Weekly Market Review - October 18, 2013


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Weekly Market Review - October 18, 2013

  1. 1. Market Review WEEK ENDING OCTOBER 18, 2013 International A last minute deal in the US along with fresh economic data out of China boosted sentiment in the global financial markets, amidst mixed newsflow on the earnings front. Increased expectations that recent events will delay the US Fed tapering also boosted markets and the MSCI AC World Index rose by 2.5%. Bond yields eased across the curve in key markets on expectations that global liquidity will remain easy for some time. Gains in precious metals towards the end of the week helped the Reuters CRB index register marginal weekly gains, even as energy prices moved down. The US dollar lost ground against major currencies due to the change in monetary policy expectations and the UK Pound gained. Regulators in various countries have reportedly initiated a global probe into suspected price manipulation in the foreign exchange. • Asia-Pacific: Most of the regional equity markets registered good gains and were also helped by positive data out of China towards the end of the week. Expectations of continued easy global liquidity boosted regional currencies along with the equity markets. China’s GDP rose by 7.8% in the third quarter (compared to 7.5% in the previous quarter) helped by stronger consumption and investment. However, trade data was on the weaker side. In Japan, a special Diet session commenced with the government looking to pass various laws that will implement the growth strategies unveiled in June along with various structural reforms. China’s Lenovo is reportedly evaluating a bid for Blackberry and Japan’s Softbank has acquired majority stake in Finland’s Supercell for around $1.5 billion. • Europe: European equity markets rallied on the back of positive global sentiment and UK markets outperformed. Data out of UK pointed towards better employment trends in September and the government unveiled proposals to relax norms for Chinese banks operating in London, as part of efforts to capture share of growingYuan trade. On the economic front, Euro area’s industrial production bounced back in August and inflation remained under control in September. As part of the austerity focus, various European governments have submitted their budget plans for 2014 to the European Commission, and the assessment will be done by mid-November. Serbia’s central bank cut its key rate by 50 bps to 10.5%. Alitalia’s shareholders have approved the bailout plans for Alitalia, backed by the government. • Americas: Resolution of the budget impasse and a hike in the debt limit helped US markets as well as EM equities in the region – Brazil witnessed a sharp rally and technology stocks got a fillip by earnings news.Brazilian policy makers are relooking at the swap auctions being used to support the Real after the change in global conditions. The US Congress managed to cobble together a legislation to raise the debt ceiling, and reopen the government after a prolonged shutdown (until January).The debt ceiling debate will take place in February and discussions for budget deficit reduction are expected to be completed by December 2013. Chile’s central bank cut rates by 25 bps to 4.75%. América Móvil withdrew its bid for KPN, on disagreement over price and KPN Foundation exercised its right to buy 50% of the shares. NRG Energy is acquiring most of the assets of Edison Mission Energy for around $2.6 billion.
  2. 2. Weekly change (%) Weekly change (%) MSCI AC World Index 2.53 Xetra DAX 1.61 FTSE Eurotop 100 2.09 CAC 40 1.57 MSCI AC Asia Pacific 1.80 FTSE 100 2.09 Dow Jones 1.07 Hang Seng 0.52 Nasdaq 3.23 Nikkei 1.09 S&P 500 2.42 KOSPI 1.36 India - Equity Strong gains on Friday helped domestic equity markets close the week with gains. Mid and small cap stocks continued to underperform their large cap counterparts and metal & oil stocks witnessing strong gains. FIIs inflows were to the tune of $440 mln. • Macro/Policy: Recent data around the clearance of large projects by CCI (Cabinet Committee on Investment) and their potential execution over the next few quarters has led to hopes of increased industrial activity. An analysis of the cleared projects point towards a dominance of power projects (especially related to Fuel Supply Agreement/FSA with Coal India, to kick start generation). If all these projects get executed, it should boost industrial activity and will help in addressing the power deficit in the country. Domestic Thermal Coal Production Projects submitted versus clearances 600 10% 500 8% 6% 400 140 US$bn Total submitted 50% % Cleared 120 40% 100 80 30% 2% 60 20% 0% 40 10% 20 Textiles S hipping Commerce & I ndus( DI PP) Coal Roads, highways R ailways Mines 0% Commerce & I ndus ( Comm) 0 Petrol, Nat gas April-July 2013 FY12 FY13 FY10 FY11 Source: Citi Research FY09 FY08 FY07 FY06 FY05 FY04 FY03 -4% FY01 - FY02 -2% FY00 100 S teel Mnt 200 Power % YoY 4% 300 Source: CLSA CCI We continue to believe that improving the confidence of the business sector and reducing policy clearance delays will go a long way in boosting industrial activity. We feel that the current pessimism around future economic growth has been overdone. India continues to enjoy the advantages of a relatively high savings rate along with positive demographics for the next decade or so, creating the largest middle class population in the world. We need to utilise the current period to cleanse the system and lay the foundation for sustainable higher growth trajectory.
  3. 3. Shares of Global Middle-Class Consumption 2000-2050 Others 100% 90% E.U. 80% United States 70% Japan 60% Other Asia 50% India 40% China 30% 20% 10% 2050 2048 2045 2042 2039 2036 2033 2030 2027 2024 2021 2018 2015 2012 2009 2006 2003 2000 0% Source :WEF Weekly change (%) S&P BSE Sensex CNX Nifty CNX 500 CNX Midcap S&P BSE Smallcap 1.73 1.53 1.18 0.29 0.34 India - Debt Bond markets weakened on data pointing towards higher inflation, stoking expectations of tighter monetary policy. FII inflows were to the tune of $130 mln during the week. • Yield movements: The 10-Yr benchmark yield went up by 13 bps. The 5-yr Gilt yield rose 16 bps while the 5 – yr AAA corporate bond yields rose by 12 bps and the spread increased to 91 bps. However, yields at the short end of the curve eased with 1 yr gilt yields falling by 5 bps. The yields on 30 yr Gilts increased by 11 bps. • Liquidity/borrowings: Liquidity remained tight with repos averaging around Rs. 63,500 crore, but call rates eased towards the end of the week. Four securities were auctioned and received competitive bids for over Rs. 43,000 crs against the notified amount of Rs.15,000 crs. • Forex: The rupee weakened marginally against the US dollar and recovered some ground after RBI refuted speculation that the swap window for oil marketing companies would remain open.The foreign exchange reserves were at $279 billion as of October 11th. • Macro: Latest data pointed towards increased inflationary pressures with both WPI (wholesale) and CPI (consumer) moving up in September to 6.46% and 9.84%, respectively. Unlike recent trends of food prices pushing inflation, there has been a rise in non-food and core inflation.This probably reflects the pass through impact of the weak rupee in terms of import prices.
  4. 4. Rising Inflation 16% 14% 12% 10% Size of EM Local Government Bond Markets ($bn) Headline CPI (IW) Headline CPI - new index Headline WPI 600 500 YoY% 400 Fixed rate & zero-coupon PEN RON NGN HUF IDR THB COP ZAR -2% Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 RUB INR 0 0% PLN 100 2% MYR 200 4% TRY 6% MXN 300 BRL 8% Other Source: Morgan Stanley. In recent weeks, there has been increased speculation about the potential inclusion of Indian bonds in some of the EM local bond indices (especially JP Morgan GBI-EM Global Index). However, we need to keep in mind that any inclusion would require substantial easing of current restrictions on foreign investors for taking Indian bond exposure. Also given the large size of Indian local bond market, it could lead to a rebalancing of the index. Some analyst estimates indicate potential foreign inflows of $20-30 billion into India, helping the balance of payments situation. 18.10.2013 11.10.2013 Exchange rate (Rs./$) 61.27 61.07 Average repos (Rs. Cr) 63,492 40,333 1-yr gilt yield (%) 8.61 8.66 5-yr gilt yield (%) 8.59 8.43 10-yr gilt yield (%) 8.80 8.67 Source: Reuters, CCIL. The information contained in this commentary is not a complete presentation of every material fact regarding any industry, security or the fund and is neither an offer for units nor an invitation to invest.This communication is meant for use by the recipient and not for circulation/reproduction without prior approval.The views expressed by the portfolio managers are based on current market conditions and information available to them and 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 depending upon the factors and forces affecting the securities market.The past performance of the mutual funds managed by the Franklin Templeton Group and its affiliates is not necessarily indicative of future performance of the schemes. Please refer to the Scheme Information Document carefully before investing. Statutory Details: Franklin Templeton Mutual Fund in India has been set up as a trust by Templeton International Inc. (liability restricted to the seed corpus of Rs.1 lac) with Franklin Templeton Trustee Services Pvt. Ltd. as the trustee (Trustee under the Indian Trust Act 1882) and with Franklin Templeton Asset Management (India) Pvt. Ltd. as the Investment Manager. Copyright © 2013 Franklin Templeton Investments. All rights reserved