Weekly market review June 29

  • Published on

  • View

  • Download




  • 1. Market ReviewWEEK ENDED JUNE 29, 2012InternationalFinancial markets got a boost on Friday from positive developments at the EU summit, which increased hopes ofstaving off a crisis over the near term.The sharp gains on Friday helped the MSCI AC World Index added around2.5% and pare the quarterly losses to around 6%. There also have been reports that the Basel Committee isconsidering changes to the liquidity requirements for banks.While riskier assets rallied, bonds continued to benefitfrom the mixed economic data pointing towards a global economic slowdown. Yields in European peripheraleconomies benefitted from the EU summit announcements. Commodities benefitted as well and the ReutersCRB index moved up by 6% during the week, helped by risk-on trades on Friday, the last day of the quarter.Thedollar index fell against major currencies and the Euro registered sharp gains after the summit. In its annual report,BIS has called for increased focus on the structural imbalances in the global economy and the need to address thefiscal problems along with the leverage in the banking sector (due to derivative positions). Asia-Pacific: Regional equity markets rallied in line with the global markets, but some of the key marketssuch as China and South Korea underperformed. Japans Lower House passed a bill to raise theconsumption tax from 5% to 10% by 2015, as part of efforts to reduce fiscal stress. Data on industrialproduction and manufacturing PMIs pointed towards slowing growth in Japan. Chinese economic datareflected continued slowing of the economy and raised expectations of policy measures to boost growth.The Chinese government announced various measures to liberalize the trade and service activities betweenHong Kong and Mainland China, and development of offshore RMB market. IKEA and Coco Colaannounced that they are likely to invest $1.9 bln and $5 bln respectively in India. Europe/Middle East: It was an important week for the region and the policy makers seeminglydelivered in terms of announcing tangible measures to address the sovereign debt crisis. There wasagreement towards fiscal and banking union that will lead to a single banking supervisory mechanismand direct recapitalization of banks from the bailout funds. In addition, a growth pact and near termmeasures to help Spain/Italy were also agreed. Germanys parliament approved the EU fiscal pact andthe bailout fund.The Czech National Bank cut its interest rates by 25 bps to 0.5%, while Israels centralbanks reduced its benchmark rate to 2.25% (by 25 bps) to boost growth. On the corporate side,Glencores proposed merger with Xstrata came under a shadow after shareholders sought better terms,especially Qatar Investment Authority. Barclays was fined in a government probe into the rigging ofLIBOR by various banks. Americas: The buoyant global market sentiment helped US equity markets as well, but Brazilianmarkets closed the week with losses. On the political front, the US Supreme Court upheld most of thehealthcare reform. Latest economic data pointed towards muted consumer spending and slowdown inmanufacturing in the US. Canadas economy witnessed marginally higher growth in April (0.3% MoM)helped by mining and crude oil production. Brazilian markets were hit by the downgrade in economicoutlook and the government announced further measures to support the Real and spending measuresto boost investment growth. Bristol-Myers will be acquiring diabetes drug manufacturer Amylin in a $7billion deal. In another deal, Anheuser-Busch InBev will acquire the remaining stake in Grupo Modelo

2. that it does not already own for around $ 20 bln. News Corporation has announced that it will look to separate its publishing and media and entertainment businesses into two companies. Weekly Weekly change (%) change (%)MSCI AC World Index 2.46 Xetra DAX 2.44FTSE Eurotop 1001.89 CAC 403.42MSCI AC Asia Pacific2.70 FTSE 1001.04Dow Jones 1.89 Hang Seng 2.35Nasdaq1.47 Nikkei2.37S&P 500 2.03 KOSPI 0.36India - EquityDomestic markets closed the week on a strong note with sharp gains on Friday and the Sensex managed to closethe quarter in the positive zone. Increased expectations of new policy measures including changes to GAARunder the PMs guidance along with positive developments in Europe, helped sentiment.Amongst sectors, powerand metal indices outperformed. FII flows were negative during the first four trading days of the week - $26 mln. Macro/Policy: Indias Balance of Payments (BoP) deficit narrowed in the quarter ending March 2012, despite a high current account deficit helped by a higher capital account surplus. BoP reduced to around $6 bn from $ 13 bn in the previous quarter.The current account deficit rose to a new high of around $22 bn (4.5% of GDP), due to lower exports. Helped by increased remittances and capital flows, the capital account registered a surplus of $16.5 bn. The draft guidelines on GAAR have sought to address the various issues raised by global investors and mitigate impact by suggesting a monetary threshold for invoking GAAR. These might undergo further changes once before getting finalized based on market feedback and the PMs inputs. Economy: Investment and consumption have been Indias key economic drivers in the 2000s. However, a combination of policy issues along with slowing growth has impacted investment growth quite sharply in the last few years. On the other hand, persistently high inflation levels are weighing on household savings. The rise in public spending in response to the 2008 global crisis is yet to be scaled back.The RBI had rightly pointed out that interest rates are not an all-pervasive panacea for the problems the economy is facing. Source: CLSA Asia-Pacific Markets, CEIC, Planning Commission 3. While Indias growth rates continue to be better than a majority of its peer group countries across the world, we need to focus on measures that will help the country achieve its long term potential. Despite a slowing growth, we are facing persistently high inflation due to supply-side issues. The need of the hour is to bring down inflation, boost investment growth, cut expenditure and channel household savings into the capital markets.While the economy is expected to benefit from the positive demographics, savings need to be shifted from non-productive physical assets into the financial sector. A low inflationary environment and higher savings rate are essential for sustained higher growth rates over the long term. Addressing the policy perception might also help attract additional long term foreign flows into the economy. Given the low interest rate regime in all developed countries and the quantitative easing measures, investors are looking for attractive investment opportunities. While long term investors remain positive about India, addressing the fiscal deficit and a conducive policy environment can help attract increased inflows (both FII and FDI flows). Weekly change (%)BSE Sensex2.70S&P CNX Nifty 2.58S&P CNX 500 2.63CNX Midcap3.06BSE Smallcap2.13India - DebtGovernment bond yields were range bound during the week as investors looked forward to some concrete measureson the fiscal consolidation front. The rupee bounced back sharply on Friday on Europe developments and alsoexpectations on further relaxation of the contentious provisions of GAAR. The scheduled GOI auctions received agood response. Yield Movements: The 10-Yr Benchmark yield remained flat at 8.37% compared to last week.The 5-Yr Gilt yield fell 8 bps while the 5 Yr AAA corporate bond yields remained flat and the spreads widened to 125 bps. Yields for 1 yr Gilt rose marginally by 2 bps while the 30 yr Gilt yields remained unchanged leading the spreads to narrow to 64 bps Liquidity/ Borrowings: Liquidity remained tight however was relatively better than last week. Repos averaged Rs. 89,494 crore as against Rs. 1,15,324 crore last week.The overnight rates closed flat at 8.25%.The scheduled auctions in four dated G-secs worth Rs. 15, 000 crore were fully accepted without any devolvement. Forex: The rupee reversed its trend and gained against the US dollar - it closed the week at 55.60 about 2.7% higher compared to previous week. Forex reserves (as of June 22) fell by over $ 768 mln to stand at $288.6 bln. 4. Macro/Policy : Credit and deposit growth moved down as of June 15 and credit growth remained above deposit growth (17.8% and 14.5% respectively). RBI released its Financial Stability Report, which indicated that the financial system remains robust, but risks have increased due to global environment and the domestic slowdown. Source :RBI RBI announced various measures to boost capital flows, which included increased FII investment limit in government bonds, reducing in withholding tax, relaxed QFI norms and allowed higher overseas borrowing for re-financing rupee loans. The central bank has been conducting OMOs for a while now and the liquidity situation is likely to improve. As a result, the short term rates may begin to come down while the long end remains under pressure. 29.06.201222.06.2012 Exchange rate (Rs./$)55.6057.12 Average repos (Rs. Cr)89,494 115,324 1-yr gilt yield (%) 8.017.99 5-yr gilt yield (%) 8.188.26 10-yr gilt yield (%)8.378.37 Source: Reuters, BloombergThe information contained in this commentary is not a complete presentation of every material fact regarding any industry, security or the fund andis neither an offer for units nor an invitation to invest.This communication is meant for use by the recipient and not for circulation/reproductionwithout prior approval.The views expressed by the portfolio managers are based on current market conditions and information available to themand 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 dependingupon the factors and forces affecting the securities market.The past performance of the mutual funds managed by the Franklin Templeton Groupand its affiliates is not necessarily indicative of future performance of the schemes. Please refer to the Scheme Information Documentcarefully before investing. Statutory Details: Franklin Templeton Mutual Fund in India has been set up as a trust by Templeton InternationalInc. (liability restricted to the seed corpus of Rs.1 lac) with Franklin Templeton Trustee Services Pvt. Ltd. as the trustee (Trustee under the IndianTrust Act 1882) and with Franklin Templeton Asset Management (India) Pvt. Ltd. as the Investment Manager.Copyright 2012 Franklin Templeton Investments. All rights reserved