1. Market Review
WEEK ENDED JANUARY 18, 2013
International
Global equity markets remained buoyant supported by economic data out of China and positive earnings
news flow. The MSCI AC World Index moved up by 0.48% led by gains in Asia and the US. Global bond
yields closed the week off highs touched earlier as investors reallocated towards risk assets. Crude oil prices
firmed up as IEA revised upwards demand forecasts for 2013 citing increased demand from EMs.The report
also said the oil market has tightened with demand picking up and reduced supply from Saudi Arabia.
Supply concerns pushed up prices of precious metals, Palladium and Platinum, and helped the Reuters
Jefferies CRB Index closed the week up 1.53%. In currency markets, the US dollar index advanced 0.6%
while the Swiss franc and Japanese yen weakened.
• Asia-Pacific: Emerging Asian equities recorded strong gains on the back of positive data out of China.
Chinese GDP growth in Q4 2012 came in at 7.9% (7.4% in Q3 2012) and full year growth was 7.8%.
Other monthly data was also largely positive - industrial production was up 10.3%yoy in December and
retail sales increased 15.2%, however FDI slowed by 4.5%. Australia’s unemployment rate climbed up from
5.3% to 5.4% primarily due to slowdown in mining sector. Indonesia’s equity markets clocked strong gains
even as Jakarta was hit by floods. Japanese equity markets continued to gain on yen weakness, led by
expectations that Bank of Japan is likely to announce a 2% inflation target and announce further
quantitative easing measures.
• Europe: Concerns about the health of the German economy and wider region overshadowed positive
corporate/global news flow. Eurozone industrial output fell for the third consecutive month (down
0.3%) led by sharp declines in Italy and Spain. German economic growth slowed to 0.7% in 2012 (3%
previous year) and 2013 growth forecasts were reduced to 0.4% from 1%. UK retail sales slid, while
inflation remained at 2.7% in December. Russia kept policy rates unchanged. On the corporate front,
Rio Tinto CEO stepped down after a $14 bln write-down on aluminum assets and a mining project in
Mozambique. Eon & GDF Suez are selling 49% stake in Slovensky Plynárensky Priemysel to
Energeticky for $3.5 bln. Also Saint Gobain is selling its US glass jar manufacturing unit to Ardagh for
$1.7 bln.
• Americas: Strong corporate earnings/economic reports helped US equity markets clock further
gains this week. US industrial production increased by 0.3% in December and housing data was also
positive. Retail sales expanded by 0.5%, but US consumer sentiment was setback by concerns about
tax increases and spending cuts. As per the Federal Reserve Beige Book the economy was relatively
resilient amidst uncertainty about fiscal cliff and continued to grow at a modest pace. Central banks
in Chile, Mexico and Brazil left policy rates unchanged. Mexico added that it could cut rates if
growth slows. Brazil economic activity index rose 0.4% in November, more than market
expectations. On M&A Front, Swatch Group is set to buy Harry Winston Diamond jewellery &
watch brand for around $1 bln.
2. Weekly Weekly
change (%) change (%)
MSCI AC World Index 0.48 Xetra DAX -0.17
FTSE Eurotop 100 -0.21 CAC 40 0.96
MSCI AC Asia Pacific 0.68 FTSE 100 0.54
Dow Jones 1.20 Hang Seng 1.45
Nasdaq 0.29 Nikkei 1.03
S&P 500 0.95 KOSPI -0.44
India - Equity
Frontline equity indices were boosted by positive policy developments. Small cap stocks however closed
in the negative territory. Trends were mixed amongst sectoral indices – oil & gas and real estate stocks
significantly outperformed broad markets. The former gained as government reformed pricing of fuel
products. FII interest remained high – flows aggregated $697 mln in the first four trading days of the
week. As a major relief to foreign investors, the government accepted most of the recommendations made
by Dr. Shome panel on GAAR (General Anti-Avoidance Rules) – most important ones being deferral to
April 2016, grandfathering for transactions prior to August 2010 and any applicable tax treaties would
supersede GAAR.
• Deficits: The government has announced partial de-regulation of diesel prices and has allowed Oil
Marketing Companies to raise prices in a calibrated manner (~Rs. 0.4-0.5/per litre per month) till they
are aligned with market rates (about Rs. 60/litre). However, given the political sensitivities, it will need
to be seen if this can be implemented in entirety.
Source: Budget Documents, Deutsche Bank
Fuel subsidies account for close to 33% of the total subsidy bill. Given that diesel accounts for bulk of
India’s energy consumption and major portion of under-recoveries, the measure should have a positive
impact on the subsidy burden and help fiscal consolidation from FY14 onwards. Initial research estimates
indicate the subsidy bill could come down by about 0.5% of GDP to 2%. A part of this impact may
however be offset by the increase in cap on subsidized LPG cylinders to 9 from 6 per annum. Also the
Food Security Bill, if implemented, will push up the subsidy burden. Overall, the picture is mixed, and it
will need to be seen how the arithmetic changes, ahead of an election year.While the implementation of
the proposed hike would add to inflationary pressures, these should be seen favourably by RBI due to
their positive impact on the macro situation over the long-term.
3. Weekly change (%)
BSE Sensex 1.91
S&P CNX Nifty 1.90
S&P CNX 500 1.38
CNX Midcap 0.55
BSE Smallcap -1.13
India - Debt
Indian Treasury bond yields eased this week but closed off lows as hawkish comments by RBI weighed on
sentiment and led traders to book profits.
• Yield Movements: Yields dipped across the yield curve – yields on the 1-year and 10-year
benchmark papers eased 3 bps and 5 bps respectively. Yields on the 30-year gilts also fell 3 bps.
• Liquidity/borrowings: Systemic liquidity conditions remained stable this week – overnight call money
rates continued to hover around the 8% and demand for liquidity under the RBI’s LAF window averaged
Rs. 87,800 crore vis-à-vis Rs. 85,634 crore in the previous week. Scheduled GOI bond auctions were
oversubscribed by a large margin.
• Forex: A combination of factors - dollar sale by foreign banks/corporates, strong FII flows and
government reform measures – helped the rupee strengthen by about 1.9% against the US dollar. As of Jan
11, India’s forex reserves stood at $296.25 bln.
India CPI and WPI inflation
Source: CLSA Asia-Pacific Markets, CEIC
