Market Review WEEK ENDED OCTOBER 26, 2012InternationalGlobal investor sentiment was impacted by the news flow on earnings and economic fronts. The MSCI ACWorld Index closed down 1.65%, as most major equity markets finished in the negative territory. Reneweddemand for safe haven helped global treasury bond yields ease. US treasury yields were however only marginallychanged as encouraging economic data and poor demand at one of the auctions exerted upward pressure onyields. Crude oil prices slumped on reports of increasing US oil inventory and concerns of diminished demandamidst slowdown in global economic growth. This along with weakness in other key commodities led theReuters Jefferies CRB index to close down 3.01%. In currency markets, the Japanese yen rebounded on Fridaybut still closed down as traders speculated the Bank of Japan will announce additional stimulus at its meet nextweek.The US dollar index moved up amidst reduced investor risk appetite.• Asia-Pacific: Regional equity markets fared relatively better than Western counterparts, led mainly by gains in Singapore and Indonesia markets. Japanese government announced a $5.3 bln stimulus package to revive economic growth. As per data, Japanese exports contracted further last month due to sluggish demand from Europe and geo-political tensions with China. The HSBC China flash manufacturing PMI rose to 49.1 from 47.9 last month, suggesting some improvement in the sector. South Korea GDP growth slowed to 1.6% (from 2.3%) in Q3 due to sluggish demand for exports and moderate domestic consumption. Philippines cut its key policy rate by 25 bps to 3.5% on concerns about slowdown in capital flows and exports. Hong Kong central bank intervened in currency markets to rein in the HK$ - large capital inflows in recent weeks have pushed the HK$ to trade at the upper end of its trading band. It also introduced a 15% tax on property purchases made by foreigners.• Europe: Mood in regional markets was subdued as earnings fell short of market expectations and economic data was lacklustre. Eurozone composite PMI edged lower from 46.1 to 45.8 mainly due to decline in manufacturing sector activity. Data out of Germany was weak - the German IFO business confidence index slid and German manufacturing & services sector PMIs also edged lower. Helped by Olympic sales, UK economy returned to positive growth last quarter - GDP expanded by 1% on a sequential basis. Spain’s regional elections delivered a mixed verdict for the incumbent government – it won in Galicia, but lost hold in Basque. Swedish Riksbank left benchmark rates unchanged at 1.25%. French government stepped in to rescue PSA Peugeot by providing bond guarantees to the tune of ~$9 bln. BP said it is in advanced talks to sell its 50% stake in TNK-BP to Rosneft for $27 bln.• Americas: US equity indices slid as weak earnings reports overshadowed the positive economic newsflow. The FOMC maintained status quo on monetary policy this week. Strength in consumer spending and housing sector helped the US economy expand by 2% (annualized) in Q3. New home sales continued to rise in September.While the headline durable goods orders index moved up sharply, the sub-segment of non-defense capital goods was little changed from last month. Elsewhere in the region, Bank of Canada and Colombia left policy rates unchanged. On the corporate front, Department of Justice is suing Bank of America allegedly for selling bad mortgage loans to Fannie Mae and Freddie Mac.
Weekly Weekly change (%) change (%) MSCI AC World Index -1.65 Xetra DAX -2.02 FTSE Eurotop 100 -1.35 CAC 40 -1.98 MSCI AC Asia Pacific -1.63 FTSE 100 -1.52 Dow Jones -1.77 Hang Seng -0.03 Nasdaq -0.59 Nikkei -0.77 S&P 500 -1.48 KOSPI -2.70India - EquityIndian equity markets declined this week primarily due to weak global sentiment and mixed domesticearnings newsflow. Mid and small cap stocks underperformed large caps. Amongst sectoral indices, capitalgoods, auto and banking stocks closed in the positive territory. Consumer durables and FMCG indiceswere the top decliners. FII inflows were relatively lower during this holiday shortened week - $141.5 mlnin the first three trading days. On the M&A front, Rain Commodities acquired Belgian chemicals firmRutgers for about Rs. 5000 crores. Source: Morgan Stanley Research• Market Outlook: Indian equity markets have had a relatively strong run over the past couple of months, helped by strong FII inflows and government policy offensive. Notwithstanding any major negative surprises on the domestic and global front, we think markets could maintain a positive trajectory over the near term. On the domestic front, most of the growth issues are well-recognized and priced in. The key is for the government to gain traction on the execution of these measures as well as speed up investment project clearances.These steps could further help boost confidence in the India growth story. Easy liquidity conditions in domestic markets have helped borrowing costs edge lower in recent times (CP/CD rates have eased and banks have announced cut in base rate).The RBI policy review next week will throw light on whether the central bank has grown more comfortable with the macro-economic situation post recent changes. From the global viewpoint, it will need to be seen how upcoming changes in political leadership in the US and China pan out and their impact on global risk appetite. Also Europe continues to dominate investor minds and developments there would have a bearing on markets sentiment. Having said that, global investors with long term investment approach should continue to find value in India - in a world of easy liquidity, long-term investors continue to focus on fundamental investment opportunities that can
play out in the next decade or so, and India certainly qualifies for the same.The key differentiating factor is obviously the large share of domestic demand in overall GDP (gross domestic product), that can help the economy remain relatively resilient in the wake of a sharp slowdown in global economy or deterioration in the Euro zone crisis. Any efforts by the government to tackle the fiscal deficit and inflation problems can further add to India’s attractiveness as a destination for foreign investment. Weekly change (%) BSE Sensex -0.30 S&P CNX Nifty -0.35 S&P CNX 500 -0.65 CNX Midcap -1.43 BSE Smallcap -1.16India - DebtIndian bond markets traded in a narrow range this holiday truncated week as investors were cautious of buildinglarge positions ahead of RBI’s monetary policy next week.• Yield movements: Yields on the 1-year paper rose 1 bp while those on longer dated benchmark papers (5/10/30 years) were unchanged from last week levels. The g-sec yield curve remained flat with spreads between 1/30 year gilts at 21 bps. Corporate bond yields continued to edge lower. Source: Morgan Stanley Research• Liquidity/borrowings: Overnight call money rates moved up from 8% to 8.2% levels this week, however demand for liquidity under RBI’s LAF auctions was relatively lower at about Rs. 82,000 crores this week. There were no GOI bond auctions scheduled this week.• Forex: The Indian rupee strengthened 0.5% against the US dollar, helped by strong FII inflows into debt (nearly $408 mln in two trading days this week). As of Oct 19, forex reserves aggregated over $295.2 bln, about $359 mln more than last week levels.• Policy: All eyes are set on the RBI monetary policy review next week. The central bank continues to face a tough policy environment – incremental economic data continues to point towards elevated inflationary pressures, even as economic growth remains modest. Over the last few quarters, RBI has emphasized on the need to take concrete steps to address structural issues weighing on growth and pushing inflation higher. To that extent, while the recent announcements by the government are positive, the exact impact will become clear only in the coming