Weekly Market Review - May 24, 2013


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Weekly Market Review - May 24, 2013

  1. 1. InternationalThe fresh debate over the withdrawal of monetary stimulus weighed on global equity markets, which pulledback from record levels and soft economic data out of China added to the weak investor sentiment.The MSCIAC World Index declined 1.40% led by sharp fall in Asia Pacific markets, especially Japan. Global treasury bondyields rose as Fed’s latest comments indicated that it is closely monitoring economic data and may reducepurchases if the economy strengthens. Bond yields however closed off highs as increase in yields spurredrenewed investor interest towards the close of week. In commodity markets, crude oil and industrial metalprices witnessed selling pressure following fall in Chinese manufacturing PMI.The US dollar weakened andthe yen & swiss franc gained ground this week amidst increased investor interest in safe havens.• Asia-Pacific: Concerns about the sustenance of global easy liquidity along with weak China data led toa sharp sell-off in regional equity markets. Japan,Australia and Hong Kong equities were the top decliners.China’s preliminary HSBC manufacturing PMI for May declined from 50.4 to 49.6, indicating industryoutput may be contracting. Japan’s trade deficit widened in April as rising import prices offset benefits oflarger exports.Thailand economy grew at a much slower pace in Q1-2013, 5.5%yoy vis-à-vis 18.9%yoy inQ4-2012, as strengthening baht weighed on exports. In contrast, Singapore GDP surprised on the upside,as strength in financial services helped economy expand by 1.8%qoq. Bank of Japan maintained status quoon policy.• Europe/Africa: European equity markets fell in line with broad global indices. Initial PMI readingsshowed some improvement in manufacturing and services sectors but the index remained below the 50mark, separating growth from contraction. Output in both large economies, France and Germany,remained weak. UK affirmed Q1-2013 GDP growth estimates at Q1-2013. German business andconsumer confidence indices gained reinforcing hopes of improvement. South Africa maintained policyrates at 5% and issued a dovish statement. Spain’s Bankia sold City National Bank of Florida for $883mln to Chilean BCI as part of efforts to shore up capital.• Americas: US equity markets retreated but markets in Brazil and Canada registered gains for the week.The FOMC left monetary policy unchanged this week but comments indicated a gradual step down inbond purchases may take place if economy continues to recover. It however reiterated that this may notnecessarily be a straight line reduction and, bond purchases may be increased if economy weakens again.US economic data was largely positive – both existing and new home sales increased and initial joblessclaims decreased by 23,000. Orders for durable goods firmed up 3.3%, and the core orders index wasup 1.2%.Valeant is reportedly close to acquiring Bausch & Lomb for about $9 bln.Market ReviewWEEK ENDED MAY 24, 2013
  2. 2. Weekly Weeklychange (%) change (%)MSCI AC World Index -1.40 Xetra DAX -1.10FTSE Eurotop 100 -1.69 CAC 40 -1.11MSCI AC Asia Pacific -2.74 FTSE 100 -1.02Dow Jones -0.33 Hang Seng -2.01Nasdaq -1.14 Nikkei -3.47S&P 500 -1.07 KOSPI* -0.67* As of May 24, 2013India - EquityWeak global sentiment and mixed corporate earnings data led Indian equity markets to snap recentgaining streak. Mid and small cap indices witnessed larger declines compared to large caps. Excepttechnology, all sectoral indices closed in the red. FII flows aggregated $1 bln in the first four trading daysof the week, significant share of which was towards increased issuances being witnessed.• Earnings: Corporate India’s latest earnings reports were lacklustre and reflected the impact ofmoderating consumer demand. Results were particularly downbeat for infrastructure & capital goods,FMCG, auto and consumer discretionary (particularly auto) sectors. In contrast, healthcare and ITservices (except Infosys) reported good set of numbers.While earnings from public sector banks wereshort of expectations, private sector banks continued to perform well. Well-established telecomcompanies put up a strong show vis-à-vis small/marginal players. Infrastructure companies showedlittle improvement in order books during the quarter, while metals sector managed to beat market’slow expectations, despite the fall in prices. In our view, the latest results are unlikely to spur largedowngrades in consensus earnings estimates and the ongoing disinflationary trend along with lowerinterest rates is likely to help corporate margins improve over the next few quarters.There has been an increase in corporate equity issuances as companies seek to increase floating stockto meet SEBI guidelines (minimum 25% public holding; PSUs 10%).Amidst low rates and high globalliquidity, issuances have witnessed strong FII demand. Unlike expectations, the large supply has notimpacted markets much. Markets continue to look reasonably priced with all downsides factored in.Weekly change (%)S&P BSE Sensex -2.87CNX Nifty -3.29CNX 500 -3.33CNX Midcap -4.48S&P BSE Smallcap -3.33
  3. 3. India - DebtIndian bond markets pared losses towards the close of week on bargain hunting,and yields pulled back from highstouched earlier on uncertainty about continuation of the US Federal Reserve bond buying programme.• Yield Movements: Overall bond yields closed mixed - yields on the 10-Yr benchmark gilt fell 10 bps.The 5-Yr Gilt yield was unchanged while yields for 1 yr Gilt and the 30 yr Gilt yields increased 6 bpsand 1 bp respectively. Consequently, spreads between the two narrowed to 11 from 16 bps.• Liquidity/ Borrowings: There was limited change in the liquidity situation with repos averaging Rs.96,881 crore as against Rs. 103,501 crore last week.The overnight rates closed slightly higher at 7.20%compared to 7.10% last week.The scheduled auctions in four dated G-secs worth Rs. 15,000 crore wereoversubscribed by a large margin and there was no devolvement on primary dealers.• Forex: EM currencies including the Indian rupee witnessed a sharp sell-off this week. The currencyclosed 1.37% down vis-à-vis the US dollar. Forex reserves as of May 17, stood at $292 bln compared to$293.6 bln in the previous week.• Inflation-indexed bonds: with a view to provide residents an alternative investment avenue to hedgeagainst inflation, the government has unveiled plans to introduce inflation-indexed bonds in June.Thebonds are linked to headline inflation data with four months’ lag and as a pilot will first be sold toinstitutional investors and then retail investors. Back in 1997, the government’s attempt to introduceinflation indexed bonds had failed due to lack of inflation protection for the coupon. This is nowrectified and the coupon will be a fixed rate of interest but paid on the adjusted principal amount eachyear. Foreign investors are also allowed to participate in this space under the $25 bln g-sec limit. At thispoint there are no tax benefits extended to investments in such bonds.The bonds will be sold via the auction route and hence market expectations of inflation will shape upthe yields. It will be interesting to see the level at which this gets pegged – a lower yield may be seenas investors’ willingness to pay a premium to guard against risks of high inflation in the future.24.05.2013 17.05.2013Exchange rate (Rs./$) 55.63 54.88Average repos (Rs. Cr) 96,881 103,5011-yr gilt yield (%) 7.32 7.265-yr gilt yield (%) 7.24 7.2410-yr gilt yield (%) 7.29 7.39Source: Reuters, CCIL.The information contained in this commentary is not a complete presentation of every material fact regarding any industry,security or the fund andis neither an offer for units nor an invitation to invest.This communication is meant for use by the recipient and not for circulation/reproductionwithout prior approval.The views expressed by the portfolio managers are based on current market conditions and information available to themand 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 dependingupon the factors and forces affecting the securities market.The past performance of the mutual funds managed by the Franklin Templeton Groupand its affiliates is not necessarily indicative of future performance of the schemes. Please refer to the Scheme Information Documentcarefully before investing. Statutory Details: Franklin Templeton Mutual Fund in India has been set up as a trust by Templeton InternationalInc. (liability restricted to the seed corpus of Rs.1 lac) with Franklin Templeton Trustee Services Pvt. Ltd. as the trustee (Trustee under the IndianTrust Act 1882) and with Franklin Templeton Asset Management (India) Pvt. Ltd. as the Investment Manager.Copyright © 2012 Franklin Templeton Investments.All rights reserved