to position themselves for the potential impact of reduced liquidity.Weakness in Europe and
emerging markets dragged the MSCI AC World Index down by 0.3%.The decline in EM equities was also
exacerbated by the weakness in EM currencies.The US dollar index gained against a basket of currencies, but
lost ground against the Euro, and the Japanese Yen weakened. Bond yields remained firm in US, Europe and
Japan, but the long yield of the curve witnessed marginal easing. The Reuters CRB index fell marginally
despite gains witnessed by precious metals and energy. IMF has called for more co-ordination amongst
policymakers and the need to evaluate local as well as global implications of policy decisions.
• Asia-Pacific: Equity markets in Indonesia, Singapore and Hong Kong underperformed, while those in
Japan and India did relatively well. The Indian Rupee and Indonesian Rupiah led other regional
currencies down against the US dollar.This was led by concerns about potential outflows as US Federal
Reserve’s starts reducing liquidity as well as weak economic newsflow. Data out of Japan pointed towards
a slow start to the quarter with exports and department store sales falling, but business sentiment for
August showed improvement. Malaysia’s GDP grew by 4.3% in Q2 driven by strong pre-election
government spending while current account surplus fell sharply.Thailand’s GDP growth slowed to 2.8%
in Q2 due to weaker private consumption and exports, and the central bank of Thailand left rates
unchanged at 2.5%. Indonesia’s current account deficit widened sharply in Q2 to 4.4% of GDP (from
2.4% of GDP in Q1).
• Europe & Middle East: Despite positive economic newsflow, European equity markets witnessed
pressure during the week (with the exception of Germany).The Euro area economy has continued to
mend with flash manufacturing and services PMI increased to 51.3 and 51 in August. In terms of
specific countries, estimates for Germany indicated expansion while France witnessed contraction.
Central Bank of Turkey raised the upper end of its interest rate corridor by 50 bps to 7.75% (for non-
primary dealer banks) and cancelled 1 week repo auctions to support its currency and curb inflation.
Bank of Israel issued new rules to cool down the property market lending, including linking of
repayments to income levels. Atlas has entered into an agreement to acquire British vacuum pump
specialist Edwards Group for $1.6bln.
• Americas: US equity markets, especially technology stocks, rallied during the week, amidst continued
rise in treasury yields. 10-year yields eased from a 2-year high towards the end of the week, after
housing starts came in weak. Minutes of the FOMC meeting didn’t provide clarity on the timing of
Fed tapering, but indicated the likelihood of a start later this year. Canadian currency came under
pressure on concerns about growth slowdown after latest data showed a fall in retail and wholesale
sales. Mexico’s GDP grew by 1.5% in Q2 (0.8 in Q1) prompting the government to cut 2013 growth
forecast to 1.8% from 3.1%. Brazil intensified its currency intervention programme and the central
bank announced a fresh program through which it will provide $60 bln worth of cash and insurance
to the forex market by year-end. Petrobras raised $2.1 bln by selling stakes in several petrochemical and
oil exploration projects.
WEEK ENDED AUGUST 23, 2013
change (%) change (%)
MSCI AC World Index -0.31 Xetra DAX 0.30
FTSE Eurotop 100 -0.70 CAC 40 -1.32
MSCI AC Asia Pacific -2.20 FTSE 100 -0.12
Dow Jones -0.47 Hang Seng -2.91
Nasdaq 1.53 Nikkei 0.08
S&P 500 0.46 KOSPI -2.60
India - Equity
Domestic equity markets managed to close a volatile week on a strong note, as late-week gains helped in
reducing the declines for the week. Mid and small cap stocks underperformed, and Metals index registered
double digit gains. On the corporate front, Baring Private Equity Asia is acquiring controlling stake in
Hexaware Technologies for around $420 million.
• Policy: Apart from its efforts to bring down long term bond yields, RBI announced various measures
to help banks impacted by Mark to Market (MTM) losses in their investment portfolio -
• Banks can continue to hold up to 24.5% of G-Secs in the held to maturity (HTM) category as
against the earlier plan to reduce this exposure to 23% by March 2014.
• It has allowed a one-time transfer of G-Secs from available for sale (AFS) / held for trading (HFT)
categories to HTM at their cost or value as on 15th July whichever is lower. The loss if any can
also be amortised equally over the coming 3 quarters of FY14.
We expect these measures to help those banks (especially PSU banks) that were facing significant
treasury losses due to the hardening of yields.
BSE Sensex – 12 month forward PE
Source: CLSA Asia-Pacific Markets. As of August 2013
• Valuation Dispersion: The recent market volatility and the wide range of valuations clearly make it
a stock pickers market.The recent market declines have pulled down valuations well below historical
means, but the sectoral trends vary widely. Notwithstanding the earnings pressure expected due to the
market environment, quite a few sectors are attractively valued compared to their growth potential.
As on 23.8.2013
PE PBV Div Yield
S&P BSE Metal 11.69 1.63 3.04
S&P BSE Bankex 9.5 1.62 1.45
S&P BSE CG 16.02 1.99 1.94
S&P BSE HC 37.79 2.61 0.63
S&P BSE FMCG 37.44 15.90 1.14
S&P BSE TECK 26.83 4.20 0.84
S&P BSE IT Index 21.55 7.77 1.00
S&P BSE CD 20.86 2.23 0.80
S&P BSE PSU 7.78 1.30 3.48
S&P BSE AUTO 21.12 4.45 1.97
S&P BSE OILGAS 8.15 1.69 2.23
S&P BSE REALTY 30.00 1.02 1.05
S&P BSE POWER 11.90 1.31 2.59
We continue to believe that defensive sectors such as consumer goods and healthcare are witnessing
stretched valuations. Consumer staples PE is more than twice broad markets and well-above historic
mean. In comparison, industrial stocks trade well below mean levels as also financials.Valuations are much
below long term average levels and attractive vis-à-vis long term fundamentals.
Weekly change (%)
S&P BSE Sensex -0.42
CNX Nifty -0.66
CNX 500 -0.96
CNX Midcap -1.60
S&P BSE Smallcap -0.42
India - Debt
RBI measures and comments to alleviate pressure at the long end of the curve provided investors comfort
and yields declined from last year’s highs. The improved sentiment helped in strong demand at the
Source: Bloomberg, JP Morgan
• Yield Movements: The 10-Yr benchmark yield fell by 34 bps. The 5-yr Gilt yield fell 24 bps while
the 5 – yr AAA corporate bond yields rose by 32 bps and the spread reduced to 108 bps.Yields for 1 yr
gilts fell by 32 bps, while 30 yr gilts fell 30 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. Four securities were auctioned and received
competitive bids for Rs. 29,000 crs against the Rs.15,000 crs.
• Forex: The rupee fell to record lows and breached the 65 level against the US dollar, before recovering
on Friday to close at 63.2. RBI appears to have intervened in the foreign exchange markets towards the
end of Friday. Forex reserves as of August 16th were marginally at around $279 bln.
Source: RBI, Morgan Stanley
• Macro/Policy: Credit growth accelerated to 16.6% YoY as of August 9, 2013 and deposit growth
moved lower to 13.0% YoY from 13.4% last fortnight. RBI looked to minimise the collateral damage
due to the rise in yields, on the back of various measures to support rupee. Apart from providing banks
succour on the MTM losses, it also announced an open market operation (OMO of Rs.8000 crs) and
indicated that it will aim to keep the money market rates around the MSF rate, but will calibrate the
issue of cash management bills (including scaling down).
The OMO along with RBI comments on adopting a calibrated approach to cash management bills
helped in improving sentiment in the markets.At this stage, there is clearly more certainty that yields at
the long end will not spike too much and RBI would like the curve to remain inverted until it achieves
its objective of rupee stability. Hence, investors with a longer investment horizon can look at long dated
portfolios and others can add to their exposure in corporate bond focused funds, to benefit from the
relatively higher yields