- 1. InternationalGlobal financial markets witnessed broad-based
declines after the US Federal Reserve outlined plans totaper asset
purchases.The MSCI AC World Index ended 3.21% lower than last week
levels and EmergingMarkets (EM) stock indices saw steeper declines
on record outflows. Weak manufacturing data out ofChina also added
to investor pessimism. Global treasury bond yields spiked as
investors assessed impactof a less accommodative stance by central
banks. Several EM nations cut/canceled scheduled bond salesdue to
the market volatility. Commodity prices also reacted sharply to the
statement and the ReutersJefferies CRB Index declined 2.83%. Gold
retreated below the $1300/ounce mark and Brent futuresended a tad
above $100/barrel levels as the US dollar strengthened. Central
banks in Emerging marketstook a range of measures to stem currency
depreciation. Asia-Pacific: Global investor reallocation away from
EMs caused sharp declines in EM Asian equity markets.Indonesia and
China were amongst the top losers.A fall in HSBCs flash China
manufacturing PMI index to48.3 from 49.2 in May exacerbated
weakness. Late in the week, the Peoples Bank of China injected
about$8.2 bln to address the systemic liquidity tightness, after
Chinese inter-bank money markets rates recordedsharp increases.
Japanese equity markets bucked the global trend, helped by a weaker
yen and positiveeconomic data. Data showed yen depreciation had
added to demand for Japanese goods and value of thecountrys exports
rose 10%yoy in May.The JapaneseTankan index also gained showing
business sentiment hasstrengthened from latest measures. Europe:
Concerns that the turning point in the global central bank stimulus
cycle is near weighed onregional equity markets. Closure of Greek
state broadcaster ERT caused a rift between coalition partnersof
the incumbent government and impacted Greek markets. Eurozone
ministers agreed for the groupsbailout fund to inject funds
directly into ailing banks, but only after local governments shared
part of theburden. On the economic front, the Eurozone flash PMI
indices continued to inch higher and UK retailsales were quite
strong in May. Sweden government managed to sell a 13.4% stake in
Nordea for $3 bln,which may be used to pare public sector debt.
Spain announced it will rationalize/streamline governmentbody
operations and expects such efforts to save 6.5 bln each year.
Americas: The CBOE VIX index jumped about 22% and US equity markets
reacted negatively to the Fedpolicy statement. The Fed upgraded
economic growth forecasts and said it could start winding down
assetpurchases later this year and halt QE by mid-2014, if economy
continues to recover as per expectations.Meanwhile, US housing
sector data remained positive and the Conference Boards index of
leading indicatorsrose 0.1%.The Brazilian government rolled back
the hike in public bus fares, but citizens continued to
stageprotests against economic conditions. Colombias GDP report
indicated slower economic expansion in Q1-2013 2.8%yoy versus
3.1%yoy corresponding quarter a year ago. On the corporate front,
BrazilsVotorantimCementi deferred close to $5 bln IPO plans.Market
ReviewWEEK ENDED JUNE 21, 2013
2. Weekly Weeklychange (%) change (%)MSCI AC World Index -0.70
Xetra DAX -1.54FTSE Eurotop 100 -1.74 CAC 40 -1.74MSCI AC Asia
Pacific 0.33 FTSE 100 -1.62Dow Jones -1.17 Hang Seng -2.81Nasdaq
-1.32 Nikkei -1.48S&P 500 -1.01 KOSPI -1.80India - EquityThe
weakness in EM countries weighed on India as well and domestic
equity markets witnesseddeclines, albeit less than some of the EM
peers. Except technology, all sectoral indices closed in the
red,and real estate, metals and banking were the top losers. FIIs
sold equities to the tune of $550 mln inthe first four trading days
of the week.The fall in Indian equities in recent weeks needs to be
seen in the context of the short term globalreallocation away from
EM assets, amidst concerns about a reversal in global liquidity
trends.The nearzero interest rates along with quantitative easing
had led to a rise in global investors increasingallocations to EM
countries such as India to benefit from relatively higher growth.
Notwithstandingthe current slowdown, EM economies remain
fundamentally well placed compared to the developedmarkets, due to
positive demographics, rising income levels and infrastructure
investments. Moreimportantly, many of the EM countries remain
relatively less leveraged and the financial systems arequite
robust. We believe these countries will continue to grow at a
stronger pace than developedmarkets in the coming years. Hence,
once the short term reactions to global liquidity trends play
out,the long term fundamental story will attract global
investors.Having said that, over the near term, FII outflows and
the domestic CAD (current account deficit)situation, in particular,
may cause markets and the currency to remain under pressure. Some
of thepoints to consider in the current situation would be -
Economy/Policy: Economic growth has moderated over the last couple
of years, but the key factorsbehind the slowdown seem to be on the
mend, and a gradual recovery seems to be underway. As wehave
mentioned in the past, favourable monsoons, spending ahead of
elections and reduced inflationarypressures should help. The
government has made progress on the fiscal consolidation front and
projectexecution bottlenecks are easing, albeit slowly.The Cabinet
Committee on Investments is functional andreportedly about $25 bln
worth projects have been cleared.This week the government cleared a
proposalfor pass-through of imported coal prices this could
potentially improve fuel availability for powerplayers, though will
push up the import bill and increased tariffs. Rupee/Foreign Flows:
The recent rupee depreciation is likely to offset potential
benefits from thefall in global crude oil and commodity prices, but
could benefit exporters. Besides, higher domestic goldprices along
with government measures could help rein in domestic gold demand.We
will however needto be see if the rupees impact on export
competitiveness is undermined due to a similar decline seenin EM
peer currencies. 3. Source:Various Stock Exchanges.Source: RIMES,
MSCI, Morgan Stanley Research Valuations: India equities remain
attractively valued vis--vis earnings potential and compared
tohistory. Higher ROE apart, lower earnings cyclicality also
strengthens the investment case for India.Weekly change (%)S&P
BSE Sensex -2.10CNX Nifty -2.42CNX 500 -2.34CNX Midcap -2.27S&P
BSE Smallcap -0.96India - DebtIndian bond yields continued to rise
and the rupee weakened to record lows as traders reacted to
USFederal Reserve plans to reduce stimulus. However, the pace of
FII outflows slowed to about $650 mln inthe first four trading days
and foreign investors subscribed to about Rs 39171 crore of
governmentsecurities quotas vis--vis Rs. 42,022 crore on offer in
the auction this week.At the mid-quarter monetary policy review,
the RBI kept policy on hold due to current account deficitand
inflation concerns Yield movements: Bond yields increased across
maturity buckets.Yields on the 10-year and 5-yearpapers increased
by 10 bps and 17 bps respectively, while those on the 1-year paper
rose 13 bps.Yieldon the 30 year Gilts also stood 13 bps higher than
last week levels.Yields on 5-year AAA corporate bonds increased 21
bps (to 8.72%) and consequently spreads oversimilar tenured gilts
rose to 111 bps from 107 bps a week ago. Liquidity/borrowings:
Systemic liquidity conditions were little changed - overnight call
money ratesclosed at 7.20%, almost same levels as the prior week,
and demand for liquidity at RBIs LAF windowaveraged about Rs.
67,000 crores. Scheduled bond auctions of GOI securities worth Rs.
15,000 croreswitnessed good response from market participants and
there was no devolvement on primary dealers. Forex: The rupee
dropped to fresh all-time lows of Rs.59.98/$ after the Feds
stimulus withdrawal planhelped the US$ strengthen and caused FII
outflows from Emerging Markets including India. RBIintervention and
inflows related to a $1 bln overseas loan by Essar Steel helped the
currency recoverslightly on Friday.Figure 1: Net foreign buying in
Emerging Asia (ex-China, ex-Malaysia)EM Asiaex-China &India
Indonesia Korea Philippines Taiwan Thailand MalaysiaMonthly
dataJan-13 4,059 590 -1,746 667 671 500 4,742Feb-13 4,575 1,161
1,760 146 1,052 -583 8,111Mar-13 1,675 188 -1,901 204 -902 212
-524Apr-13 1,000 74 -2,589 284 1,068 -683 -845May-13 4,067 -36 926
450 2,142 -173 7,376Jun-13 -412 -1,596 -3,476 -265 -2,351 -1,178
-9,278Annual data2013 (YTD) 14,966 381 -7,025 1,485 1,680 -1,905
9,5822012 24,372 1,694 14,990 2,540 5,006 2,502 51,1042011 -358
1,163 -8,762 1,326 -9,178 -196 -16,005Last update: 19 Jun
20131.01.11.21.31.41.51.61.720052005200620062007200720082008200920092010201020112011201220122013M
SCI India ROE Relative to M SCI EM 4. As we have mentioned in the
past, the rupees sharp decline is not isolated - many EM currencies
witnessedsimilar declines the chart below captures 2013YTD movement
in the rupee and other EM currencies.Select EM Currencies 2013YTD
Fall Against the USDSource: MSCI, RIMES, Morgan Stanley Research.EM
here is represented by the MSCI Emerging Markets Currency Index
Policy: RBIs decision to keep key rates unchanged (repo at 7.25%
and CRR at 4%) was in line withexpectations, given the
macroeconomic backdrop both in India and overseas. The bank
acknowledged theuneven global growth and increased risks of sudden
changes to capital flows due to the monetary policy stanceof
important central banks such as the Federal Reserve.
Notwithstanding the weak growth trends in India, ithas indicated
that uncertain inflation outlook has weighed on its policy stance.
Key factors impacting inflationoutlook are still elevated consumer
inflation levels, potential increase in imported inflationary
pressures dueto rupee depreciation and upward revisions to domestic
fuel as well as minimum support prices (MSP). Outlook: While the
recent global news flow has unnerved investors across markets, the
changes outlined areinevitable. Leading global central banks had
resorted to extraordinary policy actions to stem growth slowdownand
aid de-leveraging. With the situation improving in the US,
policymakers are signalling a gradualwithdrawal. The exit is
expected to impact short-term flows into Emerging Market assets,
but long terminvestors should continue to focus on fundamental
stories such as India.In terms of Indias monetary policy, the
latest statement indicates RBI is focused on durable/sustainable
fall ininflationary pressures and the Balance of Payments
situation.The improvement in case of the former may be limitedover
the near term as rupee depreciation limits pass through of fall in
international commodity prices. Thegovernment has been undertaking
various measures to encourage foreign investments and reduce
non-productivegold imports, and trends will be closely watched to
gauge impact on external position.While the measures mayprovide
some relief in the coming quarters, from a medium to long term
perspective, there is clearly a need toaddress the structural
drivers of domestic inflation (read bottlenecks) and boost
investment activity. RBI hasindicated it will remain on stand-by to
intervene and alleviate stress caused by adverse developments.We
believe that Indian corporate bonds may fare relatively better than
gilts in the current environmentprimarily due to their relatively
high yields (read coupon payments) along with limited supply going
forward.Gilt yields at the same time would be subject to fiscal
deficit/borrowings news flow.Monetary policy directionis likely to
be driven by trends in rupee, inflation and deficits
situation.21.06.2013 14.06.2013Exchange rate (Rs./$) 59.27
57.51Average repos (Rs. Cr) 67,713 65,4131-yr gilt yield (%) 7.47
7.345-yr gilt yield (%) 7.61 7.4410-yr gilt yield (%) 7.57
7.47Source: Reuters,
CCIL.-10.4-3.0-20.9-8.3-9.1-4.4-25.0-20.0-15.0-10.0-5.00.0Brazil
Indonesia South Africa Turkey India EM 5. The information contained
in this commentary is not a complete presentation of every material
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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
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are subject to market risks and the NAVs of the schemes may go up
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refer to the Scheme Information Documentcarefully before investing.
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