Weekly Market Review - January 24, 2014Document Transcript
WEEK ENDING JANUARY 24, 2014
Global risk appetite waned this week as concerns about Emerging Markets and their weak PMIs overshadowed
recent optimism.The MSCI AC World Index closed down 2.4% as equity indices across major markets retreated.
The IMF’s latest growth forecasts suggested global economic growth remains on the uptrend.The institution said
growth will accelerate to 3.7% in 2014 (up from 3.6% earlier) led by faster expansion in the mature economies
(forecast up by 0.2% to 2.2%) and stabilization in Emerging economies (forecast unchanged at 5.4%). Renewed
demand for safe havens boosted Treasury bond markets and yields eased. Energy prices gained as IEA raised
demand forecasts and reported a higher than expected decline in inventories.This alongside a sharp rally in gold
prices helped the Reuters Jefferies CRB Index climb up 1.48%. Emerging market currencies came under pressure
on the back of developments in Argentina and credit concerns in China. The yen benefitted from safe haven
demand, while the US dollar index edged lower.
• Asia-Pacific: Barring China and Indonesia, most regional markets closed the week in the negative territory.
Shanghai equity markets gained as People’s Bank of China made a larger than expected liquidity injection to
ease stress in inter-bank markets ahead of Lunar NewYear Holidays. Reports suggested a potential default on
one of the maturing trusts, leading to concerns about the investment trust market that has witnessed strong
growth in recent years. China’s economic growth marginally slowed in Q4 to 7.7%yoy from 7.8% in Q3 and
its flash manufacturing PMI dipped to 49.6 in January from December, suggesting growth is slowing.
Meanwhile, pick up in domestic demand helped South Korea economy expand by 4%yoy in Q4-2013.
Central banks in Thailand and Japan left policy rates unchanged (at 2.25% & 0.1% respectively). IMF raised
Developing Asia growth estimates by 0.2% to 6.7% and Japan’s by 0.4% to 1.7%.
• Europe: Mixed earnings news flow and reduced investor risk appetite weighed on European equity markets.
Economic data out of the region however remained positive – the Eurozone flash composite PMI inched up
to 53.2 from 52.1 on the back of improvement in both manufacturing and services sectors. The region’s
consumer confidence index also moved up more than expectations. However, Germany’s ZEW survey of
economic sentiment showed a slight decline. In UK, the unemployment rate fell more than expected to 7.1%
from 7.4%, prompting the central bank to indicate that it might de-link the 7% unemployment target from
its monetary policy. Moody’s affirmed France’s Aa1 rating and maintained negative outlook.Turkey’s central
bank kept policy rates unchanged but suggested it may undertake additional monetary tightening by
occasionally charging banks higher than the overnight lending rate of 7.75%. IMF revised UK and Euro area
growth estimates upwards by 0.6% and 0.1% to 2.4% and 1% respectively.
• Americas: US and Canadian equity markets suffered losses especially towards the weekend, amidst growing
worries about growth prospects for Emerging Markets and Latin American markets fell sharply. Reflecting the
increased uncertainty amongst investors, the CBOE VIS volatility index rose sharply during the week.The
Conference Board’s index of US leading economic indicators was up 0.1% in December, after a upwardly
revised 1% gain in November. Markit’s preliminary gauge of US manufacturing activity slid to 53.7 from 55.
Elsewhere in the region, Canada retail and manufacturing sales increased in the latest monthly data release.
The Argentine peso came under focus as it was allowed to devalue and the country eased restrictions on dollar
purchases by citizens. Rise in Brazil’s inflation rate slowed marginally in January, but the overall inflation rate
stayed high at 5.63%. IMF upgraded US growth forecasts by 0.2% to 2.8%. Growth in Latin America and the
Caribbean is expected to improve, but stay modest at 3%.
MSCI AC World Index
FTSE Eurotop 100
MSCI AC Asia Pacific
India - Equity
After touching record highs mid-week, markets pulled back as weak global sentiment, mixed earnings flow and
monetary policy uncertainty dragged indices lower. Leading indices closed the week nearly flat while mid and small
caps ended in negative territory. Public sector entities and energy sector stocks were the top losers, while technology
stocks notched strong gains. FIIs bought equities to the tune of $190 mln in the first four trading days of the week.
• Policy: This week, RBI notified norms to align loan restructuring at non-banking finance companies in line with
banks. NBFCs will now provide 2.75% on existing restructured loans by Mar’14 and set aside 5% by Mar’17.The
framework is slightly more flexible than banks, and the increased transparency and provisioning should be positive
from a medium term perspective. However, this would have some impact on earnings, especially for those NBFCs
with exposure to infrastructure and allied sectors that are facing stress in current times.
• IT Sector: IT stocks finished 2013 at the top of the league tables as signs of improving global growth
trends and currency depreciation spurred investor interest in the sector. The sector had come under
pressure post 2008 as clients cut down on discretionary spending and this has changed in the last year or
so. Compared to the last few years, a confluence of factors (improving demand in US and currency
tailwinds) does provide a positive background. This environment (especially a weaker rupee) can help
companies take a long term view on deals, boosting growth trends. Indian companies have also been
scaling up their focus on Horizon 3 services (Social, Mobile, Analytics and Cloud) and given the strategic
nature of these projects for their clients, such business could be relatively stable.
Indian companies are also benefitting from expansion and rise in market share in Europe.The outsourcing trend is
gathering momentum there and unlike earlier when players had focused on different themes or on a few countries,
we are now seeing Indian IT companies make a pan-European effort and try to get large outsourcing deals.
While growth prospects appear bright in the near term, scepticism about medium term growth prospects due
to commoditization and high concentration in the BFSI (banking, financial services and insurance) vertical
are some concerns.The passage of the US Immigration Bill (in its current form) could result in an escalation
of labour costs and some reduction in the profitability of Indian IT companies. Also, there are not too many
cheap stocks within the sector any more. Not just the frontline stocks, even the second line stocks have run
up quite a lot. But if growth keeps surprising on the upside, then valuations will continue to remain modest.
Weekly change (%)
S&P BSE Sensex
S&P BSE Smallcap
India - Debt
Treasury bond yields firmed up ahead of central bank policy meeting next week on concerns that any shift to
CPI as nominal anchor for monetary policy framework will cause interest rates to stay high for an extended
period of time. FII flows into debt securities slowed down to $205 mln in the first four trading days of the week.
All eyes will be focused on RBI monetary policy next week. Recent data has pointed towards a moderation
of food inflation and growth remains sluggish. However, it appears the central bank remains concerned about
twin deficits and structural issues
• Yields: Government bond yields rose across the yield curve during the week, with yields rising more
sharply at the longer end.The 10 year gilt closed the week up 10 bps, while the 1 year gilt only hardened
3 bps at the close of the week.The spread between the long and short end of the curve (1/30 year gilts)
widened to 47 bps from 37 bps at the end of previous week. Meanwhile, spreads between corporate bond
and government bond yields narrowed this week, with the latter hardening more.
• Liquidity/borrowings: Early this week, RBI conducted OMO purchase auctions and accepted bids of
Rs. 9477 crores thereby helping systemic liquidity conditions remain easy. Overnight call money rates
declined to 6.85% mid-week, but hardened to 8.6% at the close of week.
• Forex: Like other emerging market currencies, the rupee also witnessed a sell off and closed the week
1.82% weaker against the US dollar. As of Jan 17 2013, forex reserves stood at $292.08 bln — down about
$1.2 mln from last week’s levels.
• Policy: Early this week, RBI released an expert panel report on revising and strengthening the monetary
policy framework.The key points are:
The panel recommends shift to an inflation targeting regime and the new CPI (combined)
inflation as the nominal anchor.
The long term CPI target has been pegged at 4%, with flexibility of +/- 2% to allow for supplyside or external shocks. However, it suggests this be phased in over the next 24 months
by bringing down the CPI to 6% levels from 10% presently.