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Weekly Market Review - July 19 2013


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Weekly Market Review - July 19 2013

  1. 1. International Global financial markets remained in the positive zone on reiteration about US monetary policy support for growth and earnings news flow. The MSCI AC World Index closed nearly 1% above last week levels, with technology stocks and select Asian markets underperforming.The G20 meet this weekend is expected to discuss OECD proposals on tax co-operation to curb tax evasion by multi-national companies. Global treasury bond prices rallied for the second week in a row as the Federal Reserve reiterated that any change in policy stance will be gradual and dependent on economic data. Commodities also benefited from expectations of sustained stimulus and the Reuters Jefferies CRB Index ended 1.49% higher. Change in demand-supply dynamics caused a sharp surge in theWTI crude oil price and brought it at par with the Brent index. Over the last few years, theWTI has typically traded at a significant discount to the Brent. In currency markets, the US dollar edged lower while the pound rose amidst optimism about economic growth. • Asia-Pacific: Regional equity markets exhibited divergent trends – while Shanghai and Taiwan stock markets posted declines, Indonesia and Indian equities recorded gains. The Nikkei also remained on an upward trajectory, but sentiment turned cautious ahead of the upper house elections over the weekend. In China, Q2-2013 headline GDP growth came in at 7.5% yoy, slightly less than the previous quarter and the June industrial production slowed to 8.9%yoy (9.2%yoy last month).Taking a step towards market-determined rates, the People’s Bank of China removed the floor on lending rates set at 70% of benchmark lending rates. IMF urged China to undertake structural reforms to rebalance its economy towards a sustainable model and the need to reign in excess credit. Reports indicate Japan’s MeijiYasuda is in talks to buy a 15% stake in Thai Life for $700 mln. • Europe/Africa: European markets outperformed global counterparts on the back of encouraging corporate news flow. French markets were buoyed by passage of a bill mandating banks to segregate proprietary trading from retail banking. Greece Parliament approved fresh austerity measures, which would enable the nation avail loans from the EU-IMF. UK economic data was broadly positive – retail sales rose and claimant count showed improvement in the labour market is underway. As per an OECD study, unemployment in Southern European economies is likely to rise through 2014. Central bank of South Africa maintained benchmark policy rate at 5%. On the corporate front, Commerzbank managed to sell a portfolio of UK commercial real estate assets for €5 bln and private equity firm Altor bought Rossignol. • Americas: Latest comments from the Federal Reserve and earnings reports by banks and other major corporates helped US stock indices rise. However, the Nasdaq index fell marginally on the latest earnings news. Brazilian stocks extended gains amidst positive external newsflow, while higher commodity prices lifted mood in Canada. Moody’s raised the outlook on US sovereign rating to stable from negative.The city of Detroit filed for bankruptcy, becoming on one of the largest cities to do so. While headline consumer price inflation increased 0.5%mom, core inflation trends were subdued at 0.2%mom.The Bank of Canada left rates unchanged. Data showed Brazil inflation levels eased last month as transport costs fell. On the corporate front, Chevron entered into an agreement with Argentina’s YPF to invest $1.2 bln in Vaca Muerta shale gas and Barclays refused to pay a $740 fine imposed by regulators for manipulating US electricity prices. Market Review WEEK ENDED JULY 19, 2013
  2. 2. Weekly Weekly change (%) change (%) MSCI AC World Index 0.96 Xetra DAX 1.45 FTSE Eurotop 100 1.08 CAC 40 1.82 MSCI AC Asia Pacific 0.03 FTSE 100 1.31 Dow Jones 0.51 Hang Seng 0.40 Nasdaq -0.35 Nikkei 0.58 S&P 500 0.71 KOSPI 0.08 India - Equity Positive global sentiment rubbed off on local markets and this along with good earnings reports helped markets overcome weakness due to the RBI measures. FII flows were however negative (-$101 mln) in the first four trading days of the week. Sectoral trends were divergent – interest rate sensitive stocks viz., banking, real estate, capital goods fell on concerns the liquidity tightening will weigh on growth. FMCG stocks found favour with investors amidst risk aversion as well as hopes the monsoons will boost rural demand. • Macro/Policy: The central bank and the government are clearly targeting rupee speculation and have indicated that the measures are temporary.At a broad level, the extent of impact on banks will depend on their dependence on wholesale funding and asset quality. Highly levered corporates could face increased pressures. It may be too early to assess the exact impact of such a move on the economy, given the various imponderables and will depend a lot on the time period these measures will be in place. The government has been trying to shake off the perception about policy paralysis and in another move this week it has relaxed FDI norms in various sectors (telecom, credit information companies, asset reconstruction and insurance*),besides moving to the automatic route in others.The changes are in line with the recent focus to attract foreign flows.Whilst growth momentum is unlikely to change over the near term, hopefully these measures will help in restoring foreign investor confidence about the direction of reforms. IMF GDP Growth Projections Yoy change 2013 2014 World 3.1% 3.8% Advanced Economies 1.2% 2.1% - US 1.7% 2.7% - Euro area -0.6% 0.9% - Japan 2.0% 1.2% Emerging Economies 5.0% 5.4% - Brazil 2.5% 3.2% - Russia 2.5% 3.3% - Emerging Asia 6.9% 7.0% - India 5.6% 6.3% - China 7.8% 7.7% - ASEAN-5 5.6% 5.7% Source: IMF WEO July 2013
  3. 3. Notwithstanding the near term risks in terms of the weak rupee and sluggish growth, we remain positive about the medium to long term prospects.Whilst growth rates could slow down further, they remain well ahead of other EM countries and especially the developed world. Earnings dispersion is expected to remain high during such tough times, and bottom-up fundamental research with a strong emphasis on the quality of companies, especially their managements and balance sheets, should work well. *subject to Parliament approval Weekly change (%) S&P BSE Sensex 0.96 CNX Nifty 0.34 CNX 500 0.04 CNX Midcap -0.69 S&P BSE Smallcap -0.53 India - Debt Local bond markets were shaken by measures to tighten rupee supply and thereby curb speculation in foreign exchange markets.Yields however came off the week’s highs on Friday, on views that the measures are temporary and the central bank sold just about one-fifth of securities at the open market operation. • Yield Movements: Yields rose sharply across maturities and the curve was inverted as yields on shorter-dated securities rose sharply. Yields on the 1- and 5-year papers jumped 110 bps and 61 bps respectively, while those on the 10-year paper increased 51 bps to 8.13%.Yield on the 30 year gilts were up 61 bps.Yields on the 5-year AAA corporate bonds also rose by a similar quantum. • Liquidity/borrowings: Demand for liquidity rose sharply ahead of RBI measures taking effect mid-week and call rates surged to over 9%, but ended the week lower at about 6.3%. Scheduled bond auctions of GOI securities worth Rs. 15,000 crores partially devolved on primary dealers owing to price mis-match. Besides, at open market sale operations of Rs. 12,000 crores, the central bank rejected majority of the bids received at higher yield levels. • Forex: The Indian rupee got a boost from central bank and government measures to curb speculative activity and ease foreign investment norms, and gained 0.4% over the week. Further, comments from policymakers seem to suggest more measures are being considered.As of Jul 12, 2013, India’s forex reserves stood at $280 bln, marginally changed over last week levels. Source: RBI, Credit Suisse Research
  4. 4. • Macro/Policy: In a move to curb speculative trades, RBI announced few changes this week – • It increased interest rates on Marginal Standing Facility (MSF), an emergency funding option available to banks, by 200 bps to 10.25% • Announced sale of Rs. 12,000 crores of G-Sec under Open Market Operations (OMO) • Capped liquidity under Liquidity Adjustment Facility (LAF) at 1% of NDTL (Net Demand and Time Liabilities).This means around bank borrowings above Rs.75,000 crores will be at 10.25% The measures need to be seen in the context of continued weakness in the rupee and the limitations of drawing down forex reserves to stem the currency’s fall. In addition, the RBI could have been also concerned about the impact of a weak rupee on imported inflation and Indian companies with unhedged foreign borrowings. Whilst the government has indicated that these measures should not be viewed as a prelude to a change in monetary policy, the combined impact of these measures is being viewed as ‘quantitative tightening’. Looking ahead, global developments and rupee trends will weigh on monetary policy direction. Any change in benchmark interest rates is expected to depend on the effectiveness of these measures in stemming the rupee decline. It is too early to gauge the exact impact on economic growth and these developments are likely to muddy the outlook further. Further measures may be announced to fund current account deficit and boost foreign inflows (including a sovereign bond issuance). 19.07.2013 12.07.2013 Exchange rate (Rs./$) 59.35 59.56 Average repos (Rs. Cr) 103,114 51,699 1-yr gilt yield (%) 8.63 7.53 5-yr gilt yield (%) 8.29 7.68 10-yr gilt yield (%) 8.13 7.62 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 © 2012 Franklin Templeton Investments.All rights reserved