Market Review WEEK ENDED NOVEMBER 9, 2012InternationalWith US-election related uncertainty out of the way, global investors turned to focus on the upcoming USfiscal cliff and the weak Eurozone newsflow. Economic data out of US and China was quite positive, butthis had little impact on equity markets and the MSCI AC World Index finished down 2.16%. At the G20meet this week, leaders agreed to adjust the pace of fiscal consolidation such that growth is not stifled. Thereduced risk appetite bolstered global treasury bond prices and the US dollar touched multi-month highs.The Reuters Jefferies CRB index closed a volatile week only marginally lower as safe haven demandboosted gold prices and uptick in US and Chinese economies helped crude oil and some of the other rawmaterial prices gain. The euro lost ground as the European Union reduced the region’s 2013 growthforecast to 0.1% from 1% and key Eurozone economies reported lackluster growth. At the same time, theyen benefited from demand for safe havens.• Asia-Pacific: Regional equity markets fared relatively better than global counterparts helped by gains in Taiwan and Australia. Shanghai markets edged lower as the Chinese leadership kicked off the 18th Party Congress. Latest economic data showed signs of recovery underway – growth in industrial production, retail sales and fixed asset investment data accelerated. Helped by strong domestic demand, Indonesia’s economy expanded by 6.2% in the September quarter, only slightly less than 6.4% previous quarter. Japanese core machinery orders recorded second consecutive decline and current account surplus narrowed sharply in September. Central banks in Australia, Malaysia, South Korea and Indonesia left policy rates unchanged. An Australian federal court ruled that S&P inappropriately awarded AAA rating to a complex financial product.• Europe: Regional equity markets were adversely impacted by weak economic and earnings reports. ECB and BoE maintained status quo on monetary policy. The Greek Parliament narrowly approved of cuts in pension and public sector wages to secure its next bailout tranche. German policymakers also agreed to cuts in public spending and borrowing for 2013. On the economic front, German exports and industrial production contracted. The European Commission reduced its 2013 growth forecast for Germany by half to 0.8%. UK economic data was mixed - industrial production slowed while trade gap narrowed more than expectations in September. Poland central bank cut rates by 25 bps to 4.5%. Fitch upgraded Turkey’s sovereign ratings to BBB- from BB+.• Americas: The US elections delivered a verdict in favour of the status quo in terms of the President, Senate and the House of Representatives. As a result, there have been increased concerns that policymakers may not be able to reach a compromise and avoid the automatic tax increases and spending cuts (estimated about $600 bln), impacting market sentiment. US economic reports retained recent positive tone - home prices rose and consumer sentiment improved. A surge in exports helped the US trade deficit narrow from $43.8 bln to $41.5 bln in September. Elsewhere in the region, Peru left key policy rates unchanged. On the M&A front, Priceline is buying Kayak for $1.8 bln
Weekly Weekly change (%) change (%) MSCI AC World Index -2.16 Xetra DAX -2.72 FTSE Eurotop 100 -1.56 CAC 40 -1.97 MSCI AC Asia Pacific -1.05 FTSE 100 -1.68 Dow Jones -2.12 Hang Seng -3.29 Nasdaq -2.59 Nikkei -3.24 S&P 500 -2.43 KOSPI -0.75India - EquityFrontline equity indices closed the week marginally lower primarily due to weak global sentiment, despitepositive FII flows. Mid and small cap stocks managed to eke out gains and outperformed large caps.Sectoral index trends were mixed - real estate stocks notched up sharp gains while capital goods and oil& gas stocks closed in the negative territory. FII inflows amounted to $312.8 mln in the first four tradingdays of the week.• Institutional ownership trends: Latest data reflects the recent trends of strong FII inflows and outflows from domestic equity funds. Since the policy changes over the last few months, FII flows have picked up pace (around $9 bln since July 2012) and FII holding in BSE 500 companies is at 19% (including ADR/GDR), just 1% below all-time highs of 20% touched in Dec 2006. The value of the portfolio is also lower than the Dec 2010 high. Compared to the previous peaks witnessed in 2006-07, this time around FII exposure appears to be mainly towards sectors such as financials and consumer discretionary (previously it was in industrials and materials). Source: Bloomberg, CMIE and Citi Research• Corporate: Activity picked up on the M&A front - Diageo agreed to acquire majority stake in United Spirits for $2.1 bln and Tata Power picked up 26% stake in Indonesian company Baramulti Sukses Sarana Tbk. Gulf Oil is buying US based company Houghton International for $1.8 bln. Sun Pharma entered into an agreement to acquire stake in DUSA, a dermatology company, for $230 mln. Corporate India’s performance in the past quarter was broadly in line with expectations - topline growth remained stable and downward pressures on margins appear to have peaked out. FMCG companies and private banks continued to report strong growth, while results from the IT services sector were a mixed bag, with only select players reporting good performance in a slower growth environment. There was some evidence of slowdown in demand for consumer discretionary goods - consumer durables and autos.
In the capital goods space, select large players reported robust performance and appeared relatively positive (compared to past) about pick-up activity in over the next few quarters. Players are looking forward to establishment of the proposed National Investment Board, a committee with the mandate to expedite clearances for large investment projects. Earnings downgrades have now stabilized and looking ahead, if margin pressures continue to abate, we could see Corporate India RoE levels move up from the current 15-16%. Weekly change (%) BSE Sensex -0.38 S&P CNX Nifty -0.20 S&P CNX 500 -0.03 CNX Midcap 0.18 BSE Smallcap 0.07India - DebtIn the absence of fresh triggers, Indian bond market yields moved in a narrow range and closed mixed.The Indianrupee weakened against the US dollar as risk aversion in global markets boosted the greenback.• Yield movements: Yields on the 1-year paper closed unchanged from last week levels. At the same time, yields on the longer dated benchmark papers (5 and 10 years) eased 2 bps, while those on the 30-year paper closed 2 bps higher.• Liquidity/borrowings: Liquidity conditions were largely unchanged - overnight call money rates closed slightly higher at 8.1% levels and repos averaged about Rs. 67,000 crores this week. Scheduled GOI bond auctions received bids to the tune of over Rs. 29,000 crores, more than two times the notified amount of Rs. 13,000 crores.• Forex: Relative strength in the US dollar weighed on the rupee and the Indian currency closed the week down 1.76%. As of Nov 2, India’s foreign exchange reserves stood at $294.3 bln; revaluation of foreign currency assets led reserves to reduce by $950 mln over last week levels.• Macro: As per latest data on monetary indicators, credit growth (16% yoy) continues to outpace deposit growth (13.6% yoy). The credit-deposit ratio has started to move up again and now stands at 75.39%. Credit/deposit growth trends Cumulative trends in fiscal deficit Source: Bloomberg, CEIC, RBI, CLSA Asia-Pacific Markets, CGA, Ministry of Finance, Citi Research