Weekly Market Review - August 30, 2013


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Weekly Market Review - August 30, 2013

  1. 1. International Global equity markets declined as increased uncertainty led to weakness spreading to developed market equities as well. With the exception of select Asian markets, most equity markets fell and the MSCI AC World Index fell by 2.15% (down 2.3% for August). Bond yields eased from the recent highs, especially at the long end, in key bond markets. However, for the month, almost all markets witnessed tightening of yields on the back of concerns about reduce global liquidity. Gains in oil (concerns about military action against Syria) and precious metals helped the Reuters CRB index register marginal weekly gains. EM currencies continued to weaken against the US dollar, which lost ground against the Japanese Yen. OECD data pointed towards a slowdown in global trade, especially major economies - merchandise imports and exports decreased for G7 countries and BRICS countries (by 1.4% & 1.8% respectively). • Asia-Pacific: Equity markets in South Korea, China, and Taiwan did well, while those in Singapore and Japan declined. Japan’s consumer inflation rose by 0.7% yoy in July led by higher fuel and electricity costs. The July data on industrial production and manufacturing was positive. Policymakers in Indonesia and India announced fresh measures to support their weakening currencies - Indonesia’s central bank raised its benchmark rate by 50 bps to 7%. China’s regulators imposed around $85 mln in fines on Everbright Securities, for the trading error that roiled markets earlier in the month (labelled as insider trading). China will witness a revival of bond futures trading from next week. Sinopec is planning to acquire a 33% stake in Egypt’s Apache for $3.1 billion. • Europe, Gulf and Africa: European equity markets remained under pressure as the fall in global risk appetite pushed key indices down, even as national survey pointed towards a better environment. EC survey for August pointed towards an improvement in economic sentiment in August and Germany’s IFO survey for August was positive as well. Sweden is planning to introduce tougher norms for its banking sector. Hungary cut benchmark rates by 20 bps to 3.8%. UK’s Parliament defeated a motion to trigger military strikes against Syria.Turkey’s trade deficit in July increased and the Lira came under pressure after central bank comments failed to assuage investor concerns. South Africa’s GDP grew at 3% in Q2 helped by a bounce back in manufacturing.Vodafone is reportedly in talks to divest its 45% stake in Verizon Wireless for around $130 bln.. • Americas: Regional equity markets including those in US fell during the week with Latin American markets (Brazil and Mexico underperforming). US economy’s Q2 GDP was revised upwards to 2.5% from 1.7%, due to changes in the trade data. Canada witnessed a GDP growth of 1.7% helped by a jump in consumption. Brazil joined the ranks of EM central banks looking to bolster their currencies through higher rates - it raised the Selic rate by 50 bps to 9%. GDP pointed towards a 6% growth in the Brazilian economy in the previous quarter, helped by a weaker currency and higher government investment. On M&A front, Amgen is planning to buy Onyx for $10.4 bln to expand its business to cancer drugs and AstraZeneca is planning to acquire Amplimmune. BATS and Direct Edge plan are planning to merge, creating one of the top US stock exchange operators. Market Review WEEK ENDED AUGUST 30, 2013
  2. 2. Weekly Weekly change (%) change (%) MSCI AC World Index -2.15 Xetra DAX -3.73 FTSE Eurotop 100 -2.22 CAC 40 -3.33 MSCI AC Asia Pacific -0.92 FTSE 100 -1.22 Dow Jones -1.33 Hang Seng -0.60 Nasdaq -1.86 Nikkei -1.99 S&P 500 -1.84 KOSPI 3.01 India - Equity Strong gains towards the end of the week helped domestic equity markets close a volatile month on a positive note. Mid and small cap stocks continued to underperform and technology stocks witnessed strong gains. For the month, the metals index closed with double digit gains. FIIs outflows during the first four trading days amounted to around $ 440 mln. • Policy: The on-going Parliament session witnessed heightened acrimony, but the government managed to get two key bills (Food Security and Land Acquisition) cleared by the Lok Sabha.These bills will now need to be approved by the Upper House. At this stage, there isn’t enough clarity on the impact of Food Security Bill on the fiscal deficit. The new Land Acquisition norms need to be evaluated in term of the impact on project timelines and acquisition costs. Given the pressures witnessed in the financial markets, there appears to be a renewed effort to assuage concerns about policy delays. The government indicated that the CCI has cleared a slew of infrastructure projects (Rs.1.83 lakh crs) and FIPB has reportedly cleared pending acquisitions by foreign investors in to the pharmaceutical sector. • Macro: Latest GDP data indicated that the economic growth remain relatively low - GDP growth was 4.4% in the June quarter (4.8% in the March quarter). On a sectoral basis, whilst agriculture growth improved (2% versus 0.7% in March quarter) and services sector stable (6.6%), industry decelerated with manufacturing and mining witnessing a contraction. Source: CEIC, Morgan Stanley
  3. 3. These are certainly challenging times for the Indian economy and companies. The rise in short term borrowing costs and the impact of a weak rupee on unhedged balance sheets during this quarter could weigh on an already weak industrial activity levels. However, good farm production (monsoons have been normal), potential boost to consumption due to the Food Security bill and rise in exports, could help growth trends. The long term fundamentals and opportunities remain intact, but as we have been saying it is important to boost confidence amongst investors and companies. Weekly change (%) S&P BSE Sensex 0.54 CNX Nifty 0.00 CNX 500 -0.19 CNX Midcap -0.76 S&P BSE Smallcap -1.07 India - Debt The sharp fall in the rupee earlier in the week along with increasing concerns about the fiscal deficit weighed on sentiment in the bond markets. In addition, the spike in global oil prices amidst a weak rupee also dampened the mood. Yields moved up across the curve, especially at the short end and the cut-off yields were set higher during the scheduled auctions. FII outflows were to the tune of $137 mln during the week. • Yield Movements: The 10-Yr benchmark yield went up by 37 bps.The 5-yr Gilt yield rose 38 bps while the 5 – yr AAA corporate bond yields rose by 26 bps and the spread reduced further to 96 bps. Yields for 1 yr gilts firmed up by 61 bps, while 30 yr Gilts increased 41 bps and the yield curve remained negative. • Liquidity/Borrowings: Liquidity remained tight with repos averaging around Rs. 39,000 crore. Four securities were auctioned and received competitive bids for over Rs. 39,000 crs against the notified amount of Rs.17,000 crs. RBI also announced OMOs to the tune of Rs.8000 crs for support liquidity. • Forex: The rupee fell to new lows and breached the 68 level against the US dollar, before bouncing back to lose at 65.7 against the US dollar. Forex reserves as of August 23rd were down to $278 bln. RBI helped the sentiment by opening a forex swap window to meet the entire daily dollar requirements of three PSU oil marketing companies (estimated to need $400-500m a day). Unlike other central banks such as those in Indonesia, RBI has refrained from utilising its forex reserves for intervention. • Macro/Policy: Latest data points towards a rise in fiscal deficit – grew by 5.2% in July and for Apr- July 2013 stood at 62.8% of the budgeted estimate.The growth in fiscal deficit was around 28.8% versus a budget estimate of 10.7%.
  4. 4. Source: Bloomberg, Credit Suisse, CSO/Morgan Stanley The latest data and developments over the last two months have raised concerns about the ability to meet the projections of fiscal deficit being contained at 4.8% of GDP. Slower economic growth will lead to lower tax revenues and there remains uncertainty about non-tax revenues as well (read telecom, divestment). In addition, the government faces increased burden in terms of food security bill spending and oil-related subsidies due to higher oil prices (weak rupee exacerbating the impact).We also need to closely monitor foreign flows even as the current account situation improves. 30.08.2013 23.08.2013 Exchange rate (Rs./$) 65.70 63.20 Average repos (Rs. Cr) 39,724 38,425 1-yr gilt yield (%) 10.72 10.11 5-yr gilt yield (%) 9.27 8.89 10-yr gilt yield (%) 8.99 8.62 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 © 2013 Franklin Templeton Investments.All rights reserved