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Weekly market review June 15, 2012
1. Market Review
WEEK ENDED JUNE 15, 2012
International
Global equity markets moved up in response to the Spain bank rescue package agreed last weekend and on
growing expectations of policy action to deal with recent economic weakness and Eurozone crisis.The MSCI AC
World Index rose 1.72% as investors remained somewhat nervous ahead of Greece elections this weekend. US
benchmark bond yields closed lower as latest economic reports spurred hopes of policy stimulus and borrowing
costs rose for countries such as Spain and Italy. Prospects of fresh stimulus measures and Eurozone uncertainty
helped gold and other precious metal prices rise this week.The Reuters Jefferies CRB Index however closed with
marginal losses due to weakness in crude oil and other commodities. OPEC decided to maintain their production
levels despite the fall in oil prices, due to the uncertain growth environment.The US dollar index retreated amidst
reduced risk aversion. All eyes are now set on the upcoming G20 summit as well as the EU summit towards the
month end for signs of concrete policy measures.
• Asia-Pacific: Regional equity markets outperformed global counterparts led by strong gains in Hong
Kong, Singapore and Taiwan. Chinese economic data was softer than market expectations - May CPI
inflation stood at 3%yoy and retail sales growth decelerated. Growth in industrial production and fixed asset
investment was slightly higher than last month, and May’s trade data was strong. Helped by strong domestic
demand, Japanese core machinery orders index rose 5.7% in April. Bank of Japan left policy on hold as also
central banks in Indonesia and Thailand. On the M&A front, Hong Kong Exchanges & Clearing is
acquiring London Metal Exchange for $2.2 bln, with a view to expand into commodities.
• Europe/MENA: UK banking stocks gained after the BoE unveiled a ‘funding for lending’ programme
that would allow institutions to swap assets for funds to provide credit to corporates/households.
However, weak economic data curbed gains in the FTSE 100, and it underperformed French and
German indices. EU leaders agreed to lend up to $125 bln to Spain’s banks last weekend. Spain’s
borrowing costs however climbed higher after Moody’s downgraded Spain’s rating by three notches to
Baa3. Moody’s also lowered Cyprus’ rating by two levels to Baa3. On the economic front, Euro-area
industrial production was down 0.8%mom and inflation eased to 2.4%. Russia’s central bank had
decided to leave its key interest rates unchanged but cut the rates on ruble currency swaps. Egypt’s
Supreme Constitutional Court unexpectedly issued a ruling to dismiss the country’s Parliament days
before Presidential elections casting a shadow on the shift to democracy.
• Americas: Weak economic data bolstered expectations of further stimulus and led US equity indices
to close higher this week. As per latest data, US jobless claims increased by 6,000 to 386,000, retail sales
fell by 0.2% for the second consecutive month and consumer sentiment as measured by the Thomson
Reuters/University of Michigan declined to its lowest level since December. US industrial output also
fell by 0.1% in May and CPI inflation fell 0.3% in May. Banco Central do Brasil’s IBC-Br economic
activity index fell 0.02% indicating economic activity may have contracted in April and the government
has started to unwind the foreign exchange controls. On the M&A front, Carlos Slim controlled
Inmobiliaria Carso and Grupo Financiero Inbursa together picked up 8.4% stake in Argentina’s YPF.
2. Weekly Weekly
change (%) change (%)
MSCI AC World Index 1.72 Xetra DAX 1.61
FTSE Eurotop 100 1.47 CAC 40 1.18
MSCI AC Asia Pacific 2.39 FTSE 100 0.80
Dow Jones 1.70 Hang Seng 3.95
Nasdaq 0.50 Nikkei 1.30
S&P 500 1.30 KOSPI 1.23
India - Equity
Frontline equity indices added further gains this week led by a rally in FMCG and technology stocks. However,
gains in mid and small cap indices were limited.Amongst sectors, real estate, healthcare and power indices closed
the week in red. FII flows totaled $107.93 mln in the first four trading days of the week.
• Macro: India’s industrial production was flat in April due to combined impact from decline in mining
sector (-3.1%) and manufacturing (+0.1%) weighed on overall index. Electricity production maintained
positive momentum (output increased by 4.6%). Growth in capital goods sector remained volatile – output
fell 16.3% due to sharp drop in certain industries such as textile machinery, cables, heat exchangers, etc. In
contrast, growth in consumer goods production accelerated to 5.2% from 0.7% last month.
• Corporate India: Notwithstanding the challenging times over the last few years, Indian companies
continue to deliver good performance and many have utilized the downturn in developed markets to
enhance exposure overseas. Corporate India continues to score well vis-à-vis peers and rest of the world
on various counts including RoE (Return on Equity) and earnings cyclicality.The former reflects domestic
companies’ efficiency in capital utilization and better demand/pricing mix.
RoE Trends Dividend activity in
the past decade by market
25%
India (% of companies) Cut Constant Increase
20% 100
90
80
15% 70
EM 60
10% 50
World
40
30
5%
Asia Pac ex- 20
Japan 10
0% 0
20 01
1997
20 07
20 08
20 09
1996
2004
2006
EM
KR
Ru
TW
TH
World
ID
CN
IN
SA
MY
BR
PH
2000
1995
1998
2003
1999
20 02
2010
2005
Source: Factset,Worldscope, Morgan Stanley Research Source: Factset, CLSA Asia-Pacific Markets. A cut or rise
is defined by a decrease or increase in DPS of 10% or
more for the current MSCI universe.
3. Besides this, confidence in Corporate India is further strengthened by the following -
• Leverage levels have declined compared to the past.
• More than 130 companies of the CNX 200 are today generating more profits that they did in FY2008,
which was a high growth year for companies across sectors.
• The change in book value often serves as a tracking measure for change in a company’s intrinsic value.
Over the last three fiscal years ending FY11, CNX 200 companies reported a 65% increase in book value.
In contrast the index has risen by only 1.8% between 2008 and now, clearly reflecting a valuation gap.
(Source: Cline, Morgan Stanley Research)
• While India has a low dividend yield ratio compared to Asian peers, the dividend track-record has been
most stable globally over the last decade.
Overall, quality businesses continue to maintain a healthy growth profile and are well-placed to benefit from
the economic upturn.
Weekly change (%)
BSE Sensex 1.38
S&P CNX Nifty 1.39
S&P CNX 500 0.91
CNX Midcap -0.02
BSE Smallcap 0.40
India - Debt
Indian bond yields eased further this week, however closed off lows as headline inflation continued to move up.
• Yield Movements The yield curve steepened slightly as yields at the short-end of the curve (1-year) eased
more than those at the longer end of the curve (30-year paper). Rates on CP/CDs of different maturities also
trended lower..
• Liquidity/ Borrowings: OMO auctions held early this week helped ease liquidity constraints – the RBI
bought back securities worth Rs. 11,206.67 crore. Overnight call money rates closed around the 8% mark and
demand for liquidity under the RBI’s LAF window was slightly lower than last week – repos averaged Rs.
80,112 crore as against Rs. 89,716 crore last week.
• Forex: Helped by increased global risk appetite, the Indian rupee recovered losses clocked earlier in the week
on S&P comments about India’s rating outlook and closed marginally higher against the US dollar. As of Jun
08, forex reserves stood at $287.38 bln, about $1.5 bln higher than last week levels.
• Macro/Policy: Headline inflation, as represented by Wholesale Price Index (WPI), picked up further in May.
The index moved up from 7.2% in April to 7.6% in May as prices of food and primary articles climbed higher.
The recent increase in petrol prices also pushed up the fuel price index. Meanwhile, core inflation as measured
