Market Review WEEK ENDED JULY 13, 2012InternationalGlobal equity markets managed to overcome the economic blues during the week on hopes that policymakerswill do more to stem the ongoing slowdown.The MSCI AC World Index finished 0.54% with emerging markets,especially those in Asia underperforming, even as central banks in Asia/EM cut rates to boost growth.The AsianDevelopment Bank reduced its growth forecasts for the Asia ex-Japan region to 6.6% from 6.9% owing toslowdown in exports and China/India. Global benchmark bond yields continued to ease while commodity pricesadded gains. Crude oil prices moved up on the back of expectations of policy action and geo-political tensionsin the Middle East.This alongside gain in some other commodities helped the Reuters Jefferies CRB index add2.45%. In currency markets, the euro recovered some ground after a successful Italian sovereign debt sale.• Asia-Pacific: Regional equity markets underperformed global counterparts on concerns economic growth was slowing down. However, fears of a sharp slowdown receded after China GDP growth came in line with market expectations and select monthly economic indicators - new loans and fixed asset investment growth - showed improvement. China’s economy grew by 7.6%yoy in Q2-2012 as against 8.1% in the previous quarter. Bank of Japan left policy rates unchanged but increased the size of its asset purchase programme by ¥5 trillion to ¥45 trillion ($564 billion). South Korea’s central bank unexpectedly cut benchmark policy rate by 25 bps to 3% while Indonesia maintained status quo. In Australia, the jobless rate rose by a tick to 5.2% as number of jobless increased by 27,000. Singapore GDP contracted 1.1%qoq, annualized rate primarily due to weakness in manufacturing sector. On the M&A front, Dentsu is acquiring UK based Aegis for about $5 bln and Superior Aviation Beijing is acquiring Hawker Beechcraft for close to $1.8 bln.• Europe: Regional markets got a boost from policy decisions to support Spain, hopes of policy support for the global economy and successful Italian debt sale. German equities in particular notched strong gains. Eurozone finance ministers agreed on more details about the Spanish bank rescue package and envisaged the first €30 bln of the €100 bln aid to be disbursed by end of July. They also agreed to give Spain an additional year for meeting deficit reduction targets as the Spanish government unveiled plans to save €65 bln through tax increases and spending cuts. Italy managed to sell €5.25 bln debt, the higher end of its planned issue, even after Moody’s downgraded its sovereign rating two levels to Baa2. For the first time on record, France sold €7.7 bln of six-month t-bills at negative yields. In UK, the manufacturing sector expanded at a faster-than-expected pace of 1.2%.• Americas: A strong rally in financial stocks towards the close of week helped the S&P 500 and Dow finish marginally higher. Tech dominated Nasdaq however ended lower. On the economic front, US consumer confidence declined sharply and the US trade deficit by 3.8% to $48.7 bln narrowed due to fall in oil prices. The minutes from US Fed’s last policy meeting indicated majority policymakers were of the view that additional stimulus be provided if economic momentum deteriorates further. Brazil’s central bank maintained a dovish policy stance and cut the benchmark Selic lending rate by 50 bps to 8%. The country’s retail sales declined raising concerns the slowdown was spreading to consumption sectors. On the corporate front, JP Morgan reported a $4.4 bln trading loss but re-affirmed its positive
outlook for earnings this year. Intel is acquiring a 15% stake in Dutch company ASML for about $4 bln and WellPoint offered to buy Amerigroup for close to $5 bln. CFTC is investigating Peregrine Financial for defrauding clients and the company filed for bankruptcy. Weekly Weekly change (%) change (%) MSCI AC World Index -0.54 Xetra DAX 2.29 FTSE Eurotop 100 0.83 CAC 40 0.38 MSCI AC Asia Pacific -2.79 FTSE 100 0.06 Dow Jones 0.04 Hang Seng -3.58 Nasdaq -0.98 Nikkei -3.29 S&P 500 0.16 KOSPI -2.44India - EquityA weak start to the earnings season and subdued IIP growth numbers led Indian equity markets to close the weekin the negative territory. Large cap stocks underperformed mid and small caps.The BSE IT index closed sharplylower as index heavyweight Infosys stock lost ground after it delivered weaker-than-expected performance andreduced growth guidance for the rest of FY13. On the other hand, peer Tata Consultancy Services fared relativelywell and this helped curb losses. FMCG and Healthcare stocks outperformed broad markets. FIIs bought equitiesto the tune of $275 mln in the first four trading days of the week. Trends in headline IIP index %Yo 25.0 Y 20.0 15.0 10.0 5.0 0.0 -5.0 -10.0 May-07 Nov-07 May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Source: CSO, Citi Research• Macro: India’s industrial production moved back into positive territory in May – output grew by 2.4% as against a 0.9% decline in the previous month. The expansion was led by manufacturing (2.5%) and electricity (5.9%) sectors, while mining output contracted by 0.9%. An analysis by user-based industries indicated continued decline in investment activity while consumption held up well. The April numbers were revised down to -0.9% from +0.1% growth reported earlier. Overall, the latest IIP data reiterates the need for government policy action to alleviate headwinds facing industry. Even as growth remains subdued, the central bank may not favour rate hikes due to elevated inflation levels and upside risks from the weak monsoons.
Provisional data release indicates India’s trade deficit narrowed in June as a sharp drop in oil import costs helped overcome impact of a 5.45% drop in exports. As per latest data, growth in gross indirect and direct tax collections for the June quarter was below targeted levels. Indirect tax collections, comprising customs, excise and service tax, increased by 13.8% as against full-year targeted growth rate of 27%. Gross direct tax collections increased by 6.8% vis-à-vis the targeted 15% growth, mainly due to a slowdown in corporate tax collections (up 3.5%yoy). However, at a net level, direct tax collections reported a 47.2% rise as government slowed disbursement of refunds. It is important the government takes steps to both augment revenues and curb expenditure in order to return to the fiscal consolidation path. Implementation of Goods & Services Tax and Direct Tax Code would be significant steps towards boosting tax collections. Weekly change (%) BSE Sensex -1.75 S&P CNX Nifty -1.69 S&P CNX 500 -1.60 CNX Midcap -1.08 BSE Smallcap -1.25India - DebtIndian benchmark bond yields at the medium to long end of the curve eased as IIP recorded only a modestincrease and April data was revised downwards. Lower-than-expected yields at bond auctions also helped long-dated bonds gain.• Yield Movements: Yield on the 10-year and 30-year Indian benchmark treasury bond eased about 6 bps from last week’s level while that on the 1-year paper firmed up 6 bps. Consequently the yield curve flattened and spreads between short (1-year) and long dated (30-year) gilt yields decreased to 55 bps from 68 bps.• Liquidity/ Borrowings: Liquidity situation remained easy – overnight call money rates eased to about 8% from 8.2% levels earlier and repos averaged Rs.49,359 crore as against Rs. 43,117 crore. Interbank Liquidity Trend Source: RBI, Bloomberg, Morgan Stanley Research