1. Market Review WEEK ENDED MARCH 01, 2013InternationalPolicy news flow out of US and Europe led to increased investor anxiety this week but market losses werelargely offset by some positive economic data. The MSCI AC World Index closed nearly flat and Treasurybond yields eased amidst increased demand for safe havens. Concerns about US budget impasse, Italianelections and dip in China manufacturing PMIs weighed on commodity markets and the Reuters JefferiesCRB Index closed down 1.08%. In currency markets, the sterling lost ground as UK manufacturing PMIdata pointed towards contraction and euro was impacted by Italy’s inconclusive election results.• Asia-Pacific: Regional equity markets fared better than world counterparts. Indonesia, Shanghai and Japan equities were the top gainers this week. As per PMI data from HSBC and Chinese government authorities, growth in China’s manufacturing eased last month but remained in expansionary mode. Chinese authorities suggested central bank raise down-payment requirements and interest rates for residential mortgages. Japan unemployment rate dipped to 4.2% from 4.3% and industrial production expanded by 1%mom in February, adding to signs the economy is bottoming out. Japan’s core consumer prices however continued to fall – down an annual 0.2% in January. Helped by strong private spending and investments, Hong Kong GDP growth picked up in Q4 – up 2.5%yoy from 1.3%yoy.• Europe: Helped by positive corporate earnings news flow, key regional markets recovered losses clocked on Italian election deadlock and mixed economic news flow. Eurozone consumer inflation rate eased from 2% in January to 1.8% in February and final manufacturing PMI was slightly higher at 47.9 (47.8 earlier). Euro area unemployment rate moved up one tick to 11.9% and over 200,000 people were added to the jobless pool. While Spain’s economy contracted 0.8% in Q4-2012 due to lower public spending, budget deficit narrowed to 6.7% of GDP from 8.9% previous year. The Central Bank of Hungary cut benchmark policy rate by 25bp to 5.25%, while the Bank of Israel kept interest rates on hold. On the M&A front, Repsol agreed to sell LNG assets to Royal Dutch Shell for $6.7 bln.• Americas: Rise in manufacturing activity and Fed official’s dovish comments helped US equity markets eke out marginal gains amidst uncertainty about federal spending. US February ISM manufacturing index rose to 54.2 from 53.1 and the Q4 GDP data was revised upwards to +0.1% growth from -0.1% estimated earlier. Core durable goods orders index rose 1.9% while the overall index declined due to sharp fall in aircraft orders. Brazil reported GDP growth of 0.9% for 2012, a sharp slowdown over the previous two years growth of 2.7% and 7.5% respectively. Colombia central bank cut rates for the fourth consecutive month – 25 bps reduction to 3.75%. Royalty Pharma offered to acquire Elan for about $6.7 bln.
2. Weekly Weekly change (%) change (%) MSCI AC World Index -0.02 Xetra DAX 0.60 FTSE Eurotop 100 0.20 CAC 40 -0.17 MSCI AC Asia Pacific 0.85 FTSE 100 0.68 Dow Jones 0.64 Hang Seng 0.43 Nasdaq 0.25 Nikkei 1.94 S&P 500 0.17 KOSPI* 0.38 *As of Feb 28, 2013India - EquityIndian equity markets fell on confusion about budget announcement regarding the validity of FII TaxResidency Certificates and weak GDP figures. Mid and small cap stocks underperformed large caps. Realestate and PSU stocks were the top losers while technology and consumer durables gained. FII flows weremarginally negative in the first four trading days of the week. Source: CSO, HSBC, Citigroup• Macro: India’s economy expanded at a much slower pace in the December quarter – GDP was up by 4.5% in real terms vis-à-vis 5.3% in the sequentially previous quarter. Slowdown was led by weakness in services sector – growth slid to 6.1% from above 7% levels clocked in previous quarters. On the expenditure front, weak public spending weighed on the overall economy. Latest manufacturing PMI was however positive adding to signs the economy is bottoming out.• Union Budget: The Union Budget was broadly along expected lines (given the constraints/fiscal deficit) and the government continued to focus on inclusive growth. Whilst there were no big bang populist measures ahead of next year’s elections, there were no reform oriented measures announced. Prior to the Budget, there had been some expectations of directional statements in terms of expenditure rationalization, boosting of investment activity and curbing of the current account deficit. Expenditure allocation was raised for various social/development schemes but no new schemes were announced due to limitations of a high fiscal deficit.The budget arithmetic may however still prove to be aggressive as the economic growth rate remains modest and there seems to an overdependence on tax revenues and divestments.
3. A summary of the key measures announced within the main themes is given below –• Inclusive growth: Higher allocations to health, education, agriculture and rural spending, which could aid rural consumption demand.• Investments: Impetus on road awards, investment corridors, new ports, etc. and PPP framework proposed for coal mining• Capital Markets: Clarity on FDI/FII definition and said focus to be on clear and stable policies for foreign investors and simplifying procedures applicable to foreign investors. Augment household financial savings through inflation-indexed instruments and RGESS (first time equity investors) From a market perspective, the increase in corporate tax surcharge is expected to impact profitability by 1-1.5%. As always execution of the plans will determine the impact on economic growth and we could continue to expect some reform announcements to be made outside the Budget. Over the past few years, earnings growth has lagged topline growth and we believe margins should only improve from current levels. In that sense, the overall prospects for earnings growth remain largely positive and any uptick in investment activity will add to momentum. Weekly change (%) BSE Sensex -2.06 S&P CNX Nifty -2.23 S&P CNX 500 -2.64 CNX Midcap -3.77 BSE Smallcap -5.63India - DebtThe Union Budget this week pegged FY14 fiscal deficit at 4.8%, but the target was not backed by adequateexpense control measures and revenue estimates appeared to be high. Lack of concrete measures to addresscurrent account deficit and higher than expected market borrowings estimates impacted market sentimentand yields moved up across the curve. FIIs bought debt securities to the tune of $628 mln in the first fourtrading days of the week.• Yield movements: Yields on the benchmark 10-year paper increased by 6 bps, while those on the 1- year paper moved up by 4 bps. 5-year and 30-year gilt yields firmed up by 3 bps and 8 bps respectively.• Liquidity/borrowings: Demand for liquidity under the RBI’s LAF window remained high but overnight call money rates closed lower at around the 7.5% mark. RBI infused close to Rs. 10,000 crores into the system through OMO purchase auctions.• Forex: Weak GDP growth figures and lack of major reform announcements in the Union Budget weighed on the rupee – the currency closed down 1.3% and just shy of Rs.55/$ levels. As of Feb 22, Indian forex reserves stood at around $292 bln, $1.6 bln less than previous week levels.• Union Budget: The Union Budget delivered on the fiscal deficit front, but the gross market borrowings were higher than market expectations (partly due to the buyback).The FY14 targeted fiscal deficit at 4.8% of GDP is to be achieved through tax revenues and divestments. At the same time, there have been no