The World This Week
August 19 – August 23, 2013
We’ve seen a significant depreciation of Rupee in the last 2-3 weeks. Rupee has fallen by almost 7% and
Indian Equities and Bond markets have also continued to fall. On Thursday, we saw some new measures
being announced by RBI, by which they wanted to support the falling bond prices as a result of which we
saw bond yields bouncing back from 9.3% to 8.3% in a matter of one and a half days. With this there is a
significant rally in the bond yields which just played out. We yet don’t know till what level bonds yields
will rally, however there continues to be significant amount of volatility in all asset classes in India, be it
bonds, equities, or the Rupee. On Friday, we saw the Rupee bouncing back by almost 2%. While this
current volatility will take some time to subside; we believe till the time we get more clarity from U.S. Fed
in the middle of September, asset classes across the world will continue to be volatile in anticipation of
what could happen in that meeting.
In the mean time, we have seen significant cool off in Emerging Market Equities, Bonds as well as
Currencies. As far as Indian markets are concerned, we don’t think we have yet seen the worst of
volatility. The urgent need is to keep some kind of stability in terms of Rupee, because unless Rupee
stabilizes, it is unlikely that the bond and equity markets stabilize, so we continue to remain in a “Wait
and Watch” kind of a mode. This week is also crucial from the perspective of Food Security Bill passage in
the Lok Sabha. If we see some forward movement on that bill and if it gets passed in the Lok Sabha, there
could be further pressure on Indian currency and the Indian Equity markets because it is expected to be
negative as far as Fiscal Account for India is concerned. We are not recommending investors to rush into
equities as of now. We will wait for this clarity on the Food Security Bill before we actually recommend
our clients to actively and aggressively buy equities. There is no doubt that markets have fallen
significantly by almost 11% from the peak of July and are trading at cheap valuations, however, in terms
of when to enter, we would wait and see what would happen to the food security bill and then we shall
take a call.
As far as the global developments are concerned, we still need some clarity as far as U.S. Fed is
concerned about tapering schedule of the ongoing QE III. Looking at the U.S. 10-year bond yield, which is
now trading above 2.9%, we believe it is almost imperative for tapering actions to start by September.
While it is expected that tapering will begin, its just the quantum is what we are not aware of. Also from
an Emerging Market perspective, the markets have had a knee jerk kind of a reaction. We’ve been
maintaining that the tapering of QE III does not mean that all the liquidity which has flown into the
Emerging markets will go away. It is just that the quantum of addition of liquidity will get reduced. So we
believe that some of the concerns of all liquidity leaving Emerging markets are unbounded. We don’t
believe that the world is about to come to an end with the tapering of QE III.
One important factor which also the market is considering is who is going to be announced as the new
U.S. Federal Reserve Governor. There is a lot of speculation of who that person is going to be, because
the future QE measures and how the tapering cycle plays out, will also be a function of the thought
process of the new Federal Reserve Governor. So markets will continue to look at that development and
we would expect that announcement to happen sometime in September. That also becomes one of the
variables as to how the QE drawdown or the tapering activity will playout.
So to summarize, we continue to be in a wait and watch kind of a mode for Equities. From a sectoral
perspective we continue to like the IT, Pharma, Telecom and FMCG. As far as the banks are concerned,
both public and private sector banks are trading at cheap valuations. However, we believe that for now
we must neither be buying, nor selling bank stocks. If the bond yields continue to cool off further, it will
be a positive for the banking space. However we don’t know that as of now and we will give it some time
further. As of now the recommendation is that we stay put in banking stocks that and also we would wait
to put in further money into equities.
Moody's reiterated its stable outlook on India's Baa3 sovereign rating on back of low levels of
overseas government debt and adequate reserves for BoP.
The Reserve Bank of India took steps on Tuesday to comfort the government bond market by
buying long-dated government bonds worth 80 billion rupees through an OMO on August 23.
An index of household confidence in the euro zone improved for a ninth month to minus 15.6, the
highest level since July 2011, from minus 17.4 in the previous month.
Britain’s economy grew faster than expected in the second quarter of the year as the UK’s GDP
expanded to 0.7%.
U.S. Jobless Claims Fell to Five-Year Low over Past Month, the number of claims in the month
ended Aug. 17 declined to 330,500, the least since November 2007.
U.S preliminary index on factory activity rose in August to 53.9, its best showing since March. A
reading above 50 indicates expansion.
China's factories have picked up the pace in August, index of manufacturing purchasing manager’s
sentiment rose to 50.1 in August, the highest level in four months.
Satadru Mitra Varun Goel Jharna Agarwal
Abbas Naheed Kinjal Mehta
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