Market Review WEEK ENDED MARCH 22, 2013InternationalGlobal financial markets were volatile this week on uncertainty around Cyprus/Italy and weak Eurozonedata. The decision to impose losses on domestic/offshore deposit holders in Cyprus led to concerns aboutsimilar practices in other troubled economies potentially requiring bailouts. The MSCI AC World indexclosed down 1.05% led by declines in Emerging Markets and Europe. Global treasury bond yieldsbenefitted from the renewed risk aversion amongst investors. Whilst gold prices moved up marginally, oilprices moved down and the Reuters Jefferies CRB index lost 0.59%. Concerns about the economicprospects in Europe weighed on the Euro, whilst the sterling was bolstered by encouraging comments fromthe Bank of England.• Asia-Pacific: Regional equity markets continued to underperform global counterparts, even as strong economic data helped Shanghai equities rally.The gains were more than offset by declines in large markets such as India, Australia and Indonesia. China’s HSBC flash PMI recovered in March to 51.7, against its prior reading of 50.4 led by gains in new orders index. OECD said it expects China to grow by 8.5% and 8.9% in 2013 and 2014 respectively, and surpass the US economy in three years’ time. In continuation of recent trends, Japan reported record trade deficit for February – trade gap rose above $8 bln as imports growth outpaced exports. The new Bank of Japan governor (Haruhiko Kuroda) reiterated the need to stave off deflation and reducing focus on fiscal health for the time being.• Europe, Middle East & Africa: Earlier in the week, the Cypriot Parliament rejected an EU-bailout package that imposed a charge on local banking deposits.This along with limited progress on talks with European officials weighed on regional markets.Weak regional economic data in the form of decline in the Eurozone flash PMI indices and German IFO business climate index exacerbated volatility. Fitch placed UK’s credit rating on negative watch. The UK budget sought to boost the economy through reduction in corporate tax rate and support to home buyers. There was some deterioration in borrowings and GDP growth for 2013 was pegged at 0.6%. South Africa Reserve Bank kept the repo policy rate unchanged at 5%.• Americas: US equity indices outperformed global counterparts on the back of sustained positive economic news flow. US housing starts continued to advance and initial weekly jobless claims declined to fresh lows. US Markit manufacturing PMI increased to 54.9 from 54.3. The US Federal Reserve maintained status quo on policy and upgraded its assessment of the US economy. Elsewhere in the region, Mexican Parliament approved a telecoms bill that paves the way for creation of a tough industry regulator and enhanced competition in the telecoms and television market. Chile GDP growth picked up in the final quarter of 2012 on the back of strong domestic demand. Colombia cut rates by 50 bps to 3.25%. Citigroup agreed to pay $730 mln to settle a class-action lawsuit that claimed investors were misled by the banks disclosures when they purchased its debt and preferred stock.
Weekly Weekly change (%) change (%) MSCI AC World Index -1.05 Xetra DAX -1.63 FTSE Eurotop 100 -1.06 CAC 40 -1.92 MSCI AC Asia Pacific -1.72 FTSE 100 -1.49 Dow Jones -0.01 Hang Seng -1.85 Nasdaq -0.13 Nikkei -1.77 S&P 500 -0.24 KOSPI -1.90India - EquityIndian equity markets ended another week in red as developments in Euro-zone and withdrawal of supportby one of the key allies of the government unnerved investors. In addition, markets were impacted by indicationsthat there was limited room for further monetary easing. Small and midcap stocks continued to underperformlarge caps.All sectoral indices closed in the red, except FMCG index which ended largely flat. Real estate stockswere the top losers with double-digit declines. Foreign portfolio flows slowed and amounted to $172 mln inthe first four trading days of the week.• Infrastructure/Policy: We continue to believe a revival in investment activity is critical for economic recovery and further reforms are required to create sustainable growth. At this stage, it appears that the government could survive the current political turmoil, but any expectations of substantial reforms need to be tempered. More importantly, in this environment, government efforts to accelerate approvals and remove bottlenecks for stalled projects become more critical. This week the government gave an in-principle nod for Mumbai-Bengaluru industrial corridor (a Bengaluru-Chennai corridor is also being considered).These along with the Delhi-Mumbai Investment corridor can provide fillip to investment activity in the near term. In addition, efforts to address transport capacity constraints through the establishment of a dedicated freight corridors and two new ports should help. Projects under implementation* (%yoy) Source: CMIE, Morgan Stanley Research *Includes all government and private projects that were either announced/proposed or were under various stages of implementation The government’s recent efforts seem to have helped improve capex environment somewhat – indicators such as CMIE projects under implementation and engineering & construction companies’ order books have
stabilized at low levels. At the same time, we are seeing that some coal, power and metals projects are also making progress.A lot of projects are dependent on state governments, and we are witnessing good progress in some states. At the same time, given that many of these projects are longer term in nature, it would take time before we see meaningful impact on investment growthglobal crisis, it needs to strengthen the foundation for sustainable economic growth. Weekly change (%) BSE Sensex -3.56 S&P CNX Nifty -3.77 S&P CNX 500 -4.21 CNX Midcap -5.29 BSE Smallcap -6.58India - DebtWhile the RBI delivered a 25 bps cut in the repo rate in line with market expectations, the bank’s cautiouscomments on further monetary policy easing weighed on market sentiment and led bond yields to rise thisweek. FII inflows into debt remained positive - $254 mln in the first four trading days of the week.• Bond Markets: Benchmark gilt yields at the long end of the curve rose – yields on the 10 year gilt closed up 8 bps, while that on the 5-year firmed up 7 bps.Yields on the 30-year paper also increased by 13 bps. At the same time, 1-year gilt yields closed flat, after rebounding from lows touched earlier in the week.• Forex: The Indian rupee slid amidst broad-based risk aversion in global financial markets and local events. As of Mar 15, Indian forex reserves stood at around $292.3 bln, about $2 bln more than previous week levels primarily due to revaluation of forex assets.• Forex: The rupee extended gains from last week helped by foreign fund flows, dollar sales by exporters and relative dollar weakness. As of Mar 08, Indian forex reserves stood at around $290 bln, about $224 mln less than previous week levels primarily due to revaluation of forex assets. Source: Morgan Stanley Research• Monetary Policy: At its mid-quarter review of monetary policy this week, RBI reduced the benchmark repo rate by 25 bps to 7.75% and left the CRR unchanged at 4%. Key points from the policy statement were –