Weekly Market Review - September 06, 2013


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Weekly Market Review - September 06, 2013

  1. 1. International Global equity markets gained on hopes of policy status quo on mixed economic data out of US, amidst strong gains in Emerging Markets and some large M&A deals. This along with strength in Asia Pacific and Europe, helped the MSCI AC World Index gain 2.10%. Global benchmark treasury bonds pared losses towards close of week on hopes of a delay in Fed Tapering. In its latest economic assessment, the OECD expressed optimism about growth trends in the developed world, but pointed towards a cloudy outlook due to loss of momentum in major Emerging Economies. It also highlighted downside risks such as the euro-area banking system’s vulnerability to renewed financial system volatility, deadlock over US fiscal policy and capital flight from Emerging Markets. In commodity markets, crude oil prices continued to trend higher amidst geopolitical uncertainty and lower US crude inventories, while gold benefitted from the shift in investor expectations from Fed. Overall the Reuters Jefferies CRB index closed 0.75% up.The sterling pound gained on the back of rising expectations of strong economic recovery. • Asia-Pacific: Regional markets recorded strong gains this week - Hong Kong equities rose on speculation that China is looking ease capital controls to boost the economy. China’s services PMI rose to 52.8 from 51.3. The OECD said it expects China’s economy to pick up pace in the quarters ahead. Japan equities benefitted from a weaker yen and Indian equities rallied following fresh policy measures to stabilize the rupee.The Reserve Bank of Australia and Bank of Japan maintained status quo on monetary policy. The latter also raised its economic outlook, citing firm consumer spending and modest gains in capex. Indonesia exports fell and the trade deficit widened to a record $2.3 bln from $850 mln previously. On the corporate front, US authorities approved Chinese firm Shuanghai International’s acquisition of Smithfield Foods and Bank of America exited its China Construction Bank. • Europe: European equity markets were buoyed by central bank newsflow and rising confidence in the region’s economy. BoE and ECB left monetary policies unchanged. Noting the recent improvement in the economy, ECB raised GDP growth estimates for 2013 to -0.4% (earlier -0.6%), but comments from officials signalled caution about said the bank remains on the vigil to counter any rise in risks. Eurozone Q2 GDP growth number was confirmed at 0.3%. German exports however declined by 1.1%mom and trade surplus narrowed. Switzerland economy expanded by 0.5% in Q2, slightly less than 0.6% growth clocked in sequentially previous quarter. Poland also kept monetary policy on hold, but changes to the pension system weighed on equity and bond markets. On the M&A front,Verizon agreed to purchaseVodafone’s 45% stake in their American JV for $130 bln and Nokia said it is selling its handset division to Microsoft for $5 bln. • Americas: US and Canada equity markets moved up this week, but Brazil witnessed sharper gains amidst hopes of increased demand for commodities and index heavyweight OGX soared after exercising a $1 bln put option. US markets got a boost from renewed expectations of a delay in stimulus withdrawal after non-farm payrolls expanded by 169,000 in August, less than market expectations and prior two month figures were revised downwards. On the other hand, both ISM non- Market Review WEEK ENDED SEPTEMBER 07, 2013
  2. 2. manufacturing and manufacturing indices ticked higher suggesting acceleration in growth. Economic data from other parts of the region was also positive - Canada’s economy added 59,200 jobs and the unemployment rate dipped by 0.1% to 7.1%. Helped by sustained rise in investment, Brazil Q2 GDP grew by 1.5%qoq and was ahead of market expectations.While Colombia’s central bank left key policy rate unchanged at 3.25%, Mexico reduced its overnight lending rate by 25 bps to 3.75%. Jarden is acquiring Yankee Candle for about $1.8 bln. LinkedIn stock rose after the company said it plans to issue $1 bln of equity. Weekly Weekly change (%) change (%) MSCI AC World Index 2.10 Xetra DAX 2.13 FTSE Eurotop 100 2.87 CAC 40 2.93 MSCI AC Asia Pacific 2.75 FTSE 100 2.10 Dow Jones 0.76 Hang Seng 4.09 Nasdaq 1.95 Nikkei 3.52 S&P 500 1.36 KOSPI 1.50 India - Equity New measures by the central bank and ensuing recovery in the rupee, along with strong global cues helped Indian equity markets gain this week. Barring technology stocks all sectoral indices closed in the positive territory. Banking sector stocks were the top gainers as the RBI relaxed bank branch licensing and indicated new licenses will be issued by January 2014, amongst others. FII flows also marginally positive this week at $150 mln. • Macro/Policy: Latest PMI data for India suggests the recent tightening of monetary conditions has exacerbated the weakness in the economy. The HSBC manufacturing PMI index slid to 48.5 from 50.1, and the services PMI dipped to 47.6 from 47.9. This along with last week’s weaker-than- expected GDP report caused many research houses to downgrade economic growth and earnings estimates. On the rupee front, a lot will depend on global news flow in the weeks ahead - whilst the Federal Reserve is unlikely to make any significant changes, given the impact on global financial markets, it could initiate symbolic moves in the form of marginal reduction in bond purchases. The policy tone will be closely scrutinized for future direction. The Pension Bill received the Lok Sabha’s nod this week – the bill, which has been in the works for a while now, provides the Pension Fund Regulatory and Development Authority statutory backing and allows 26% FDI in the sector. India’s pension sector contrasts with many of its global counterparts with conservative asset allocation, limited private player participation and few investment alternatives. Given the country's long term growth potential and positive demographics, the sector would be of interest to both global and domestic players. However, the fee levels need to be commercially viable for long term players and there needs to be open access to all retirement assets (majority of the assets are presently with EPFO and NPS I). • Technology: Tech stocks have outperformed broad markets in recent months on expectations of better earnings growth due to increased exports amidst signs of economic stabilization in the developed world and a weakening rupee.While the rupee weakness can help in boosting margins on existing pricing deals, the main factor is likely to be the improvement in demand in key markets such
  3. 3. as US, Europe and UK. The current environment (especially the depreciating rupee) can also help companies take a long term view on deals, boosting growth trends. Looking beyond the near term, a more important trend is that many of the companies have been diversifying their revenue base and scaling up their focus on Horizon 3 services (Social, Mobile,Analytics and Cloud). Given the strategic nature of the latter for clients, such business could be relatively stable. Overall, companies with a diverse business model (in terms of vertical as well as geographies) and focused on high margin segments appear well poised for medium term growth. Weekly change (%) S&P BSE Sensex 3.49 CNX Nifty 3.81 CNX 500 3.44 CNX Midcap 2.70 S&P BSE Smallcap 2.94 India - Debt Indian debt markets snapped recent losing streak and bond prices rose after policy measures bolstered sentiment. Profit-booking however resulted in yields closing off intra-week lows. • Yield Movements: Yields edged lower across the curve - the 10-Yr benchmark yield declined 28 bps. The 5-year Gilt yield fell 41 bps while the 5–year AAA corporate bond yields eased by 29 bps and the spread expanded to 108 bps from 96 bps.Yields for 1 yr gilts eased by 81 bps, while 30 year Gilts decreased 33 bps.The yield curve remained inverted. • Liquidity/Borrowings: Liquidity conditions remained tight with repos averaging around Rs. 39,000 crore. Scheduled GOI bond auction size was reduced to Rs. 10,000 crore from Rs. 15000 crore. Auctions for the two securities received strong response and there was no devolvement on primary dealers. • Forex: The rupee managed to eke weekly gains of 0.7% on the back of new RBI measures, FII inflows and dollar sales by exporters.The currency however closed off intraweek high of Rs.65/$. Forex reserves as of August 30 were down to $275.5 bln. • Policy: In a bid to prop up the currency, the central bank enhanced limits for exporters to re-book cancelled forward exchange contracts and offered banks a special window to swap foreign currency non- resident (FCNR) deposits at concessional rates. The bank also increased overseas borrowing limit for banks to 100% of unimpaired Tier I capital (earlier 50% unimpaired capital). The events of the past month have further complicated the policy environment as the government along with the central bank looked to support the rupee, without impacting economic growth. Initial remarks by the new central bank head suggest policy continuity and an increased emphasis on communication clarity. His address also laid emphasis on increasing financial inclusion and monitoring as well as sharing
  4. 4. data on NPAs/restructured loans. The bank is also expected to issue CPI-linked inflation index bonds by November 2013. Apart from this, the new governor indicated that the central bank has instituted a committee to review monetary policy framework, including providing quantitative objectives to RBI. 06.09.2013 30.08.2013 Exchange rate (Rs./$) 65.24 65.70 Average repos (Rs. Cr) 39,613 39,724 1-yr gilt yield (%) 9.91 10.72 5-yr gilt yield (%) 8.86 9.27 10-yr gilt yield (%) 8.71 8.99 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