1. Market Review
WEEK ENDING OCTOBER 18, 2013
A last minute deal in the US along with fresh economic data out of China boosted sentiment in the global
financial markets, amidst mixed newsflow on the earnings front. Increased expectations that recent events
will delay the US Fed tapering also boosted markets and the MSCI AC World Index rose by 2.5%. Bond
yields eased across the curve in key markets on expectations that global liquidity will remain easy for some
time. Gains in precious metals towards the end of the week helped the Reuters CRB index register
marginal weekly gains, even as energy prices moved down. The US dollar lost ground against major
currencies due to the change in monetary policy expectations and the UK Pound gained. Regulators in
various countries have reportedly initiated a global probe into suspected price manipulation in the foreign
Asia-Pacific: Most of the regional equity markets registered good gains and were also helped by positive
data out of China towards the end of the week. Expectations of continued easy global liquidity boosted
regional currencies along with the equity markets. China’s GDP rose by 7.8% in the third quarter (compared
to 7.5% in the previous quarter) helped by stronger consumption and investment. However, trade data was on
the weaker side. In Japan, a special Diet session commenced with the government looking to pass various laws
that will implement the growth strategies unveiled in June along with various structural reforms. China’s
Lenovo is reportedly evaluating a bid for Blackberry and Japan’s Softbank has acquired majority stake in
Finland’s Supercell for around $1.5 billion.
• Europe: European equity markets rallied on the back of positive global sentiment and UK markets
outperformed. Data out of UK pointed towards better employment trends in September and the
government unveiled proposals to relax norms for Chinese banks operating in London, as part of efforts
to capture share of growingYuan trade. On the economic front, Euro area’s industrial production bounced
back in August and inflation remained under control in September. As part of the austerity focus, various
European governments have submitted their budget plans for 2014 to the European Commission, and the
assessment will be done by mid-November. Serbia’s central bank cut its key rate by 50 bps to 10.5%.
Alitalia’s shareholders have approved the bailout plans for Alitalia, backed by the government.
• Americas: Resolution of the budget impasse and a hike in the debt limit helped US markets as well as EM equities
in the region – Brazil witnessed a sharp rally and technology stocks got a fillip by earnings news.Brazilian policy makers
are relooking at the swap auctions being used to support the Real after the change in global conditions. The US
Congress managed to cobble together a legislation to raise the debt ceiling, and reopen the government after a
prolonged shutdown (until January).The debt ceiling debate will take place in February and discussions for budget
deficit reduction are expected to be completed by December 2013. Chile’s central bank cut rates by 25 bps to 4.75%.
América Móvil withdrew its bid for KPN, on disagreement over price and KPN Foundation exercised its right to buy
50% of the shares. NRG Energy is acquiring most of the assets of Edison Mission Energy for around $2.6 billion.
MSCI AC World Index
FTSE Eurotop 100
MSCI AC Asia Pacific
India - Equity
Strong gains on Friday helped domestic equity markets close the week with gains. Mid and small cap stocks
continued to underperform their large cap counterparts and metal & oil stocks witnessing strong gains. FIIs
inflows were to the tune of $440 mln.
• Macro/Policy: Recent data around the clearance of large projects by CCI (Cabinet Committee on
Investment) and their potential execution over the next few quarters has led to hopes of increased industrial
activity. An analysis of the cleared projects point towards a dominance of power projects (especially related to
Fuel Supply Agreement/FSA with Coal India, to kick start generation). If all these projects get executed, it
should boost industrial activity and will help in addressing the power deficit in the country.
Domestic Thermal Coal Production
Projects submitted versus clearances
& I ndus( DI PP)
I ndus ( Comm)
Petrol, Nat gas
Source: Citi Research
Source: CLSA CCI
We continue to believe that improving the confidence of the business sector and reducing policy clearance
delays will go a long way in boosting industrial activity. We feel that the current pessimism around future
economic growth has been overdone. India continues to enjoy the advantages of a relatively high savings
rate along with positive demographics for the next decade or so, creating the largest middle class population
in the world. We need to utilise the current period to cleanse the system and lay the foundation for
sustainable higher growth trajectory.
3. Shares of Global Middle-Class Consumption 2000-2050
Weekly change (%)
S&P BSE Sensex
S&P BSE Smallcap
India - Debt
Bond markets weakened on data pointing towards higher inflation, stoking expectations of tighter
monetary policy. FII inflows were to the tune of $130 mln during the week.
• Yield movements: The 10-Yr benchmark yield went up by 13 bps. The 5-yr Gilt yield rose 16 bps
while the 5 – yr AAA corporate bond yields rose by 12 bps and the spread increased to 91 bps. However,
yields at the short end of the curve eased with 1 yr gilt yields falling by 5 bps. The yields on 30 yr Gilts
increased by 11 bps.
• Liquidity/borrowings: Liquidity remained tight with repos averaging around Rs. 63,500 crore, but
call rates eased towards the end of the week. Four securities were auctioned and received competitive
bids for over Rs. 43,000 crs against the notified amount of Rs.15,000 crs.
• Forex: The rupee weakened marginally against the US dollar and recovered some ground after RBI
refuted speculation that the swap window for oil marketing companies would remain open.The foreign
exchange reserves were at $279 billion as of October 11th.
• Macro: Latest data pointed towards increased inflationary pressures with both WPI (wholesale) and CPI
(consumer) moving up in September to 6.46% and 9.84%, respectively. Unlike recent trends of food prices
pushing inflation, there has been a rise in non-food and core inflation.This probably reflects the pass through
impact of the weak rupee in terms of import prices.
4. Rising Inflation
Size of EM Local Government Bond Markets ($bn)
Headline CPI (IW)
Headline CPI - new index
Fixed rate & zero-coupon
Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13
Source: Morgan Stanley.
In recent weeks, there has been increased speculation about the potential inclusion of Indian bonds in some
of the EM local bond indices (especially JP Morgan GBI-EM Global Index). However, we need to keep in
mind that any inclusion would require substantial easing of current restrictions on foreign investors for taking
Indian bond exposure. Also given the large size of Indian local bond market, it could lead to a rebalancing of
the index. Some analyst estimates indicate potential foreign inflows of $20-30 billion into India, helping the
balance of payments situation.
Exchange rate (Rs./$)
Average repos (Rs. Cr)
1-yr gilt yield (%)
5-yr gilt yield (%)
10-yr gilt yield (%)
Source: Reuters, CCIL.
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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.
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