1. Market Review
WEEK ENDED OCTOBER 26, 2012
International
Global investor sentiment was impacted by the news flow on earnings and economic fronts. The MSCI AC
World Index closed down 1.65%, as most major equity markets finished in the negative territory. Renewed
demand for safe haven helped global treasury bond yields ease. US treasury yields were however only marginally
changed as encouraging economic data and poor demand at one of the auctions exerted upward pressure on
yields. Crude oil prices slumped on reports of increasing US oil inventory and concerns of diminished demand
amidst slowdown in global economic growth. This along with weakness in other key commodities led the
Reuters Jefferies CRB index to close down 3.01%. In currency markets, the Japanese yen rebounded on Friday
but still closed down as traders speculated the Bank of Japan will announce additional stimulus at its meet next
week.The US dollar index moved up amidst reduced investor risk appetite.
• Asia-Pacific: Regional equity markets fared relatively better than Western counterparts, led mainly by
gains in Singapore and Indonesia markets. Japanese government announced a $5.3 bln stimulus package to
revive economic growth. As per data, Japanese exports contracted further last month due to sluggish
demand from Europe and geo-political tensions with China. The HSBC China flash manufacturing PMI
rose to 49.1 from 47.9 last month, suggesting some improvement in the sector. South Korea GDP growth
slowed to 1.6% (from 2.3%) in Q3 due to sluggish demand for exports and moderate domestic
consumption. Philippines cut its key policy rate by 25 bps to 3.5% on concerns about slowdown in capital
flows and exports. Hong Kong central bank intervened in currency markets to rein in the HK$ - large
capital inflows in recent weeks have pushed the HK$ to trade at the upper end of its trading band. It also
introduced a 15% tax on property purchases made by foreigners.
• Europe: Mood in regional markets was subdued as earnings fell short of market expectations and
economic data was lacklustre. Eurozone composite PMI edged lower from 46.1 to 45.8 mainly due to
decline in manufacturing sector activity. Data out of Germany was weak - the German IFO business
confidence index slid and German manufacturing & services sector PMIs also edged lower. Helped by
Olympic sales, UK economy returned to positive growth last quarter - GDP expanded by 1% on a
sequential basis. Spain’s regional elections delivered a mixed verdict for the incumbent government – it
won in Galicia, but lost hold in Basque. Swedish Riksbank left benchmark rates unchanged at 1.25%.
French government stepped in to rescue PSA Peugeot by providing bond guarantees to the tune of ~$9
bln. BP said it is in advanced talks to sell its 50% stake in TNK-BP to Rosneft for $27 bln.
• Americas: US equity indices slid as weak earnings reports overshadowed the positive economic
newsflow. The FOMC maintained status quo on monetary policy this week. Strength in consumer
spending and housing sector helped the US economy expand by 2% (annualized) in Q3. New home
sales continued to rise in September.While the headline durable goods orders index moved up sharply,
the sub-segment of non-defense capital goods was little changed from last month. Elsewhere in the
region, Bank of Canada and Colombia left policy rates unchanged. On the corporate front,
Department of Justice is suing Bank of America allegedly for selling bad mortgage loans to Fannie Mae
and Freddie Mac.
2. Weekly Weekly
change (%) change (%)
MSCI AC World Index -1.65 Xetra DAX -2.02
FTSE Eurotop 100 -1.35 CAC 40 -1.98
MSCI AC Asia Pacific -1.63 FTSE 100 -1.52
Dow Jones -1.77 Hang Seng -0.03
Nasdaq -0.59 Nikkei -0.77
S&P 500 -1.48 KOSPI -2.70
India - Equity
Indian equity markets declined this week primarily due to weak global sentiment and mixed domestic
earnings newsflow. Mid and small cap stocks underperformed large caps. Amongst sectoral indices, capital
goods, auto and banking stocks closed in the positive territory. Consumer durables and FMCG indices
were the top decliners. FII inflows were relatively lower during this holiday shortened week - $141.5 mln
in the first three trading days. On the M&A front, Rain Commodities acquired Belgian chemicals firm
Rutgers for about Rs. 5000 crores.
Source: Morgan Stanley Research
• Market Outlook: Indian equity markets have had a relatively strong run over the past couple of months,
helped by strong FII inflows and government policy offensive. Notwithstanding any major negative
surprises on the domestic and global front, we think markets could maintain a positive trajectory over the
near term. On the domestic front, most of the growth issues are well-recognized and priced in. The key
is for the government to gain traction on the execution of these measures as well as speed up investment
project clearances.These steps could further help boost confidence in the India growth story.
Easy liquidity conditions in domestic markets have helped borrowing costs edge lower in recent times
(CP/CD rates have eased and banks have announced cut in base rate).The RBI policy review next week
will throw light on whether the central bank has grown more comfortable with the macro-economic
situation post recent changes.
From the global viewpoint, it will need to be seen how upcoming changes in political leadership in the
US and China pan out and their impact on global risk appetite. Also Europe continues to dominate
investor minds and developments there would have a bearing on markets sentiment. Having said that,
global investors with long term investment approach should continue to find value in India - in a world
of easy liquidity, long-term investors continue to focus on fundamental investment opportunities that can
3. play out in the next decade or so, and India certainly qualifies for the same.The key differentiating factor
is obviously the large share of domestic demand in overall GDP (gross domestic product), that can help
the economy remain relatively resilient in the wake of a sharp slowdown in global economy or
deterioration in the Euro zone crisis. Any efforts by the government to tackle the fiscal deficit and
inflation problems can further add to India’s attractiveness as a destination for foreign investment.
Weekly change (%)
BSE Sensex -0.30
S&P CNX Nifty -0.35
S&P CNX 500 -0.65
CNX Midcap -1.43
BSE Smallcap -1.16
India - Debt
Indian bond markets traded in a narrow range this holiday truncated week as investors were cautious of building
large positions ahead of RBI’s monetary policy next week.
• Yield movements: Yields on the 1-year paper rose 1 bp while those on longer dated benchmark
papers (5/10/30 years) were unchanged from last week levels. The g-sec yield curve remained flat
with spreads between 1/30 year gilts at 21 bps. Corporate bond yields continued to edge lower.
Source: Morgan Stanley Research
• Liquidity/borrowings: Overnight call money rates moved up from 8% to 8.2% levels this week,
however demand for liquidity under RBI’s LAF auctions was relatively lower at about Rs. 82,000
crores this week. There were no GOI bond auctions scheduled this week.
• Forex: The Indian rupee strengthened 0.5% against the US dollar, helped by strong FII inflows
into debt (nearly $408 mln in two trading days this week). As of Oct 19, forex reserves aggregated
over $295.2 bln, about $359 mln more than last week levels.
• Policy: All eyes are set on the RBI monetary policy review next week. The central bank continues
to face a tough policy environment – incremental economic data continues to point towards
elevated inflationary pressures, even as economic growth remains modest. Over the last few
quarters, RBI has emphasized on the need to take concrete steps to address structural issues
weighing on growth and pushing inflation higher. To that extent, while the recent announcements
by the government are positive, the exact impact will become clear only in the coming
