WEEK ENDING FEBRUARY 7, 2014
Global equity markets regained stability amidst select pieces of positive economic and corporate data and increased
hopes of further monetary support by the ECB.The MSCI AC World index moved up 0.76% led by gains in US
and Europe, while the Emerging Markets put up mixed performance. Treasury bond yields in key markets
exhibited mixed trends – yields on German bunds firmed up as ECB kept rates on hold and economic data out
of the region was quite encouraging. Meanwhile, weaker-than-expected employment gains led yields to ease in
the US. The Reuters Jefferies CRB index started off the month on a positive note, helped by strong gains in
copper and gold prices. The US dollar index was impacted by weaker economic data at home, while the euro
rallied as contrary to expectations ECB did not offer additional stimulus.
• Asia-Pacific: Regional equity markets remained under pressure – Japan, Hong Kong and South Korea were
amongst the top losers. Chinese equity markets resumed trading at close of week and recorded gains on the
back of strong rally in technology stocks. Indonesia GDP data surprised on the upside – economy grew by
5.7% as stronger exports offset impact of slowing domestic demand. Reserve Bank of Australia raised
economic growth forecasts and maintained its main cash rate at 2.5%. Meanwhile,Australia retail sales topped
market estimates and sharp expansion in exports helped push trade surplus to multi-year highs. Philippines left
benchmark rates unchanged after last week’s strong GDP data. In a bid to strengthen local securities market
and avoid a repeat of last year’s penny stock crash, Singapore announced new trading rules that stipulate
minimum trading prices and collateral requirements, amongst others.
• Europe: European equities got a boost from good earnings and economic data. Europe’s leading central
banks, ECB and BoE kept rates on hold. Amongst notable economic data released this week, Euro zone
manufacturing PMI moved up to 54 from 52.7, showing sustained improvement in the region. Except France
all country PMI indicators came in above 50.At the same time, Eurozone December retail sales fell by 1.6%
and German industrial output contracted 0.6% after a 2.4% jump recorded in November. Germany’s trade
surplus also narrowed to €14.2 bln from €19.1 bln. UK manufacturing PMI dipped slightly but showed sector
continued to expand in January and trade deficit fell.
• Americas: US and Canada equities gained as investor risk aversion ebbed and markets shrugged off soft US
economic data. US non-farm payrolls increased by less than expected 113000 and the unemployment rate
edged lower to 6.6%, likely due to fall in participation rate.The ISM manufacturing PMI dropped to 51.3
from 56.5, new factory orders declined and the US trade deficit increased about 12% to $38.7 bln in
December. The Congressional Budget Office said it expects fiscal deficit to narrow to 3% this year.
Unemployment is expected to remain at 6.7% and GDP growth at 3.1%. Brazil inflation rate slowed
Encouraged by the recent policy changes, Moody’s upgraded Mexico credit rating one notch to A3. On the
M&A front, Coca-Cola is acquiring 10% stake in Keurig coffee brewer for around $1.3 bln.
MSCI AC World Index
FTSE Eurotop 100
MSCI AC Asia Pacific
India - Equity
After a weak start, Indian equity markets gained on improved global sentiment and better PMI readings. While
frontline indices closed in the negative territory, mid and small cap stocks moved up. Healthcare, auto and metal
stocks were amongst the top gainers, while IT stocks lost ground. FII inflows were negative this week (-173.3 mln).
During the week, 2G telecom spectrum auctions witnessed strong demand from operators and it appears the
government will be able to meet budgeted revenue estimates from the auctions. Meanwhile,Vodafone plc was
granted approval to buy out minority shareholders in its India unit for over Rs. 10,000 crore.
• Earnings: Latest earnings season has been largely in line with expectations – earnings growth appears to be
bottoming out on the back of strong performance by export-oriented sectors. Corporate India’s earnings growth
had been quite muted over the past couple of years due to various factors.We see this changing over the next year
or so as companies de-lever and consolidate,and the macro situation improves.Over the past year,companies have
been looking to raise additional capital through equity and sale of non-core assets (those with large debt burden).
This trend is likely to extend into 2014, and augurs well for banks’ asset quality. Consolidation is also likely to
provide a fillip to earnings growth.We expect margins to expand once the interest rates normalize and positive
operating leverage kicks in. Capacity addition has been quite low and it can improve quite fast.
• Economy: India’s PMI readings showed some improvement from last month – the manufacturing index
moved up to 51.4 from 50.7 and services index gained 1.6 points to 48.3. As per CSO’s initial estimates,
India growth will be about 4.9% in the current fiscal year, compared to 4.5% last fiscal. Growth in FY14
is helped by sharp rise in agriculture output (up 4.6% in FY14 vis-à-vis 1.4% last year) and a relatively
resilient financial and business services sector. In contrast, manufacturing output is expected to contract
by 0.2% (1.1% growth last year). CSO forecasts growth will pick up to 5.6% in FY15. While a cyclical
pick-up is expected, the strength of the recovery will depend on economic reforms and investment cycle.
Weekly change (%)
S&P BSE Sensex
S&P BSE Smallcap
India - Debt
Treasury bond yields eased as the rupee stabilized and investors hoped inflation data will lead RBI to not tighten
rates further. The government concluded its FY13 borrowing programme this week with the auction of Rs.
10,000 crore worth GOI securities.
• Yields: Government bond yields eased across maturity buckets, with yields decreasing more sharply at
the longer end. The 10 year gilts finished the week down 8 bps, while the 1-year gilt eased 4 bps. The
30-year gilt yield dropped 19 bps to 9.02%. As a result, spreads between long and short dated papers
narrowed from 34 bps to 19 bps.
• Liquidity/borrowings: Systemic liquidity conditions were largely stable and overnight call money rates
closed around 8.80% levels. Reverse repos averaged Rs. 28,860 crores as against Rs. 34,347 crores last
week. Scheduled GOI bond auction of Rs.10,000 crores received bids of 2.3X the notified amount and
there was no devolvement on primary dealers.
• Forex: Relative weakness in the US dollar and expectations of a boost to foreign flows from Vodafone
deal approval helped the Indian currency close 0.64% stronger against the US dollar. As of Jan 23 2013,
forex reserves stood at $291 bln — down about $1.1 bln from last week’s levels.
Source: CLSA, Bloomberg. As of end-January
The Indian rupee has weathered the recent EM turmoil relatively well, reflecting investor comfort with the recent
developments on the current account deficit and forex reserves front.