Market Review WEEK ENDED JULY 20, 2012InternationalGlobal equity markets closed the week on a positive note, despite the broad declines on Friday amidst growthconcerns and Eurozone issues. The MSCI AC World Index closed the week up 0.56% led mainly by EmergingMarkets. As per IMF, the global economy is set to expand by 3.5% this year, slightly less than the 3.6% estimatedback in April. Growth expectations for 2013 were also revised down to 3.9% from 4.1%.Trend in growth revisionswas divergent across economies – while Japan, Spain and Canada are estimated to expand at a faster pace thanearlier, growth forecasts for UK and industrialized Asian economies were cut sharply. GDP in EM/BRICeconomies is also expected to increase at a slower pace than before. Global benchmark bond yields eased furtherthis week as weak economic data pattern continued. The Reuters Jefferies CRB index clocked sharp gains (up3.61%) as various agri-commodity prices moved up on supply concerns and crude oil prices responded toescalating geo-political tensions in the Middle East. The euro lost ground as Spanish borrowing costs spiraledhigher and ECB said it would stop accepting Greek sovereign bonds as collateral.• Asia-Pacific: Regional equity markets fared better than global counterparts helped by gains in Hong Kong, Australia and Indonesia. Stocks in Shanghai however declined led by fall in property stocks. The Chinese government ordered local authorities to tighten rules after data showed real estate price rose in various cities. In a move to encourage more overseas investment, the government reduced taxation rates for foreign companies domiciled in countries that have a double taxation treaty with China. Data showed that Chinese inbound FDI declined by 7% in June. On the M&A front, Citic Securities agreed to buy Credit Agricole’s Asian CLSA unit for $1.25 bln and Heineken made a $4 bln offer for acquiring rest of Asia- Pacific Breweries. Also Thailand’s PTT Exploration won the race to acquire Cove Energy after Royal Dutch Shell abandoned its bid.• Europe: Weak market sentiment on Friday led the FTSE 100 to close the week in negative territory. German and French markets fared relatively well and closed up. Concerns about Spain increased following a disappointing bond auction and expectations growth will remain weak for next couple of years. ECB said it will no longer accept Greek sovereign bonds as collateral. On the economic front, Eurozone trade surplus expanded in May as exports got a boost from a weak euro and imports were flat. The German ZEW expectations survey index continued to trend lower but the extent of decline was less compared to last month. UK’s unemployment rate eased to 8.1% from 8.2% as the London Olympics helped add jobs. Increased violence in Syria led residents to flee to neighbouring countries.• Americas: US equity indices moved up this week on the back of positive earnings announcements from select large corporates. On the economic front, the Fed’s Beige Book survey of business conditions painted a picture of modest economic growth. Industrial production rose 0.4% in June while retail sales registered their third consecutive decline. Housing data was mixed – while sales of pre-occupied homes fell, new construction hit multi-year highs and the median price of homes stood 8% higher than year ago levels. In Canada, fall in fuel prices led the consumer price index to ease more than expected. On the M&A front, GSK is buying US-based Human Genome Sciences for $3.6 bln.
Weekly Weekly change (%) change (%) MSCI AC World Index 0.56 Xetra DAX 1.11 FTSE Eurotop 100 0.39 CAC 40 0.41 MSCI AC Asia Pacific 1.19 FTSE 100 -0.25 Dow Jones 0.36 Hang Seng 2.87 Nasdaq 0.58 Nikkei -0.62 S&P 500 0.43 KOSPI 0.55India - EquityIndian equity markets were range-bound this week and frontline indices closed marginally lower than last weeklevels.Amongst sectoral indices, consumer durables, FMCG and healthcare stocks notched gains while real estate,auto and power stocks posted declines. Amongst auto stocks, Maruti Suzuki came under pressure owing toindustrial unrest at one of its manufacturing plants. FIIs bought equities to the tune of $275 mln in the first fourtrading days of the week.• Macro: As per IMF’s latest assessment of the global economy, growth momentum has slowed in various Emerging Economies including India reflecting the weaker external environment as well as moderation in domestic demand. The IMF now expects India’s economy to grow by 6.1% (6.8% previously) and 6.5% (7.2% previously) in 2012 and 2013 respectively. Despite the slowdown, on a relative basis, growth rates still continue to better than that of developed counterparts (2012 growth pegged at 1.4% for advanced economies) and are also ahead of the overall EM growth rate of 5.6%. As we have been saying, the reasons for the slowdown in the Indian economy are largely local in nature. While interest rates remain high, the RBI has been right in pointing out that the ongoing slowdown is much due to policy issues. India has been witnessing a slowdown in investment growth due to policy uncertainty and this needs to be addressed. Also the structural issues such as supply bottlenecks need to be resolved for a long term solution to inflation. This policy gridlock stems from coalition politics, which has become the norm in India over the last decade or so. Political wrangling has resulted in reforms in key areas being stalled in recent years.There is a constant tension within the ruling government as the smaller parties look to push through their agenda and the larger party looks to build policy consensus. Notwithstanding the slow pace of changes, it is important to recognize that despite the change in governments, the broad direction of the reform programme has been positive. In that sense, it is just the democratic process playing out.
Weekly change (%) BSE Sensex -0.32 S&P CNX Nifty -0.42 S&P CNX 500 -0.53 CNX Midcap -1.09 BSE Smallcap -0.92India - DebtLower than expected headline inflation numbers and hopes the government will push forth with reforms and fiscalconsolidation helped Indian bond yields ease slightly this week. Hawkish comments by RBI however curbed gains.• Yield Movements: Yields at the shorter end of the yield curve eased more than those at the long end as liquidity conditions improved.While the 1-year gilt yield ended 13 bps lower, the 10-year and 30-year Indian benchmark treasury bond yields dipped 2 bps from last week’s level. Consequently the yield curve steepened and spreads between short (1-year) and long dated (30-year) paper increased to 66 bps from 55 bps.• Liquidity/ Borrowings: Liquidity situation remained easy – overnight call money rates hovered around 8% levels earlier and repos averaged about Rs.55,000 crores. Scheduled auctions of four GOI securities of Rs. 15,000 crores received bids worth Rs. 33,000 crores.• Forex: The Indian rupee closed the week marginally weaker against the US dollar following dollar demand from oil and defence firms. As of July 13, forex reserves stood at $286.7 bln, $872.7 mln lower than last week levels. Source: CEIC, Morgan, Stanley Research• Inflation trends: As per latest data, deposit and credit growth decelerated to 13.4% yoy (from 14.3%) and 16.5% (from 17.8%) previously. Consequently the loan-deposit ratio eased from highs of 77.1% to 76.4%.While overall GDP growth and corporate capex have slowed in recent times, credit growth continues to be relatively robust possibly due to increased demand for working capital.