Market Review WEEK ENDED MAY 12, 2012InternationalGlobal equity markets fell further as a combination of weak economic newsflow and fresh uncertainty in Europe,weighed on investor sentiment.The MSCI AC World Index fell 2.09% led by sharp declines in Asia. Benchmarktreasury yields edged lower as latest economic data pointed towards slowing growth momentum in key globaleconomies. Crude oil prices declined on expectations of diminishing demand due to downshift in economicgrowth and signs supply had improved. The IEA slightly raised its oil demand forecast for 2012 - it now pegsglobal consumption at 790,000 b/d, up from 770,000 b/d.The fall in crude oil prices alongside weakness in goldand other industrial commodities led the Reuters Jefferies CRB Index to close down 1.80%.Amongst currencies,the US dollar index gained on the back of continued risk aversion.• Asia-Pacific: Regional markets underperformed global counterparts on concerns that the slowdown in mature economies and China will weigh on regional growth. Economic data out of China was mixed – headline inflation continued to ease, but industrial output and retail sales growth came in below market expectations. China’s April trade surplus expanded as imports growth slowed more than exports. Exports data out of Taiwan and Malaysia was also weaker than expected. Hong Kong GDP growth slowed to 0.7%yoy from 1.1%yoy in the sequentially previous quarter. Central banks in Indonesia and Korea left interest rates unchanged. Indonesia reported 6.3%yoy GDP growth for Q1-2012, slightly slower than the 6.5% growth recorded in the sequentially previous quarter. Moderation in export and investment activity contributed to the slowdown.• Europe: Election outcomes in France and Greece indicated growing support for anti-austerity political groups and concerns about a potential Greece exit from the Euro. Francois Hollande won the Presidential elections in France leading to doubts over the fiscal path and expectations of a more growth-oriented approach.The inconclusive elections results in Greece have led to political uncertainty. This alongside developments in Spain led regional equities lower, as the Spanish government took a 45% stake in Bankia to shore up the bank’s finances and also announced new norms for the banking sector, which would require additional capital raising. Germany’s Xetra Dax index however closed in the positive zone helped by strong domestic economic data. European Commission revised regional growth forecasts upwards – it now expects GDP to contract by 0.3%yoy in 2012 and grow by 1% in 2013.The Bank of England kept policy rates and asset purchases on hold. Poland increased policy rate by 25 bps to 4.75%. KPN rejected America Movil’s $4.2 bln offer saying it undervalued the company.• Americas: US equity indices slid even as domestic economic data was relatively upbeat. Banking stocks were under pressure after JP Morgan reported $2 bln of trading losses. US consumer sentiment index registered sharp increase and the government reported its largest monthly budget surplus in nearly three years. US exports recorded robust gains but higher fuel costs added to import bill and led the trade deficit to widen to $51.8 bln. Canada economy added 58,200 jobs in April but the unemployment rate increased to 7.3% as more people were added to the workforce. On the corporate front, News Corp doubled the size of its share buyback programme to $10 bln from $5 bln. Coty raised its offer price for Avon to $10.7 bln from $10.05 bln.
Weekly Weekly change (%) change (%) MSCI AC World Index -2.09 Xetra DAX 0.28 FTSE Eurotop 100 -0.47 CAC 40 -1.02 MSCI AC Asia Pacific -4.41 FTSE 100 -1.41 Dow Jones -1.67 Hang Seng -5.32 Nasdaq -0.76 Nikkei -4.55 S&P 500 -1.15 KOSPI -3.62India - EquityIndian equity markets declined on continued global risk aversion and weak macro-economic numbers, even asthe government deferred the implementation of the much –debated General Anti-Avoidance Rules (GAAR).Amongst sectors, power, metal and IT indices underperformed broad markets while consumer durable stocksmanaged to hold ground. FII outflows aggregated about $184 mln in the first four trading days of the week.• Macro: Growth in India’s industrial production, as represented by the IIP index, turned negative in March – index declined by 3.5% on the back of broad-based contraction in output across mining and manufacturing sectors. There was also a marked slowdown in electricity generation and capital goods output fell by 21.5%. Growth in consumer goods output was a bright spot in the report – output increased by about 0.7%. from 20% to 5%.The continued volatility in the IIP data has been a concern and raises the validity of data. However, the broad trend points towards slowdown – cumulative growth for FY12 stood at 2.8%yoy as against 8.2%yoy a year ago. While the Indian economy continues to be driven by the services sector (accounts for about 60% of GDP), the slowdown in manufacturing and investment has been weighing on investor sentiment.The sector is seen to be a critical one for private sector investments and generating large scale employment over the medium to long term.• Policy: The government this week announced few changes to the Finance Bill. Key amongst them being the deferment of GAAR implementation to the next fiscal year so as to complete consultations and put in place the operational framework. The onus of proving tax avoidance has now been shifted to tax authorities and it was clarified that GAAR will not supersede DTAA on retrospective basis. The government however maintained its stance on retrospective taxation of cross-border transactions – this could be a negative for some of the corporates. Further clarity is expected to emerge once the government releases guidelines at end of month.Other key changes to the Finance Bill included – • Reduction in the withholding tax on external commercial borrowings (ECBs) from 20% to 5% has been extended to all businesses (from infrastructure sector alone)
• Tax on long-term capital gains due to sale of unlisted securities (private equity investors) has been aligned to FII taxation rates - 10% from 20%. • Rolled back the 1% excise duty on gold jewellery • Foreign banks are exempted from any capital gains taxes for converting their local branches into wholly-owned subsidiaries • Proposal to levy a 1% TDS on real estate transactions was withdrawn Notwithstanding the prevalent negative sentiment in Indian equities, we believe any positive surprise in the form of policy responses can trigger a rebound. Also further decline in global crude oil prices can have a positive impact on India’s deficit situation and boost market sentiment. Weekly change (%) BSE Sensex -3.20 S&P CNX Nifty -3.11 S&P CNX 500 -3.03 CNX Midcap -3.18 BSE Smallcap -2.93India - DebtWeak IIP numbers raised hopes of further monetary easing and boosted Indian bond markets this week.The RBI.• Yield Movements: The 10-year benchmark yield eased 6 bps, while 5 year gilt yields dipped 1 bp.The yield on corporate bonds of a similar tenor increased 1 bp and consequently, spreads over 5-year gilts widened to 98 bps from 96 bps.Yields on the 30 year paper rose by 6 bps, while 1-year gilt yields firmed up by 12 bps. As a result, spreads between short & long dated gilts (1 and 30 year papers) expanded to 87 bps from 81 bps.• Liquidity/Borrowings: RBI intervention in forex markets pushed up systemic liquidity deficit and RBI bought back securities worth Rs. 9,757 crore through OMO auctions to cushion impact. Overnight call money rates rose to 8.30% compared to 7.50% last week. Scheduled auctions in four dated GOI securities of Rs. 15,000 crore received bids of over Rs.36,500 crore and were fully accepted.• Forex: Sustained fall in the rupee led RBI to announce fresh set of measures to support the currency and intervene in forex markets.The central bank asked exporters to convert 50% of their dollar holdings to rupee and raised the ceiling on interest rates on FCNR (B) accounts. It also imposed limits on banks’ intra-day positions in the forex market and allowed NRIs to transfer repatriable funds from their NRO account to NRE account.The currency however closed 0.30% lower than last week levels. As of May 04, forex reserves stood at $293.2 bln, about $2.19 bln lower than last week levels.• Securitization Guidelines: RBI issued final guidelines on securitization and direct assignment this week. Key observations are –