Weekly Market Review - January 03, 2014


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Weekly Market Review - January 03, 2014

  1. 1. Market Review WEEK ENDING JANUARY 3, 2014 International Global equity markets bid a warm adieu to 2013 with strong gains in the last quarter that boosted the annual gains. However, they had a bit of an uncertain start to the New Year leading to declines during the week. The MSCI AC World Index moved up nearly 7% during the fourth quarter (up over 20% in 2013), helping key indices in developed markets scale new peaks, but declined marginally for the week. EM equities underperformed during the quarter and closed the year down 5% (MSCI EM Index). Expectations of lower global liquidity in 2014 pushed bond yields up for the quarter and 2013 as well. During last week, US 10 year treasuries closed around 3% levels. Notwithstanding the strength in gold during the week, the fall in energy prices and other commodities pushed the Reuters/Jefferies CRB Index down by 2.7%. The Euro lost ground on expectations of further stimulus required to boost growth in the region, while the Japanese Yen and the US dollar gained. • Asia-Pacific: Stellar performance by Japanese equities offset weakness in Emerging Asia and helped the regional index close in positive territory for 2013. During the week, most Asian equity markets traded lacklustre amidst weak economic data. PMI data out of China suggested deceleration in economic activity - the official manufacturing PMI slid to 51 from 51.4 last month primarily due to weakness in export orders.The HSBC China manufacturing PMI index mirrored trends in the official index, and the services PMI also fell to 54.6 from 56. Singapore advance GDP estimates indicate the economy contracted by 2.7%qoq (annualized basis) compared with the 2.2% expansion witnessed previous quarter. • Europe: Key European equity indices closed 2013 with double-digit gains, but started the New Year on a cautious note even as regional economic data was relatively positive. The region’s headline PMI index rose to 52.7 from 51.6 last month. The improvement was led by gains in Germany, Italy and Netherlands, while French manufacturing continued to decline.The Turkish lira plunged to record lows as the ongoing corruption probes raised political risks. Fiat gained full control of Chrysler after paying $4.3 bln for the remaining 41% stake. • Americas: US equity indices closed the year in record territory. Markets however edged lower this holiday shortened week on thin volumes. US economic data reinforced views the economy remains in good shape – US consumer confidence index moved up to 78.1 from 72 and the ISM manufacturing index dipped slightly to 57 from 57.3. Elsewhere in the region, Brazil’s government posted a budget surplus of 1.5% of GDP, exceeding targets on the back of higher tax collections. On the M&A front, FireEye Inc acquired Mandiant for $1.05 bln.
  2. 2. Weekly change (%) Weekly change (%) MSCI AC World Index -0.63 Xetra DAX -1.61 FTSE Eurotop 100 -0.35 CAC 40 -0.70 MSCI AC Asia Pacific -0.02 FTSE 100 -0.30 Dow Jones -0.05 Hang Seng -1.83 Nasdaq -0.59 Nikkei* 0.69 S&P 500 -0.54 KOSPI -2.80 *As of 30 Dec 2013 India - Equity Indian equity markets closed 2013 in the positive territory, but were down for the week as mixed economic data weighed on investor sentiment. Mid and small cap stocks however performed relatively well this week. Amongst sectors, capital goods stocks were the top losers, while technology stocks ended higher. FII activity was limited - $183 mln flows in the first four trading days of the week. For 2013, FII inflows amounted to nearly $20 bln, one of the highest in recent years. • 2014 Outlook: The global economy will remain in adjustment phase and the divergent growth trends are likely to persist in 2014. The policy priorities for EM and developed economies will be different and a lot depends on US, but policymakers appear to be cognizant of the cross-border spill overs and hence, any liquidity tightening will be done in a careful manner. From a medium to long term perspective, developed economies need to reduce their large deficits without impacting growth momentum. For India, 2014 will witness heightened focus on politics given the national elections. The results of the recent state elections might help in shifting focus away from welfare-politics to developmentfocused politics. Irrespective of the nature of the ruling parties (coalition), we expect to see an improved policy environment. We believe that focus needs to be on ensuring adequate reforms to lay the foundation for the next growth phase. Inflation needs to be addressed holistically to enable a higher growth rate and this would require addressing continued supply-side bottlenecks, subsidies and government intervention in pricing of food grains. Boosting financial savings and diverting them away from non-productive physical assets like gold will help augment the growth rate. 16% 14% Real GDP New CPI CPI YoY% 12% 10% 8% 6% 4% 2% 0% Sep-03 Sep-05 Sep-07 Sep-09 Sep-11 Sep-13 Source: CEIC, Morgan Stanley Research
  3. 3. We are seeing early signs of the Indian economy stabilizing and believe a gradual (and uneven) recovery will take shape in 2014-15, helped initially by positive contribution from exports and agriculture sectors. Potential headwinds include rising inflation, further monetary tightening by the central bank and government spending cuts to achieve fiscal deficit targets. Despite the moderation in growth trends, we believe India’s economic expansion will be ahead of most peers and as has been the case in the past, we expect markets to rally ahead of an improvement in economic fundamentals. From a medium to long term perspective, consumption and investment remain the core themes. A strong middle class along with the need to boost infrastructure will be the drivers, and companies that are positioned to take advantage of them will be wealth creators over the coming decades. While we are not betting big on exports there are some positives emerging in that space as well. Investors need to look beyond the short term uncertainty to participate in the long term growth story as the cycle turns. • 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. 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 -1.61 CNX Nifty -1.63 CNX 500 -1.30 CNX Midcap -0.87 S&P BSE Smallcap 0.57 India - Debt Indian bond markets a difficult year on the positive note - yields eased across the curve this week as improved liquidity situation and comments from the RBI that the economy is relatively well placed to deal with Fed tapering helped bond prices rally. FII flows into debt securities amounted to $202 mln in the first four trading days of the week ($8 bln outflows in 2013). On Friday, RBI shared its draft report on financial market benchmarks – amongst other recommendations the committee has suggested the current polling methodology used to determine money market rates be replaced with one based on trades so as to eliminate any possibility of manipulation. This change is in line with changes being implemented globally on money market benchmark rate setting. • Yields: Drop in yields was sharper at the shorter end of the curve – yields on 10-year gilts decreased 5 bps, while 5-year gilts fell by 9 bps.Yields on 1-year papers dropped 21 bps while that on the 30 year
  4. 4. papers eased 4 bps. As a result the yield curve steepened. • Liquidity/borrowings: Systemic liquidity conditions improved and overnight call money rates closed down to 7.70%, as against 8.70% last week. Scheduled GOI bond auctions of Rs. 11,000 crores received strong demand and there was no devolvement on primary dealers. • Forex: Strong dollar demand from corporates and relative strength in the greenback pushed the rupee lower. The currency however pared losses towards close of week possibly on RBI intervention. For 2013, as a whole, the Indian rupee was down 12.4% against the US dollar. As of Dec 27, forex reserves stood at $295.7bln, up about $204 mln over last week levels. • 2013 in review and 2014 outlook: 2013 proved to be a tough year for global bond markets as concerns about liquidity tightening led to a rise in bond yields, amidst outflows from bond funds in the middle of the year. Whilst global liquidity remained high, market liquidity in EM asset classes has been impacted by higher risk aversion of investors and the regulatory measures put in place to reduce risk on bank balance sheets.The tough global environment coupled with domestic issues highlighted India’s vulnerabilities and the rupee fell sharply, prompting a reversal in the monetary policy. Concerted policy efforts by the central bank and the government have helped rein in the current account deficit and boosted the rupee. The current environment can be viewed as an adjustment phase for the Indian economy as we correct fiscal largesse and increased leveraged amongst certain segments of Corporate India. Monetary policy divergence across EM and developed markets is likely to continue in the New Year, but overall policy environment is expected to maintain a focus on boosting credit growth and ensuring adequate liquidity. Whilst the US Federal Reserve has embarked on a gradual taper, conditions in Europe and Japan point towards a continuance of easy monetary policies. In India, the outlook for monetary policy remains uncertain, given the inflation and growth trajectories, and the uncertain external environment. Over the near term, bond yields will be driven by global news flow and local economic data. India is better compared to last May to deal with a challenging external environment. Liquidity conditions are expected to remain comfortable over the near term. Latest fiscal deficit data has been disappointing, and this will be closely monitored in coming months, and any negative surprises could 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. 03.01.2014 27.12.2013 Exchange rate (Rs./$) 62.16 61.85 Average repos (Rs. Cr) 35,905 40,722 1-yr gilt yield (%) 8.68 8.89 5-yr gilt yield (%) 8.93 9.02 10-yr gilt yield (%) 9.07 9.12 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