1. Market Review
WEEK ENDED FEBRUARY 08, 2013
International
Global equity markets closed a volatile week with losses, as fresh concerns about the EU economy weighed
on investor sentiment. European markets led the MSCI AC World Index down by 0.53%. Emerging Markets
underperformed Developed counterparts.There were more reports about increased inflows into US/global
equity funds, reflecting expectations of a shift into equities away from bonds. Benchmark Treasury bond
yields eased, even as concerns about Spain and Italy weighed on their borrowing costs. Crude oil prices
were boosted by lower supply from OPEC and surge in Chinese demand. However weakness in some of
the other commodities led the Reuters Jefferies CRB Index close down by 1.31%. In currency markets,
euro lost ground against the US dollar as investors focused on the region’s political woes. Venezuela
devalued its currency by 32% to narrow widening fiscal gaps and ease currency supply constraints
• Asia-Pacific: Trends were divergent across Asian equity markets – Shanghai, Australia and Indonesia
equities moved up, while Hong Kong, India and Singapore closed lower. China reported sharply higher
exports and imports growth, and the trade surplus trimmed to $29.2 bln. Chinese inflation also eased to
2% from 2.5% last month. The People’s Bank of China injected $72 bln into money markets to ease
seasonal liquidity pressures ahead of the Chinese New Year.Territorial disputes between China and Japan
escalated after the latter alleged that Chinese navy targeted their radar at a Japanese vessel. Reserve Bank
of Australia kept policy rates unchanged at 3% and the Australian unemployment rate held steady at 5.4%.
Indonesia’s economy continued to grow strongly in Q4-2012 – GDP expanded by 6.11% almost the same
as Q3.
• Europe/Africa: Political situation in Spain and Italy weighed on European equity markets and led key
indices to close in the red. Spain’s PM faced graft allegations and political uncertainty ahead of elections
led borrowing costs to rise. EU leaders agreed to spending cuts of about 3.3%, reducing the budget to
€960 bln. At its latest policy review meeting, ECB officials expressed concerns over the impact of
stronger currency on the Euro economy and the impact of LTRO repayments on EONIA rates, while
keeping rates unchanged. BoE also maintained status quo on monetary policy. On the economic front,
German industrial orders increased in December. UK industrial output gained 1.1% and trade deficit
narrowed to £8.89 bln from £9.72 bln. Fitch cut outlook on Netherlands rating to negative, citing
rising level of public debt, banking system and fall in property prices. Ireland managed to strike a deal
with ECB that staggers the cost of bailing out Anglo Irish Bank over 40 years and thereby reduces the
country’s immediate borrowing needs.
• Americas: US equity markets outperformed global counterparts on the back of sustained positive
economic news flow. Rise in exports helped the US trade gap narrow by 21% in December. US factory
orders rose 1.8% in December, but core capital goods orders fell 0.3%. Pace of expansion in the US non-
manufacturing sector eased to 55.2 from 55.7. On the corporate front, Dell’s promoter has joined hands
with Silver Lake Partners for a $24.4 bln leveraged buy-out of Dell Computers and Liberty Global is
acquiring Virgin Media for $23.3 bln. US authorities announced a $5 bln lawsuit against S&P over pre-
crisis ratings mortgage bond ratings.
2. Weekly Weekly
change (%) change (%)
MSCI AC World Index -0.53 Xetra DAX -2.31
FTSE Eurotop 100 -0.64 CAC 40 -3.29
MSCI AC Asia Pacific 0.26 FTSE 100 -1.31
Dow Jones -0.12 Hang Seng -2.14
Nasdaq 0.46 Nikkei -0.34
S&P 500 0.31 KOSPI -0.35
India - Equity
Indian equity markets closed the week lower due to weak macro-economic data and concerns about
supply issuances as companies move to meet the SEBI mandated public float guidelines. Mid and small
cap indices underperformed large caps. Barring technology, all sectoral indices closed in the red. FII
inflows aggregated over $2.6 bln during the first four trading days of the week.
• Corporate Earnings: The numbers announced so far have been better than expectations, as lower input
costs helped margins improve. Topline growth was largely stable, except in the case of consumption
oriented sectors such as FMCG and auto, which witnessed slowdown in volume offtake. In banking
sector, private banks continued to report strong results and appear to have limited asset quality issues,
compared to public sector counterparts. Results from IT companies were also largely in line with
expectations – Infosys outperformed the low consensus estimates significantly. In the capital
goods/infrastructure space, the recent project announcements are yet to materialize into strong order
flows for companies and stiff competition appears to have weighed on margins. There has been some
upward revision in earnings expectations for the BSE Sensex following the recent earnings
announcements and the trend should continue, especially once policy execution picks up. Over the next
three years, we expect corporate earnings to grow by about 12-15%.
• Economy: GDP estimates for FY11 and FY12 were revised to 9.3% (from 8.4%) and 6.2% (from 6.5%)
respectively. Growth in per capita income decelerated and savings rate fell to multi-year lows. The overall
savings ratio to GDP dipped to 30.8% (from 34%) in FY11 due to dis-saving by the public sector and drop
in financial savings rate of households. Fixed capital formation ratio to GDP also edged lower to 35% -
reflecting the slowdown in investment activity. CSO expects GDP growth for FY 13 to come in a multi-
year low of 5%.Whilst one can debate about the estimate being too conservative, it is imperative to look at
the structural issues in the economy.
Real GDP growth %yoy
Source: CSO
3. The current slowdown can trace its origins to the policy response after the global financial crisis in 2008.
The large fiscal stimulus in those years resulted in consumption-led growth even as investment activity
got impacted due to various policy issues and withdrawal of the fiscal largesse was quite gradual. This
combined with the infrastructural bottlenecks in the country led to supply-side pressures and high
inflation. This had inevitably led to higher interest rates that have now started to impact consumption.
Hence, there is an urgent need to boost investment activity through infrastructure spending and reforms,
which should also help in attracting long term foreign capital. India was one of the few economies across
the globe that coped well with the global crisis, but needs to lay the structural foundation for sustainable
economic growth.
Weekly change (%)
BSE Sensex -1.50
S&P CNX Nifty -1.59
S&P CNX 500 -1.95
CNX Midcap -2.97
BSE Smallcap -3.72
India - Debt
Weak economic data raised expectations of easing and helped benchmark gilt yields ease towards the close
of week. Earlier in the week higher oil prices had pushed up yields slightly.
• Yield movements: Yields on the 1-year and 5-year benchmark papers were marginally up (1 bp). In
contrast, the 10 year and 30 year gilt yields decreased by 5 and 6 bps respectively. The yield curve
flattened further and spreads between 1/30 year gilts reduced to 18 bps from 25 bps last week.
• Liquidity/borrowings: Demand for liquidity under the RBI’s LAF window was lower this week ahead of
the CRR cut taking effect. Overnight call money rates hovered around the 7.7-7.8% mark. Scheduled bond
auctions of three GOI securities for Rs. 12000 crores received bids to the tune of over Rs. 41,000 crores.
• Forex: The Indian rupee came under pressure at close of week, following the release of weak GDP
advance estimates. Indian forex reserves stood at 295.2 bln, abou $600 mln lower than last week levels.
YTD fiscal deficit
Source: CLSA Asia-Pacific Markets
