InternationalThe spike in US bond yields were the focus for global investors as the debate over the tapering of quantitativeeasing gathered momentum. Equity markets were volatile amidst upbeat economic data out of the US andconcerns over the end of easy money.The MSCI AC World Index declined 1.43% on the back of sharp losses inJapan and select Emerging Markets, and thereby erased gains clocked earlier in the month. Global benchmarktreasury prices corrected sharply and yields on US treasuries rose above the 2% mark. Oil prices trended lower asOPEC kept its production target unchanged, while gold prices extended declines.The Reuters Jefferies CRBIndex closed down 1.07% on the week and 2.18% for May. EM currencies lost ground against the US dollar thisweek – South African Rand, Mexican Peso and Hungarian forint were amongst the top losers.• Asia-Pacific: Regional equity markets underperformed global counterparts by a significant margin led bysharp fall in Japanese equity markets. Japanese economic data was however relatively strong – industrialproduction rose 1.7% mom and retail sales also increased 0.7%mom.China’s official manufacturing PMI indexrose slightly to 50.8 and helped alleviate concerns about slowdown. Philippines economy expanded by7.8%yoy in the March quarter helped by higher government spending and domestic consumption. Bank ofThailand reduced benchmark policy rate by 25 bps to 2.5%. South Korea exports jumped on the back ofhigher demand for smartphones. On the M&A front, China’s Shuanghui is planning to acquire US-basedSmithfield Foods for $4.7 bln.• Europe/Africa: Apart from US stimulus concerns, weak economic data led European markets lower.German equities however bucked the downward trend helped by positive corporate data. On theeconomic front, Euro Area unemployment rate hit fresh highs of 12.2% in April on the back of furtherjob losses in Italy, Spain and peripheral countries. Unemployment rate remained unchanged in Germanyand France. Swiss government proposed a bill that permits banks to co-operate with US authorities in taxevasion investigations.While Q1 GDP data out of Switzerland (0.6%) and Sweden came ahead of marketexpectations, Denmark cut its 2013 growth forecasts to 0.5% from 1.2% earlier. UK Nationwide HousePrice Index moved up 1.1%yoy. Weakness in manufacturing and mining sectors caused South Africaeconomic growth to slow to 0.9%qoq (annualized) from 2.1% in December quarter.• Americas: US equity markets lost ground towards the end of the week and leading indices closeddown for the second week in a row, while Brazilian markets declined sharply. On the economicfront, the S&P/Case-Shiller house-price index rose by 10.9% in and US Conference Boardconsumer confidence index hit multi-year highs. Moody’s raised the outlook on US banking sectorto stable from negative citing an improving economy and financial health. Elsewhere in the region,central banks in Canada and Colombia left rates unchanged. In contrast, Brazil’s central bank hikedthe Selic rate by 50 bps to 8% even as Q1-2013 GDP data was quite weak, as part of efforts to bringdown inflation. The economy grew by 0.6%qoq even as investment and agriculture sectors postedstrong growth. On the M&A front, Berkshire Hathaway purchased NV Energy for $5.6 bln andValeant confirmed its bid for Bausch & Lomb for $8.7 bln.Market ReviewWEEK ENDED MAY 31, 2013
Weekly Weeklychange (%) change (%)MSCI AC World Index -1.43 Xetra DAX 0.52FTSE Eurotop 100 -1.04 CAC 40 -0.21MSCI AC Asia Pacific -2.71 FTSE 100 -1.07Dow Jones -1.23 Hang Seng -1.00Nasdaq -0.09 Nikkei -5.73S&P 500 -1.14 KOSPI 1.40India - EquityWeak global sentiment and domestic macro data weighed on local markets and led frontline equity indicesto surrender most gains and close off highs. Real estate stocks lost ground while consumer durable stocksregistered gains. FIIs bought equities to the tune of $684.5 mln in the first four trading days of the week.• Macro/Outlook: GDP data released this week showed that India’s economy expanded by 4.8%yoyin the March quarter, slightly higher than the upwards revised 4.7%yoy growth clocked in thesequentially previous quarter. The marginal pick-up was largely due to some improvement inindustrial output at 2.7%yoy (2.5%yoy previous quarter), while services sector remained resilient.Private consumption slowed, and the impact was partially offset by acceleration in exports. Broad-based deceleration across sectors resulted in the full year growth falling to 5% from 6.2% in FY12.Quarterly GDP Growth Trend (%YoY)Source: CSO, Morgan Stanley ResearchWe continue to believe that the worst is behind us and growth is likely to pick up in the currentfinancial year. Some of the key drivers are expected to be reduced inflationary pressures, favourablemonsoons, and improved environment for project execution.The latter could be supported by a policypush and export revival led by developed market demand.The fall in consumption in recent years hasbeen a concern and this could change helped by pre-election spending and lower interest rates.However, a return to a high growth trajectory will be gradual and will happen over the coming years.
Along with the economy the RoE for Corporate India may also well be on the path of bottomingout. Rise in consumer/investment spending along with falling borrowing, input and wage costs augurswell for earnings growth in the year ahead.Weekly change (%)S&P BSE Sensex 0.28CNX Nifty 0.04CNX 500 -0.09CNX Midcap 0.02S&P BSE Smallcap -0.82India - DebtProspects of tapering asset purchases in the US along with comments by RBI led bond yields to rise, beforebargain hunting towards the close of week helped yields close off highs.• Yield movements: Bond yields closed higher this week and the upmove was sharper in the 5 and 10year segments.Yields on the 10-Yr benchmark gilt increased 10 bps, while those on the 5-Yr paper rose13 bps.Yields on 1 year and the 30 year Gilts stood 7 bps and 6 bps higher respectively.• Liquidity/borrowings: Liquidity situation improved slightly and demand for liquidity under the LAFwindow averaged Rs. 83,885 crore as against Rs. 96,881 crore last week. Overnight rates closed slightlyhigher at 7.00% compared to 7.30% last week. Scheduled auctions in four dated G-secs worth Rs.15,000 crore were oversubscribed by a large margin and there was no devolvement on primary dealers.• Forex: EM currencies including the Indian rupee remained under pressure this week and the currencyclosed 1.55% down vis-à-vis the US dollar. Forex reserves as of May 24, stood at $292 bln, $109 mlnhigher than previous week levels.Fiscal Deficit (12M Trailing sum % of GDP)Source: CGA, Morgan Stanley Research