Market Watch

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INDIAN EQUITY MARKETS.

The Indian economy has been felt on the recovery mode and sentiments are strong for emergence of a better and stronger India. After currency depreciation, inflation and current account deficits worries last year, the 2015-Q3 has brought good news for India in form of lower inflation and falling crude oil prices which have fell well below $60 per barrel. The new government has reacted solidly and quickly to kick start growth and today, India is now better positioned and healthier than other emerging markets.

2015-Q3 saw continued return of the investors to Indian equities, driven by optimism. Key Indian equity indices had a stellar 2014 year with the Sensex rising by almost 30%, BSE 200 by over 35% and CNX 500 by nearly 38%. Clearly, the small and mid caps have rallied more sharply than the blue-chip companies with the BSE Small Cap rising over 69% in last 1 year. On a quarterly basis too, mid & small caps have outperformed their bigger peers rising secularly during Q3. On a sectoral basis, banking, automobiles were the front-runners in year 2014 with increase of nearly 65% and 52% followed by health care rising at about 47%. Realty, Metal and Oil & Gas companies were among the bottom performers followed by Technology. Banking stocks performed handsomely during 2015 Q3 as well, rallying nearly 22%. The lot of bottom performers remained the same with returns in the negative for 2015 Q3. The fall in commodity and oil prices and currency depreciation were the contributing factors to this negative performance.

For the year ahead, the ability of the government to deliver and eventually revive economic growth, inflation trends, interest rates will be the key factors to look for. The year 2014 witnessed record FII flows of close to USD 40 Billion in equity and bond markets. With stronger and attractive policies, India will continue to remain an attractive market. Improving macro economy, possible rate cuts and strong corporate earnings growth, will likely maintain an upward momentum for the equity markets backed by increased liquidity coming from domestic investors.

Returns are calculated on absolute basis for less than one year and on CAGR basis for one year or greater

Returns are calculated on absolute basis for less than one year and on CAGR basis for one year or greater

GLOBAL EQUITY MARKETS

Returns are calculated on absolute basis for less than one year and on CAGR basis for one year or more.

Global oil prices have fallen sharply over the past seven months, leading to significant revenue shortfalls in many energy exporting nations, while many importing countries are paying much less. The reasons for this change are two fold - weak demand in many countries due to insipid economic growth, coupled with surging US production. The fall is largely unchecked as the oil cartel OPEC has declined to cut production on fears of loosing market share. Lower oil prices have helped emerging countries lower inflation. Clearly, the fall in crude oil prices have created big winners and losers.

The year 2014 saw global economic developments unfolding on expected lines with few exceptions. The US economy made a come-back with new business investments happening in the economy which again is likely to help the global economy. The DJIA rose by nearly 8% during the year and growing by an impressive 4.5%+ during 2015 Q3. In Japan, Prime Minister Abe is making slow but steady progress on much needed structural reforms. On back of the same, the markets delivered nearly 8% returns during 2015 Q3. China however remained the best performing market with rise of over 54% during 2014 and nearly 37% during 2015 Q3. Growth in China is on back of a weakening property market which is being mostly offset by domestic policy stimulus and improving export demand.

Performance of Brazil was getting worse with 2015 Q3 delivering about 7.5% in negative after falling into recession in the first half of the year. Russian markets have been one of the biggest losers during 2014 with markets falling over 45%. Russia which looses $2 bn in revenues with every dollar fall in oil prices. The economy is also facing the negative effects of sanctions that have resulted from its geo-political tensions with Ukraine. The Eurozone economy, which collectively is world's second largest economy, is still stagnant with only a marginal rise expected in 2015 Q3. Grappling with recession, countries like France, Italy are dragging others, especially Germany down. The expectations for the Eurozone for 2015 are thus, not very bright.

Global growth expectations for 2015 are divergent but expected to be relatively better than 2014. This will be on back of better performance and structural activities happening in US, UK, China, India and Japan. The US and UK are set to tighten monetary policy in 2015, more growth stimulating action is expected in China and Japan while Europe has to fight its' growth problems with strong long-term reform initiatives.

INDIAN DEBT MARKETS

The year 2014 ended on a positive note with encouraging data and outlook on the inflation front. The CPI data had fallen below the 5% mark during the period. Significant fall in crude oil prices augurs well for inflation and fiscal balance given that India imports over 80% of its oil need. Year 2014 also saw policy rates remaining stable giving increased policy credibility which largely focused on controlling high inflation observed over previous periods.

The year 2014 saw substantial FII inflows to the tune of USD 26 Billion in bond markets. This along with improving macro situation, inflation outlook and policy credibility helped the the bond yields fall by about 100 bps. This was also further helped by slow credit growth. For 2015, the key things will be look out for the trend in policy rates on back of improved economic parameters. The credit growth is another key factor to look out for as the manufacturing push by the government starts giving results. A lower credit growth helps liquidity and supports bank's demand for government securities. As the budget session nears, all eyes will be also on fiscal deficit achievement against the 4.1% target and plans for the next year. Savings on account of subsidy cuts, rationalisation of expenditure and disinvestment proceeds are likely to help government finances easing pressure on market borrowings.

In near term, markets are expecting RBI to reduce policy rates in gradual steps beginning with the first half of 2015. This will help accelerate economic growth without alarming inflationary pressures.

FOREX

The 2015 Q4 saw a relatively higher degree of volatility compared to the previous quarters. Also the trends visible in the previous quarters seem to disappear with most of the currency-crosses. The big surprise for the quarter was the monetary policy easing done by the Bank of Japan in October. Following which there was a good rally in Japanese Yen which appreciated nearly 6.50% against INR during the quarter to end 2014 at close to INR 53.

In cross-currency comparisons, the US Dollar strengthened against Sterling and the Pound by 3.8% in Q4 and 6.5% over the course of 2014. The Euro fell to $1.2010 slipping by 4% in Q4, it ended 2014 down by 11.7% against the Greenback. The Dollar gained 15% against the Yen over the course of 2014 and stood at 120.21 Yen at 2014 end. The Euro ended December worth 144.4 Yen, slipping by 3.4% in December, but rising by 5.2% in Q4 and 1.6% over the year. The Sterling gained 0.28% against the Euro over the fourth quarter and by 6% over 2014. The Chinese currency has eased against the Dollar over the course of the year by 2.6%.

At the start of year 2015, the scene looks set for the US Federal Reserve to start raising interest rates and quantitative easing programme – a shift in the monetary cycle, which could unfold more volatility in markets, currency, equity and debt. It will also highlight increasing divergence between the US, the Eurozone and Japan. The markets are seemed to be better prepared for this rise with the USD appreciating against other currencies. Closer home, with falling crude oil prices and anticipation of better investment inflows into the economy, the INR looks stable and may marginally appreciate going forward.