Weekly Market Review - August 2, 2013

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Weekly Market Review - August 2, 2013

  1. 1. International Global equity markets closed the week and the month of July on a positive note, helped by hopes of robust economic and earnings data, and expectations that US Fed will keep stimulus in place.The MSCI AC World Index closed up 0.97% (up 4.69% in July), but Emerging Markets witnessed declines (up 0.77% in July). Benchmark treasury bond markets were range-bound and closed marginally higher, even as central bank news flow emphasised status quo. In commodity markets, gold prices edged lower and grain/food prices softened on estimates of higher US production. Gain in crude oil prices helped offset losses partially and the Reuters Jefferies CRB index closed down 0.24%. The index managed to clock gains of 3.02% last month. In currency markets, Euro registered gains against major currencies on expectations of better growth, whilst US dollar gained amidst continued speculation about the direction of US quantitative easing. • Asia-Pacific: Asian markets exhibited divergent trends – while Japan, Greater China equities recorded gains, India, Indonesia and Taiwan posted declines. Japan industrial production declined 3.3%, but unemployment rate eased to 3.9% and ratio of jobs available to job seekers increased. China’s official PMI index data contrasted with HSBC’s release – the former index improved slightly to 50.3 from 50.1, indicating pick up in the pace of growth.The services PMI data also showed signs of recovery in the sector. Chinese central bank infused liquidity through reserve repo operations. Indonesia reported sharp rise in inflation on the back of fuel price hike, and a fall in exports caused the trade deficit to widen. Indonesia’s economy expanded by 5.81%yoy in the June quarter, less than market expectations and corresponding quarter last year. • Europe: Regional stock markets rose amidst robust economic data and continued central bank support. Euro zone unemployment rate stayed at 12.1% but the 24,000 reduction in the number of unemployed suggested economy may be turning the corner. UK manufacturing and construction activity expanded. ECB and BoE remained on hold. Central banks in Israel and Czech Republic also left rates unchanged. Publicis and Omnicom announced a $35 bln merger, creating the world’s largest advertising agency. Barclays announced a $8.9 billion rights issue to meet regulatory requirements and Deutsche Bank is planning reduce its balance sheet to meet leverage requirements. • Americas: US equity markets climbed higher towards the close of week as mixed jobs report sparked speculation the US Fed will defer stimulus pullback. Non-farm payrolls increased by 162,000, but less than market expectations, and the jobless rate eased to 7.4%. In contrast, US June quarter GDP growth data surprised on the upside – growth accelerated to 1.7% from 1.1% in the sequential previous quarter. The US’s Bureau of Economic Analysis has also announced a change in methodology for calculating GDP (inclusion of R&D, entertainment...etc), which added around 3% to the US GDP. Elsewhere in the region, Brazil sold currency swaps to strengthen the real. On the corporate front, Irish biotechnology firm Elan is being purchased by Perrigo for $8.6 bln. JP Morgan Chase said it would pay $410 mln penalty to regulators on charges of manipulating power prices. Market Review WEEK ENDED AUGUST 02, 2013
  2. 2. Weekly Weekly change (%) change (%) MSCI AC World Index 0.97 Xetra DAX 1.97 FTSE Eurotop 100 1.65 CAC 40 1.94 MSCI AC Asia Pacific 0.10 FTSE 100 1.42 Dow Jones 0.64 Hang Seng 1.01 Nasdaq 2.12 Nikkei 2.38 S&P 500 1.07 KOSPI 0.66 India - Equity Weak domestic economic news along with earnings data, amidst concerns about the impact of rupee- related policy measures, weighed on Indian equities markets. Mid and small cap stocks underperformed large caps amidst risk aversion. Real estate and power stocks recorded double-digit losses. The week witnessed $145 mln FII outflows in the first four trading days of the week. • Macro/Policy: As per latest data, the index of eight core infrastructure industries, which has 37.9% weight in the IIP, witnessed marginal growth in June (up 0.1%yoy) due to fall in coal, natural gas and crude oil output. India’s HSBC manufacturing PMI index dipped to 50.1 from 50.3. This week, the government announced a higher interest rate subvention for exporters and eased some of the FDI restrictions placed on multi-brand retail sector (such as local sourcing) and clarified policy stance on others.These changes have been made to address concerns raised by some of the large foreign players. • Corporate Earnings: The corporate earnings season has been a mixed bag so far.While results from IT, Telecom and private banking sectors exceeded market expectations, reduced consumer spending weighed on earnings performance of FMCG and consumer discretionary businesses. In continuation of recent trends, results from the capital goods/infrastructure related industries disappointed markets. Indian pharmaceutical companies were able to counter slower product off-take in domestic segment (ahead of new drug pricing rules taking effect), through exports. In the banking sector, private and retail sector focused banks continued to fare well, while PSU banks showed increase in asset quality pressures.The current tough market conditions are likely to result in increased differentiation in the performance of banks, and those with stronger financial position are likely to outperform. As we have shared earlier, there are tentative signs of growth bottoming out and GDP growth may be slightly better than last year. However, a meaningful recovery in economic growth will take time, especially as monetary policy focus has shifted towards rupee stability. Given this, we think Corporate India earnings growth will be subdued in the current financial year. Fresh policy measures to boost growth along with the outcome of national elections next year, will shape the outlook for the next year and beyond. Companies deriving a fair share of revenues from overseas/US markets may be relatively better placed than pure domestic demand plays over the near term.
  3. 3. Weekly change (%) S&P BSE Sensex -2.96 CNX Nifty -3.54 CNX 500 -4.27 CNX Midcap -5.88 S&P BSE Smallcap -6.13 India - Debt Indian bond markets took a breather this week as RBI left benchmark rates unchanged and indicated that recent liquidity measures are temporary in nature and will be gradually reversed as the rupee stabilizes.The rupee however reversed recent gains and closed 3.4% lower. RBI move to tighten hedging norms for FIIs helped the rupee recover somewhat. • Markets: Yields edged lower at the shorter end of the curve, while those at the longer end stood slightly higher. With the daily LAF borrowings capped, banks were seen tapping the MSF window. Overnight call money rates however closed the week lower. Scheduled GOI bond auctions received good response but two of the securities partially devolved on primary dealers. Muted FII flows caused the rupee to weaken against the US dollar this week. Source: CEIC, Bloomberg Finance LP, Deutsche Bank • Policy: The overall policy tone remains cautious (with a dovish tinge) and reflects the trade-off between external sector stability & growth.We need to keep in mind that large EM countries (Brazil,Turkey and Indonesia) have been undertaking tightening measures to defend their currencies. RBI has indicated that barring the rupee pressures, the overall macro situation would have provided adequate background to ease rates further. However, the central bank has decided to focus on external sector stability for the time being and has indicated a gradual reversal of liquidity tightening, as rupee settles into a stable band against the US dollar. Given the weak growth environment in India and overseas, the case for monetary easing could only become stronger. The government needs to focus on addressing the CAD concerns and boost investor confidence (both domestic and foreign) through concrete measures.
  4. 4. The central bank revised FY14 economic growth estimates (baseline) downwards to 5.5% from 5.7% earlier, citing increased risks from continued slowdown in domestic industrial activity as well as weak global growth trends. We expect short term rates to remain firm until there is a change in liquidity stance and a lot depends on developments on the rupee, CAD and global liquidity fronts. Institutional Investors are likely to gradually position their portfolios towards an eventual monetary easing cycle to address growth concerns. The governor has clearly indicated that the central bank would like to see an inverted yield curve and the focus is on curbing volatility (not a particular rupee level against the US$). 02.08.2013 26.07.2013 Exchange rate (Rs./$) 61.10 59.04 Average repos (Rs. Cr) 37,443 37,052 1-yr gilt yield (%) 9.79 9.84 5-yr gilt yield (%) 8.71 8.63 10-yr gilt yield (%) 8.46 8.35 Source: Reuters, CCIL. The information contained in this commentary is not a complete presentation of every material fact regarding any industry,security or the fund and 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. Risk Factors: All investments in mutual funds and securities are subject to market risks and the NAVs of the schemes may go up or down depending upon the factors and forces affecting the securities market.The past performance of the mutual funds managed by the Franklin Templeton Group and its affiliates is not necessarily indicative of future performance of the schemes. Please refer to the Scheme Information Document carefully before investing. Statutory Details: Franklin Templeton Mutual Fund in India has been set up as a trust by Templeton International Inc. (liability restricted to the seed corpus of Rs.1 lac) with Franklin Templeton Trustee Services Pvt. Ltd. as the trustee (Trustee under the Indian Trust Act 1882) and with Franklin Templeton Asset Management (India) Pvt. Ltd. as the Investment Manager. Copyright © 2012 Franklin Templeton Investments.All rights reserved

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