InternationalA bout of monetary easing across the globe set a positive tone for global equity markets and some of leadingindices crossed all-time highs.The MSCI AC World Index rose by 0.9%, helped by a broad based rally acrossthe globe. Expectations of better growth rates helped by the recent monetary easing and concerns aboutincreased allocation towards equities, pushed up bond yields, especially towards the long end of the curve.TheReuters CRB index was down 0.5% for the week, led by declines in precious metals, especially gold. TheJapanese Yen continued to weaken against major currencies and breached the 100 level against the US dollar.The latter registered gains and rallied strongly during the week. Currency movements along with central banksupport for growth are likely to be discussed at the G7 meeting over the weekend.• Asia-Pacific: Regional equity markets registered strong gains with Japanese and Malaysian marketsleading the gainers, while South Korean markets fell. The sharp fall in Japanese Yen led to increasedexpectations of better export growth and boosted domestic markets. On the other hand, Kospi fell onconcerns about the impact on export competitiveness due to a weaker yen. Malaysian equity marketscheered election results which gave a clear verdict in favour of the incumbent government. Economic dataout of China was mixed. In Japan, Balance of Payments data pointed towards a current account surplusreflecting the boost from the weakness in yen. S&P raised Philippines long term credit rating by one levelto BBB-. Reserve Bank of Australia announced a 25 bps cut of its benchmark rate to 2.75% and alsoreduced its inflation projection. Bank of Korea followed suit later in the week with a 25 bps cut to 2.5%.Central banks in Vietnam and Sri Lanka also joined in with rate cuts of 100 bps (to 7%) and 50 bps (to9%), respectively.• Europe: Equity markets in region moved up helped by the positive global sentiment and the Germanmarkets led the gains, with the Xetra DAX registering a historical high.The April Euro area compositePMI was revised up and some of the industrial production reports for March were positive. Germaneconomic data was quite positive with industrial output, factory orders and exports recording robustpositive growth.The Israel cabinet deferred budget cuts and raised deficit target for the current year to4.65% of GDP from 3%. S&P downgraded Egypt’s credit rating from B- to CCC+. Polish central bankcut benchmark interest rates by 25 bps to 3%.The European Bank for Reconstruction and Developmentcut the growth projections for Central and Eastern European countries (2013 growth to be at 2.1% fromthe earlier projected 3%), citing weakness in Russia and Poland.• Americas: US markets continued to move northward on the back of largely positive economic data,but Latin American markets, especially Brazil and Mexico, fell during the week. In US, latest datapointed towards a further fall in jobless claims and the leading equity indices hit new historical highs.Mexico’s industrial production fell sharply in March and the government has announced a financialreforms bill, which triggered a sovereign rating upgrade to BBB+ by Fitch. On the corporate front,Icahn and Southeastern Asset Management offered an alternative deal to Dell shareholders. In a $6.9billion leveraged buyout, a consortium of investors led by Bain Capital and Golden Capital, is acquiringBMC Software.Market ReviewWEEK ENDED MAY 10, 2013
Weekly Weeklychange (%) change (%)MSCI AC World Index 0.89 Xetra DAX 1.92FTSE Eurotop 100 1.05 CAC 40 1.04MSCI AC Asia Pacific 1.32 FTSE 100 1.59Dow Jones 0.97 Hang Seng 2.78Nasdaq 1.72 Nikkei 6.67S&P 500 1.19 KOSPI -1.07India - EquityDomestic equity markets joined the global rally amidst strong FII flows and witnessed strength across theboard. FMCG, consumer durables and auto sectoral indices outperformed, while the metals indexdeclined. FII flows for the first four trading days were over $700 mln.• Infrastructure/ Industrial Activity: Increase in infrastructure spending has been a critical driver ofgrowth for the Indian economy over the last decade or so.As a % of GDP, infrastructure spending wasestimated at close to 8% of GDP in FY12, up from about 4-4.5% at the turn of the century. However,a combination of policy issues along with slowing growth has impacted investment growth in the lastfew years. Supply constraints and global commodity prices have pushed up input costs, this along withproject delays have weighed on infrastructure companies. The better quality companies (those withlower leverage, diversified product portfolio) have done relatively well and seem well-positioned tobenefit from economic recovery.Source : Citigroup, CSO Source : E&Y (Based on FY07 prices)Some of the recent reports have pointed towards improving conditions in terms of project executionand industrial production, and if the trend holds, it augurs well for the overall economy. Latest datapoints towards a 2.5% rise in March industrial production, led by a base effect and rise inmanufacturing/electricity sectors. Whilst capital goods have registered positive trends (up 6.9%),consumer goods witnessed marginal growth of 1.6%.IIP % 3M Avg Infrastructure Spending as a % of GDP
There have been renewed efforts from the government to shake off the perception of a policy gridlockand various announcements including the setting up of a committee to expedite approvals for highvalue investment projects and announcement of freight corridors and investment corridors. Thegovernment is aiming to raise the investment to Rs. 40.9 trillion in the Twelfth Five-Year Plan (2012-17), or 10.7% of GDP from about 8% presently. Industrial activity should get positively impacted bythese policy measures and the recent cut in interest rates, in the coming quarters.Weekly change (%)S&P BSE Sensex 2.59CNX Nifty 2.54CNX 500 2.36CNX Midcap 1.42S&P BSE Smallcap 2.22India - DebtGovernment and corporate bond yields fell across maturities, on expectations of inflation trending downfurther and helping the case for further rate cuts.Also expectations of further buying support from RBI toboost liquidity helped sentiment. Importer led demand continued to weigh on the rupee and the scheduledGOI auctions received a good response. FII flows into the debt markets were to the tune of $578 million.• Yield Movements: Yields on the 10-Yr benchmark gilt fell 15 bps. The 5-Yr Gilt yield fell 14 bpswhile the 5 – Yr AAA corporate bond yields fell 10 bps and the spreads widened to 110 bps.Yields for1 yr Gilt and the 30 yr Gilt yields fell 8 bps and 23 bps respectively as spreads between the twocompressed to 25 bps.• Liquidity/ Borrowings: Liquidity remained tight with repos averaging Rs. 1,02,084 crore as againstRs. 86,409 crore last week.The overnight rates closed lower at 7.10% compared to 7.25% last week.Thescheduled auctions in four dated G-secs worth Rs. 15, 000 crore were fully accepted without anydevolvement.• Forex: The rupee depreciated against the US dollar due to importer led demand. It closed the week at54.80 about 1.6% lower over last week. Forex reserves as of May 3, stood at $294.7 bln compared to $296.3 bln the previous week lower by $2.06 bln.• Macro: Current Account Deficit (CAD) remains one of the key concerns in India and the rise in India’sCAD has been primarily due to a sharp rise in imports.This is not just gold and energy, but also itemssuch as coal.While the recent fall in global commodity prices augurs well for the short term, structuralreforms are required to remove supply constraints and address the fundamental issues.The governmenthas taken varius measures to boost capital flows to address the Balance of Payments issues and theseinclude relaxation of FII Tax Residency Certificate Rules and the cut in withholding tax on FIIinvestments in Indian debt to 5% from 20%. Also we need to keep in mind that many other EMeconomies are also witnessing increase in CAD in recent years and India is not alone.