Market Review


Global equity markets responded positively to US Federal Reser...
rates unchanged and S&P upgraded the country’s sovereign ratings one notch to BBB+ amidst
optimism about energy reform. On...
Overall the paper, as it stands, is a step in the right direction and can help banks deal with NPAs in a
structured manner...
Looking ahead, the outlook for policy remains uncertain, given the conflicting inflation and growth
trajectories, and toug...
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Weekly Market Review - December 20, 2013


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Weekly Market Review - December 20, 2013

  1. 1. Market Review WEEK ENDING DECEMBER 20, 2013 International Global equity markets responded positively to US Federal Reserve’s dovish tapering announcement and positive economic data. The MSCI AC World Index moved up 2.16% with equities in Europe, Japan and the US performing well, while most EM/Asia markets underperformed. In contrast, global bond yields closed higher as Fed’s decision and positive economic data led investors to reallocate in favour of risk assets. Signs of improved global growth trends pushed up commodity prices and helped the Reuters Jefferies CRB index clock gains of 1.2%. Gold prices however declined amidst strength in the US dollar. In currency markets, the yen slid further against the US dollar, reflecting the divergence in policy stance between their central banks. • Asia-Pacific: Regional markets traded mixed – Chinese equities were impacted by a sharp spike in interbank rates on renewed cash crunch. Liquidity injection by the People’s Bank of China failed to alleviate market stress.Volatility was further exacerbated by moderation in Chinese December manufacturing PMI (flash) to 50.5 from 50.8. Bank of Japan reiterated its commitment to easy monetary policy. The Tankan survey, a measure of business sentiment in Japan, showed increase in business confidence amongst large and small businesses. Indonesia asked banks to shore up core capital base by 1% to 6% of risk weighted assets so as to build resilience against shocks. On the M&A front, PCCW is buying back its Hong Kong telecom business from rival Telstra for $2.4 bln. • Europe, Middle East & Africa: Regional stocks recorded sharp gains on the back of positive economic data and as a calibrated US QE exit along with low rates seemed to comfort investors. EU leaders finalized banking union agreement and on the economic front, Euro area flash manufacturing PMI (up 1.1 to 52.7) and Germany’s IFO index (up 0.2 to 109.5) pointed towards improvement in the manufacturing sector. UK inflation eased to 2.1%, moving in closer to the central bank’s target inflation rate. S&P downgraded Euro area credit rating to AA- from AAA. Political turmoil in Ukraine increased after the government received a $15 bln bailout package from Russia. Turkish equity markets and currency slumped as corruption investigations raised political risks. S&P affirmed South Africa credit rating at BBB, but retained negative outlook. On the corporate front, Alitalia is in talks with Etihad Airways for stake sale and Astrazeneca is purchasing Bristol-Myers Squibb stake in their diabetes drug JV for $4.1 bln. • Americas: US equity indices climbed to record highs and Canadian equities also performed well as investors cheered latest economic data and policy moves.The US Federal Reserve decided to reduce monthly asset purchases by $10 bln (split between treasuries and agency mortgages) to $75 bln and indicated that the low interest rates will be maintained until the unemployment rate is well below 6.5%. US November industrial production increased by 1.1% on the back of stronger utilities and mining output. US Q3 GDP growth estimates were revised up to 4.1% (annualized) from 3.6% earlier, largely due to accelerated consumer spending. Elsewhere in the region, Canada inflation rate moved up slightly but held below the central bank’s target levels. Mexico central bank left policy
  2. 2. rates unchanged and S&P upgraded the country’s sovereign ratings one notch to BBB+ amidst optimism about energy reform. On the corporate front, 3M increased its share buyback estimates to $17-22 bln until 2017 and Oracle is buying Responsys for $1.5 bln. Weekly change (%) Weekly change (%) MSCI AC World Index 2.16 Xetra DAX 4.37 FTSE Eurotop 100 3.69 CAC 40 3.30 MSCI AC Asia Pacific 0.52 FTSE 100 2.59 Dow Jones 2.96 Hang Seng -1.87 Nasdaq 2.59 Nikkei 3.03 S&P 500 2.42 KOSPI 1.04 India - Equity Helped by strong FII flows ($873 mln), Indian equity markets managed to close an eventful week in the positive territory. RBI’s decision to maintain status quo boosted market sentiment, and after an initial negative reaction to the US stimulus tapering news, markets moved up tracking global counterparts. Mid and small cap indices performer better than large caps. SEBI’s revamped rules on trading of thinly-traded stocks were welcomed by the markets. Technology and real estate sector indices were the top gainers, while banking index closed marginally lower. Trends in Bank Stressed Assets 12 10 8 6 4 2 Gross NPLs 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 - Restructured Assets Source: RBI, Citi Research • Policy: RBI’s discussion paper on non-performing assets (NPA) management puts forth a range of measures for early recognition of problem assets and to tighten asset recovery process. Some of the key aspects of the proposed NPA resolution programme are creation of a special mention account category for accounts with over 30-day and 60-day payment delays and certain other qualitative factors such as delays in stock statements, etc. For larger loans, the central bank has suggested setting up a joint lenders forum to start negotiating with the borrower on early signs of slippage. Banks can also categorize certain borrowers as non-co-operative and this can trigger a system wide increase in provisioning. Lastly, the paper also has some suggestions for the government and judiciary system so as to improvise the asset recovery process.
  3. 3. Overall the paper, as it stands, is a step in the right direction and can help banks deal with NPAs in a structured manner. At this point, problem assets are not at alarming levels and mostly concentrated in the books of public sector banks. Such a mechanism will help expedite resolution and improvise the bargaining position of banks. Weekly change (%) S&P BSE Sensex 1.76 CNX Nifty 1.72 CNX 500 2.22 CNX Midcap 3.08 S&P BSE Smallcap 2.62 India - Debt Indian bond markets got off to a weak start on high WPI readings, but yields edged lower in the week as RBI surprised markets by staying on hold. FII inflows continued, aggregating $248 mln for the first four trading days. • Markets: Rise in yields was sharper at the longer end of the curve and the curve flattened – yields on 10-year gilts increased 15 bps, while those on the 5-year gilts increased 12 bps. Yields on the 1-year papers firmed up 5 bps while that on the 30 year papers increased 30 bps. Systemic liquidity tightened somewhat and overnight call money rates moved up slightly to 8.75%. The INR rebounded towards the close of week on sustained FII inflows and was relatively resilient against the US dollar even as the Federal Reserve announced tapering. • Policy: At the mid-quarter policy review this week, RBI expressed concerns about persistent rise in inflation at both, wholesale and retail levels, but noted that the recent rise was mainly driven by temporary factors like food inflation. The central bank expects recovery in the rupee, ongoing economic slowdown and expenditure cuts to meet the fiscal targets to ease upward price pressures in coming months. However, it remains on the vigil and said it will act if inflation levels do not ease as expected. Rate actions may be announced outside of the scheduled policy meeting days. Positive trends in trade deficit and rise in foreign exchange have made the central bank relatively comfortable with the external situation at this point. Repo rate and market rates (%) 9.5 9.0 8.5 8.0 7.5 7.0 6.5 5y IRS Policy rate 6.0 Dec-10 10y Gov 5y Gov Dec-11 Dec-12 Source: Bloomberg, Credit Suisse Dec-13
  4. 4. Looking ahead, the outlook for policy remains uncertain, given the conflicting inflation and growth trajectories, and tough external environment. Over the near term, bond yields will be driven by global news flow and local economic data. Investors also await clarity on the new monetary policy framework to be unveiled by end-December. Liquidity conditions are expected to remain comfortable over the near term. Fiscal deficit data will be closely monitored in coming months and any negative surprise is expected to weigh on long-bond yields. Against the current macro-economic backdrop, we continue to see merit in investing in funds focused on the shorter end of the curve and/or accruals. Investors with a medium to long term horizon and high risk appetite can consider funds with exposure to long dated bonds/gilts 20.12.2013 13.12.2013 Exchange rate (Rs./$) 62.04 62.12 Average repos (Rs. Cr) 39,124 19,795 1-yr gilt yield (%) 8.74 8.79 5-yr gilt yield (%) 8.86 8.98 10-yr gilt yield (%) 9.01 9.16 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