Hexagon Wealth

March 25, 2013

Markets Last Week

Global & Local Jitters

During the week, the Sensex fell by 3.6% to finish at 18,738 – the lowest close in 2013. The fall was partly because of adverse political developments, as the DMK’s decision to withdraw support to the ruling UPA-led coalition government spooked markets. On Tuesday, the DMK’s announcement overshadowed the repo rate cut and dragged markets lower.

Pre-poll stresses seem to have kicked in earlier this time, overturning most assumptions where such a scenario was factored in for the second half of the year. Political instability could be a road block for any reform measures proposed by the government to try and re-start the economy. So markets are likely to experience wild swings this year, probably providing more entry points than exit points.

Defensive sectors such as FMCG and Pharma were once again in the limelight, though their valuations are becoming untenable.

Global markets were jittery because of the hostile tone of negotiations between Cyprus and the European Union over the proposed bailout of the island’s banks. The European Union’s conditions for the bailout involved the unusual clause of a tax on bank deposits, but this proposal was rejected by the Cypriot Parliament.

The ECB has threatened to cut off funding to banks in Cyprus, if they do not negotiate a deal by March 25th. Eurozone nationals are worried that this could set a precedent as an easy solution for other troubled countries. Global markets are weak due to this reason and could remain so till a decision is reached. Euro strains may even bring back some attention to gold, if liquidity does not remain a constraint.

RBI cuts repo rate, but concerns remain

The RBI reduced the repo rate by 25 basis points to 7.5%, (almost reluctantly, it seems) in its mid-quarter policy review on 19th March. The CRR and SLR rates were left unchanged. (which disappointed the markets)

However, the central bank warned that there would be limited room for further easing, because of high food inflation, which has “driven a wedge between wholesale price and consumer price inflation”. The RBI is also concerned about India’s high current account deficit (CAD), which rose to a record high of 5.4% of GDP in the second quarter of the current fiscal year. The RBI expects the CAD to deteriorate in the third quarter of the current fiscal.

Retail food price inflation at 13.7% remains a very serious worry. Food price inflation leads to wage inflation and a broader increase in inflation making it very difficult to reverse. But there is not much the RBI can do about this – it is the government’s role.

Long bond prices fell on this news, yields rising from 7.87% pre-policy to 7.97% at end of week. Medium term bond funds have not been affected, which are the core of our bond portfolio. As gilt prices fall, it may even be an opportunity to invest in (well managed) longer duration bond funds.

CPI Food Index
Higher foreign direct investment may help India’s economy

After two consecutive monthly declines, foreign direct investment (FDI) in India rose to $2.15 billion in January – an annual increase of 8%. However, during the first 10 months of the current fiscal year, FDI fell by 39% to $19.10 billion. India attracted FDI worth $31.28 billion in the same period last year. Lower FDI flows may widen the CAD and lead to further deterioration in the Rupee. India also needs FDI to improve infrastructure. Positive global economic conditions and the recent liberalization of norms may help India attract more FDI inflows.

Falling business activity in Europe suggests contraction


In March, business activity in the Eurozone may have contracted as the “flash” or preliminary composite Markit Purchasing Managers Index (PMI) declined to a four-month low of to 46.5 in March. This was lower than February’s final estimate of 47.9. The index has remained below the threshold of 50 which separates expansion from contraction since January 2012. Because of the contraction in business activity, the Eurozone is unlikely to emerge from recession soon.

Business activity fell to a four-year low in France but expanded marginally in Germany – the Eurozone’s largest economy. The Markit Flash Germany Composite Output Index fell to 51.0 in March, from 53.3 in February. However, German business confidence unexpectedly declined in March as the Ifo business confidence index fell to 106.7 in March from 107.4 in February, below economists' forecasts of 107.6.

Growth in the U.S. housing market

In February, housing starts climbed by 0.8% to a 917,000 annualized pace, while permits rose by 4.6% to a 946,000 rate - the most since June 2008. In February, existing home sales jumped to a three year high as sales rose by 0.8% to an annual rate of 4.98 million units - the highest level since November 2009. In January, house prices rose by 0.6% on a monthly, seasonally-adjusted basis, according to the Federal Housing Finance Agency. The annual increase in house prices was 6.5% - the biggest gain since 2006. This was partly because of falling inventories. Low borrowing costs have contributed to the recovery in the U.S. housing market, as the benchmark interest rate has been close to zero for several quarters. At a meeting on March 20th, the Federal Reserve decided to leave the pace of asset purchases unchanged at $85 billion a month and stated that it would maintain the key interest rate near zero as long as unemployment remained above 6.5% and the outlook for inflation remained below 2.5%. Lower interest rates and a buoyant housing market may positively affect U.S. economic growth.

Loose monetary policy in Japan may revive exports

Japan posted a trade deficit of ¥777.5 billion ($8.1 billion) in February – the eighth consecutive monthly deficit. This was the longest run of trade deficits since 1980. In February, imports rose by 11.9% while exports fell by 2.9% on an annual basis. During a news conference on Thursday, Haruhiko Kuroda – the new Bank of Japan governor – pledged to push up inflation to 2% in two years through quantitative easing. Quantitative easing may help push down the value of the Yen, which will make Japanese exports more competitive. Consequently, this may help Japan to eliminate its trade deficits.


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