Market Review WEEK ENDED MARCH 30, 2012InternationalAfter a strong start to the week, global equity rally momentum faded a bit in Europe and select Asian markets.Investor sentiment got a boost from hopes of continued easy liquidity after a US Federal Reserve official indicateda continuation of the accommodative stance for an extended period of time , despite recent positive economicdata . The MSCI AC World index closed up 0.24%, capping quarterly gains at 11.28% with Emerging Marketsand Japan leading the gains along with technology stocks in US. At their latest meeting in India, leaders of theBRICS nations reiterated the need to reform the IMF’s governance structure so as to reflect the growingcontribution of developing nations to global economy.With a view to strengthen intra-BRICS trade, the nationsalso inked a pact to extend credit in local currencies.Treasury yields in the US eased as investors took comfort inthe latest policy remarks. Crude oil prices pulled back from losses initially clocked on indications the US, andselect European nations are mulling the release of strategic reserves into the market.The Reuters Jefferies CRBIndex closed the week down 1.91%, reducing the quarterly gain to 1.04%. In currency markets, the yenstrengthened on fiscal year-end flows and strong exporter demand for the currency this week. However, for thequarter as a whole the currency stood weaker against the US dollar and the euro.• Asia-Pacific: Strong performance by Japanese equities helped regional indices overcome losses in Greater China equity markets and close in the positive territory. For the quarter as a whole, Emerging Asia outperformed developed markets. Weak earnings newsflow for Chinese industrial firms weighed on local markets. Japanese equities ended on a strong footing even as industrial output slid 1.2%mom, after a 1.9% gain in January. Thailand’s exports posted growth first time in three months on recovery from floods. Industrial production also rebounded. On the M&A front, Japanese electronics firm Sharp sold a 10% stake in its business to Taiwan’s Hon Hai for $806 mln.• Europe/Africa: Regional markets closed in the negative territory – German equities performed relatively well, helped by strong corporate earnings announcements. The euro gained on Friday after Eurozone finance ministers agreed to boost the region’s bail-out fund by 40% to about $930 bln and Spain announced additional budget cuts of $36 bln. On the economic front, consumer confidence in France increased sharply while Germany reported slight decline. German labour markets however continued to improve – jobless rate fell by 0.1% to 6.7%. Central banks in Israel, Turkey, Hungary and South Africa left interest rates unchanged. On the corporate front, Roche raised its cash offer for Illumina from $44.5 to $51 a share, valuing the US diagnostics group at about $6.7 bln. Total’s stock price fell sharply after a large gas leak was reported in on one of the company’s production blocks.• Americas: US equities continued their recent strong run amidst positive economic data and Fed official comments. The Nasdaq closed the quarter up 18%, much of which can be attributed to the steep rise in Apple’s stock. The US House of Representatives approved the JOBS Act, a legislation that is aimed at easing restrictions on fund raising for start-up businesses and thereby encouraging entrepreneurship. Bureau of Economic Analysis affirmed US GDP growth number at 3%. US durable goods orders index climbed up 2.2% in February, partially reversing declines in January and consumer spending rose 0.8%, despite only a modest 2% increase in incomes.The Thomson Reuters/University of Michigan consumer
sentiment index rose to 76.2 in March from 75.3 last month. Brazil’s Camargo Carreo said it is making a takeover bid for Portuguese cement producer Cimpor-Cimentos. Weekly Weekly change (%) change (%) MSCI AC World Index 0.24 Xetra DAX -0.70 FTSE Eurotop 100 -1.26 CAC 40 -1.51 MSCI AC Asia Pacific 0.21 FTSE 100 -1.48 Dow Jones 1.00 Hang Seng -0.55 Nasdaq 0.77 Nikkei 0.72 S&P 500 0.81 KOSPI -0.63India - EquityIndian equity markets witnessed a sharp rally on Friday as the Finance Minister sought to allay investor fearsover the recently announced tax proposals, and growth in core infrastructure industries surprised on the upside.Improved market sentiment helped frontline equity indices reverse losses clocked earlier in the week and closemarginally positive. Mid cap stocks fared better than large caps. Amongst sectoral indices, power and consumerdurables outperformed while healthcare and FMCG sectors lagged broad markets. FIIs sold equities to the tuneof $208 mln during the first four trading days of the week.• Tax proposals: Markets came under pressure as investors were concerned about the potential impact of certain taxation provisions proposed in the recent Union Budget along with General Anti-Avoidance Rules (GAAR) on offshore investors. Broadly, the Budget provides revenue authorities with wider powers to investigate entities set up offshore without commercial substance but with the sole purpose of evading tax. An additional point about GAAR overriding any Double Tax Avoidance Treaty has led to concerns that capital flows from countries such as Mauritius and Singapore might be impacted. On Friday, the Finance Minister partially addressed concerns by clarifying that holders of Participatory-Notes (instruments issued by FIIs to their overseas investors) will not be liable to taxation. Investors are awaiting further clarity on various issues related to the same.• Macro: The core infrastructure index, representing eight industries, grew 6.8% in February, a sharp acceleration from the 0.5% increase recorded last month. Growth was led by robust rise in coal (17.4%), electricity (8.0%) and cement (10.8%) output. A widening trade gap alongside lower foreign capital inflows led India’s Balance of Payments (BoP) to record a deficit of $12.8 bln in the December 2011 quarter, as against a small surplus of $274 mln recorded in the sequentially previous quarter. Sharp slowdown in exports alongside continued strength in imports (due to higher energy prices and gold imports) impacted trade balance. Sustained strength in invisibles could only partially mitigate impact of a wider trade deficit - the current account deficit increased to $19.6 bln from $16.9 bln in the sequentially previous quarter. On the capital account side, the deterioration was
primarily on account of reversal in debt inflows (such as banking capital, external commercial borrowings, etc.) and slowdown in portfolio flows. Looking ahead, the turnaround in FII flows in 2012YTD along with curbs on gold imports can help mitigate stress on the current account side and result in a positive Balance of Payments for the March quarter. Weekly change (%) BSE Sensex 0.24 S&P CNX Nifty 0.33 S&P CNX 500 0.47 CNX Midcap 0.52 BSE Smallcap 0.05India - DebtIndian long-dated treasury yields firmed up this week on supply worries as the RBI announced a front-loadedborrowing calendar for H1FY13, with average weekly issuances of Rs. 15,000-18,000 crore per week.• Yield Movements: The 10-year benchmark yield rose 14 bps and the 5-year gilt yield increased 11 bps.Yields on AAA rated corporate bond of similar tenor rose by 2 bps and consequently spreads narrowed to 95 bps from 103 bps last week.Yields on the 1 year paper dipped 1 bp while those on the 20-year g-sec paper firmed up 7 bps. As a result, spreads between the long (30-year) & short end (1-year) of the curve expanded to 42 bps.• Liquidity/ Borrowings: Overnight call money rates spiked to multi-year highs of 15% on heightened liquidity stress due to financial year-end pressures. Demand for liquidity under the RBI’s LAF window averaged Rs. 179,278 crore this week (Rs. 161,951 crore last week). At the OMO auctions, RBI re-purchased securities worth Rs. 4,528 crore as against the notified amount of Rs. 10,000 crore.• Forex: Strong rebound on Friday following Finance Minister clarification on some of the taxation issues helped the rupee reverse losses and close week 0.59% higher against the US dollar. Renewed weakness in recent weeks, after strong gains in the first two months of the year, has reduced the rupee’s YTD gains against the US dollar to 4.16%. As of Mar 23, forex reserves aggregated $295.14 bln, about $318.6 mln higher than last week levels.• Policy: The borrowing calendar pegs government gross borrowing for the first half of this fiscal year (FY13) at Rs. 370,000 or 65% of budgeted estimates, in line with market expectations. Compared to the same period last fiscal year, these gross borrowings are close to Rs120,000 crore higher. Most of the issuances are concentrated in the 10-15 years maturity bucket and average weekly borrowing amounts to about Rs.15,000- 18,000 crore. In our view, the large supply will exert upward pressure on yields at the longer-end of the g-sec curve. With year-end liquidity pressures set to fade from next week, systemic liquidity conditions should improve. However, we need to keep an eye on the rupee and capital flows, as any sharp depreciation might lead to RBI intervention, impacting liquidity and necessitating OMO auctions. Notwithstanding the relatively realistic fiscal projections this year, we continue to be wary about the upside risks posed by higher subsidy burden due to global energy prices.