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HINDUJA BANK (SWITZERLAND) LTD BUILDING WEALTH, ENABLING ENTERPRISE 11 February 2015 WEEKLY MARKET COMMENTS EXECUTIVE SUMMARY – Michel Menoud The outlook for European stocks appears to be positive. Partly due to the sharp depreciation of the euro (and the steep drop in oil prices), earnings data for the EMU (especially European large caps, which generally achieve a larger proportion of their sales and profits outside the EMU) could turn out to be more positive than expected in the near future. However, it looks like much of the money creation has already been discounted in prices. In conclusion, we remain positive for the region, but stocks will remain volatile. In Japan, stocks will continue to be supported by the BoJ’s stock-buying program and buying by major Japanese pension funds. Combined with the possibility of the yen weakening further, after climbing above resistance at around 18,000, in the long run we foresee the index rising towards 20,000. Neutral stance maintained. As far as Emerging Markets (EM) are concerned, the stronger dollar and generally higher interest rates will increase the cost of debt servicing and weigh on many companies and on economic growth. The situation is the most unfavourable in three countries: Turkey, South Africa and Indonesia. On the contrary, Mexico, Colombia are profiting from the solid US upturn. GENEVA Place de la Fusterie 3bis P.O. Box 1011 1211 Geneva 1 • Switzerland T. +41 58 906 08 08 F. +41 58 906 08 00 LUCERNE Pilatusstrasse 35 P.O. Box 2960 6002 Lucerne • Switzerland T. +41 58 906 02 02 F. +41 58 906 02 62 We would like to keep the allocation to government bonds as a whole underweight. The ECB’s buying program is of such a large scale that it could create large surpluses of money that needs to be invested and a shortage of bonds with a high credit rating. It therefore looks as if yields on 10-year German bonds will remain extremely low. The People’s Bank of China (PBoC) announced a 50bp cut in the Reserve Requirement Ratio for banks for the first time in three years as inflation eases. It will ease banks' credit crunch and decreased yuan funds from foreign exchanges.. As far as equities are concerned, it should boost shortterm sentiment and be globally positive. Moreover, the rate cut should trigger a weaker CNY which is supportive of export growth and exporter shares. Our opinion on the Chinese stock market remain positive for 2015. The main trend in EUR/USD continues to be down. Over the coming months, the pair can drop to at least 1.00 on widening policy divergence between the Fed and the ECB. Now that the CHF appears to have lost its safe haven status currency and we foresee the SNB continuing to prevent EUR/CHF from falling below 1.05, we expect the rate to fluctuate between 1.05 and 1.10 in the coming weeks to months. LUGANO Via Serafino Balestra 5 P.O. Box 5877 6901 Lugano • Switzerland T. +41 58 910 43 43 F. +41 91 923 55 73 ZURICH Florastrasse 7 P.O. Box 8034 Zurich • Switzerland T. +41 58 906 05 05 F. +41 58 906 05 06 ASSET CLASS REVIEW – Michel Menoud EQUITIES & BONDS Euro-zone Emerging Markets The outlook for European stocks appears to be positive. Partly due to the sharp depreciation of the euro (and the steep drop in oil prices), earnings data for the EMU (especially European large caps, which generally achieve a larger proportion of their sales and profits outside the EMU) could turn out to be more positive than expected in the near future. Together with the surplus liquidities generated by the ECB’s QE and the dividend yield of around 2.5%, it looks as if there is a good basis for a continuation of the recent outperformance of European stocks in relation to US stocks. In the course of this year, we anticipate more tensions between the EMU countries as a result of high unemployment and the poor growth outlook, due to which debts are weighing increasingly heavily. In conclusion, we remain positive, but stocks in this region will remain volatile. In January Emerging Markets outperformed Developed Markets. There was a great dispersion in performance, with India the top performer, closely followed by other Asia markets: the Philippines, Viet Nam and Thailand. China, after stellar performance in 2014, especially in Q4, paused with just 1.4% in yuan terms. The stronger dollar and generally higher interest rates will increase the cost of debt servicing and weigh on many companies and on economic growth. The situation is the most unfavourable in three countries: Turkey, South Africa and Indonesia. On the contrary, Mexico, Colombia are profiting from the solid US upturn. Japan Japanese stocks will continue to be supported by the BoJ’s stock-buying program and buying by major Japanese pension funds. Combined with the possibility of the yen weakening further, after climbing above resistance at around 18,000, in the long run we foresee the index rising towards 20,000. In the event of a downward breakout from the support zone at 16,300 - 16,600 (if the climate in the financial markets should switch to risk off in the coming months, for example) the chart-technical picture would weaken considerably, though (there would be no completed top pattern) and we anticipate the Nikkei 225 Index falling towards 14,000. S&P 500 Nasdaq Euro Stoxx 50 Nikkei 225 SMI GENEVA Place de la Fusterie 3bis P.O. Box 1011 1211 Geneva 1 • Switzerland T. +41 58 906 08 08 F. +41 58 906 08 00 LUCERNE Pilatusstrasse 35 P.O. Box 2960 6002 Lucerne • Switzerland T. +41 58 906 02 02 F. +41 58 906 02 62 Developed Countries Developing Countries Brazil Russia India China (HK) LUGANO Via Serafino Balestra 5 P.O. Box 5877 6901 Lugano • Switzerland T. +41 58 910 43 43 F. +41 91 923 55 73 Average trend for the week 1.3% 1.8% -1.1% -0.1% -0.2% Average trend for the week -2.2% 6.8% -1.2% -1.4% ZURICH Florastrasse 7 P.O. Box 8034 Zurich • Switzerland T. +41 58 906 05 05 F. +41 58 906 05 06 Bonds We would like to keep the allocation to government bonds as a whole underweight. The ECB’s buying program is of such a large scale that it could create large surpluses of money that needs to be invested and a shortage of bonds with a high credit rating. It therefore looks as if yields on 10-year German bonds will remain extremely low for the time being, but yields on bonds from Italy, Spain and France will also be suppressed. This therefore no longer justifies underweighting government bonds from weak countries. Developed Countries 2-Year Yield 10-Year Yield USA UK Germany France Italy Spain Switzerland 0.65% 0.41% -0.22% -0.11% 0.34% 0.25% -1.05% 2.00% 1.66% 0.36% 0.68% 1.67% 1.61% 0.02% Developing Countries (USD) 2-Year Yield 10-Year Yield Brazil Russia Mexico 1.74% 5.12% 1.26% 4.60% 3.45% FOREX – Michel Menoud The main trend in EUR/USD continues to be down. A majority of factors convincingly points to a pullback instead of a rally. From a technical perspective, a substantial upward correction remains possible. Various developments could have triggered a rally (such as positive growth expectations for the EMU and outperforming European shares). However, so far this has not happened. On balance, we expect a sideways correction between 1.10 and 1.15 over the coming weeks to months. We could see a EUR/USD rally to 1.20 or higher if the pair breaks clearly above 1.15. For instance, if a deal is struck with Greece or due to growing speculation on delayed Fed rate hikes. Over the coming months or quarters, the pair can drop to at least 1.00 on widening policy divergence between the Fed and the ECB, plus mounting Eurozone tensions. If a Grexit is imminent –which we doubt – the slide to 1.00 and lower can start earlier. EUR/USD: The wave structure since the May high can be interpreted as a complete impulse wave. In that case, an upward correction (to the resistance zone of 1.18-1.20) may be about to GENEVA Place de la Fusterie 3bis P.O. Box 1011 1211 Geneva 1 • Switzerland T. +41 58 906 08 08 F. +41 58 906 08 00 LUCERNE Pilatusstrasse 35 P.O. Box 2960 6002 Lucerne • Switzerland T. +41 58 906 02 02 F. +41 58 906 02 62 start. The alternative scenario is that the aforementioned wave will first take the pair to support near 1.075 or 1.03. This would point to a postponement of the rally. EUR/CHF: Lately, the SNB is currently doing its best to make the franc unattractive as a safe haven (the penalty interest rate on CHF deposit accounts is -0.75%). There are rumours that the SNB is now aiming for a soft floor in EUR/CHF. After abandoning the 1.20 floor, the SNB intervened in the currency market to weaken the franc. If that proves insufficient, then the central bank can consider implementing capital restrictions and/or increasing the penalty rate. Extra measures are not, as yet, necessary. Despite the growing risk of a Grexit and mounting tensions surrounding Ukraine, there has been little or no appreciation of the Swiss currency. Not surprisingly, the heavy penalty rate makes other safe havens such as gold and German and US government bonds more attractive than the Swiss franc. LUGANO Via Serafino Balestra 5 P.O. Box 5877 6901 Lugano • Switzerland T. +41 58 910 43 43 F. +41 91 923 55 73 ZURICH Florastrasse 7 P.O. Box 8034 Zurich • Switzerland T. +41 58 906 05 05 F. +41 58 906 05 06 Now that the franc appears to have lost a great deal of its appeal as a safe haven currency and we foresee the SNB continuing to prevent EUR/CHF from falling below 1.05, we expect the rate to fluctuate between 1.05 and 1.10 in the coming weeks to months. Over the next few months, the euro could also benefit from a slight growth rally in Europe, while the expensive franc is more likely to generate unpleasant surprises in Switzerland. Finally, we ultimately envisage a Grexit being avoided, which could lead to a temporary relief rally in the euro. VIEWS FROM THE EQUITY TRADING FLOOR – Ben Morton The S&P climbed to its highest level since Dec 30th, closing at 2068. Just a percent or so short of its all time highs, we are seeing a continuation of the short term positive momentum from the last week, when the S&P held at its 100 day average and rallied to a level now forcing the bears to start to nervously enter levels into their stop loss algorithms. Top performers over this period were the energy stocks, materials and financials, whilst defensives lagged. Since the start of the year, we have seen a lot of volatility, as the VIX index traded mostly above its averages, but little direction. In fact, US stocks have traded for the last 2 months in one of the highest ranges since 2007, marked by a record high of 2090. With favourable fundamentals in the US economy, nice moves on earnings, and Greek concerns diminished after news some sort of agreement should be reached on February 11th that the country will implement about 70% of reforms already included in the current bailout accord, the turnaround we saw has bought in some high frequency momentum trading. Technically, the S&P closed above a level where previous rallies have failed, and as mentioned, the stop losses are close to triggering. The market may continue sideways once again, but if the recent influx of high frequency trades pushes it through on this occasion, we want to be holding the right positions. We remain bullish. SPECIAL TOPICS – Michel Menoud China to lower the Requirement Ratio Bank Reserve The People’s Bank of China (PBoC) announced a 50bp cut in the RRR for banks for the first time in three years as inflation eases. It also announced: a) an additional 50bp cut for city commercial banks and noncounty level rural commercial banks; and 2) an additional 400bp cut for the Agriculture Development Bank of China. One can estimate that the latest round of cuts should inject CNY570bn of liquidity into the banking system. The reduced RRR rate will GENEVA Place de la Fusterie 3bis P.O. Box 1011 1211 Geneva 1 • Switzerland T. +41 58 906 08 08 F. +41 58 906 08 00 LUCERNE Pilatusstrasse 35 P.O. Box 2960 6002 Lucerne • Switzerland T. +41 58 906 02 02 F. +41 58 906 02 62 ease banks' credit crunch, caused by a high RRR and decreased yuan funds from foreign exchanges, as well as promote reasonable growth in banking loans and stabilize economic growth. Rate cut to help ease tight liquidity and offset weak growth and outflows The RRR cut reflects weak growth momentum, strong disinflationary pressure as well as sizeable capital outflows. Dec and Feb are the most critical months for banking sector liquidity due to: 1) seasonally strong demand for cash withdrawal during Chinese New Year in Feb; and 2) the need to LUGANO Via Serafino Balestra 5 P.O. Box 5877 6901 Lugano • Switzerland T. +41 58 910 43 43 F. +41 91 923 55 73 ZURICH Florastrasse 7 P.O. Box 8034 Zurich • Switzerland T. +41 58 906 05 05 F. +41 58 906 05 06 window-dress deposit books by banks for their Dec year-end reporting. Positive to overall sentiment, A-shares likely more upbeat than offshore The PBOC’s rate cut should boost short-term sentiment, and A-shares may respond more positively than H-shares. That said, while the timing of the RRR cut is slightly earlier than anticipated by consensus, market expectation over such a cut has been rather high. In addition, we believe there are certain concerning signs that will make offshore investors pause: 4Q14 recorded the biggest quarterly capital outflow of USD91.2bn since 1998 (vs. USD96bn outflow for full-year 2014), high frequency macro data in coming months may remain weak, and anticorruption measures in the financial sector has more to go. Our sectorial views for 1Q15 remain unchanged: overweight tech/telecom/consumer vs. underweight banks/brokers/insurance. We believe investors may also prefer quality over beta GENEVA Place de la Fusterie 3bis P.O. Box 1011 1211 Geneva 1 • Switzerland T. +41 58 906 08 08 F. +41 58 906 08 00 LUCERNE Pilatusstrasse 35 P.O. Box 2960 6002 Lucerne • Switzerland T. +41 58 906 02 02 F. +41 58 906 02 62 for now amid a rising commitment towards easing by Beijing, though there are signs of new risks. A weaker CNY supportive of export growth and exporter shares In 2014, CNY had depreciated vs. USD during Jan-Apr by ~3.5%, remained put through early June, and steadily rebounded through early November. After CNY/USD reached a bottom of ~6.11 on 6 Nov, the trend reversed, with CNY depreciating by 1.6% in Nov-Dec. According to major strategists, the RRR cut may help to stabilize the near-term CNY outlook if growth and liquidity stabilize subsequently. If not, the market may be concerned over: 1) a potential shift in FX policy towards depreciation or band widening, and 2) further capital outflows, if market expectations over CNY depreciation become more widespread. Our opinion on the Chinese stock market remain positive for 2015. LUGANO Via Serafino Balestra 5 P.O. Box 5877 6901 Lugano • Switzerland T. +41 58 910 43 43 F. +41 91 923 55 73 ZURICH Florastrasse 7 P.O. Box 8034 Zurich • Switzerland T. +41 58 906 05 05 F. +41 58 906 05 06 11 February 2015 WEEKLY MARKET COMMENTS – INDIA SUMMARY Key benchmark indices edged lower in the week as key index heavyweights ICICI Bank, L&T and Tata Motors declined on a poor set of quarterly numbers. The government on Monday estimated India’s economic growth this financial year at 7.4%, against 6.9% in 2013-14, as the country changed its definition of GDP and the base year for calculating it. Indian corporate leaders have welcomed the landslide victory of the Aam Admi Party in New Delhi and say the change will lead to good governance. Indian corporate CEOs are hoping that the new Chief Minister will abandon and make it easier for companies to do business in the capital city. IT shares gained tracking better-than-expected numbers in the fourth quarter as well as the accounting year ended December 31 by IT Services Company Cognizant posted last Wednesday. It gave a robust growth forecast for the next year. Among macro economic data, the government will release index of industrial production (IIP) for December 2014 and the annual rate of inflation based on the combined consumer price indices (CPI) for urban and rural India in January 2015 INDUSTRY NEWS & TRENDS Indian Overseas Bank, a state-run lender, reported its second straight quarterly loss on Thursday as bad loans surged, sending its shares down as much as 10%. UCO Bank and Allahabad Bank, two other state-run lenders that reported quarterly results on Thursday, also saw their bad loan ratios widening, leading to a fall in their share prices. Domestic passenger car sales increased 3.14% to 169,300 units in January 2015 as compared with 164,149 units in the year-ago month. Motorcycle sales last month declined 5.85% to 868,507 units as compared to January 2014, according to data released by the Society of Indian Automobile Manufacturers (SIAM). Total two-wheeler sales in January rose 1.07% to 1,327,957 units. Sales of commercial vehicles rose 5.30% to 52,481 units. Average trend for the week Sector Auto BFSI Construction Consumer Goods Energy Industrial Manufacturing IT Metals Telecom Match-making portal Matrimony.com has set the ball rolling on its much-awaited initial public offering (IPO), expected to be the first by an Indian internet company after Justdial's successful listing in June 2013. The Chennai-based company has signed on Citigroup Global Markets, Deutsche Bank and Kotak Mahindra Capital as investment bankers to the upcoming issue and is eyeing a valuation of $450-500 million. GENEVA Place de la Fusterie 3bis P.O. Box 1011 1211 Geneva 1 • Switzerland T. +41 58 906 08 08 F. +41 58 906 08 00 LUCERNE Pilatusstrasse 35 P.O. Box 2960 6002 Lucerne • Switzerland T. +41 58 906 02 02 F. +41 58 906 02 62 LUGANO Via Serafino Balestra 5 P.O. Box 5877 6901 Lugano • Switzerland T. +41 58 910 43 43 F. +41 91 923 55 73 ZURICH Florastrasse 7 P.O. Box 8034 Zurich • Switzerland T. +41 58 906 05 05 F. +41 58 906 05 06 ECONOMIC AND POLITICAL HEADLINES India expects its economy to grow at 7.4% in the current fiscal year, a growth rate that rivals China's, reflecting a strengthening recovery but also a recent radical revision in the way the country calculates its gross domestic product. The country's upbeat growth figures-and the revised calculations that underpin them-provoked confusion and jubilation in roughly equal measure. The figures were released Monday by the Indian statistics ministry. The first growth estimates produced using the new methodology showed growth in the previous fiscal year, which ended in March, well above what was originally announced: 6.9% instead of 4.7%. The size of the economy was relatively unchanged. Late last month, the statistics ministry said it was updating the base year used as the reference point for measuring price changes and incorporating morecomprehensive data into its GDP calculations, which aim to measure the country's total economic output. The ministry also shifted its focus to GDP computed at market price, not at factor cost, as its main indicator of economic expansion. Market-price GDP gauges activity by adding up consumers' and firms' spending, whereas factor-cost GDP tabulates producers' costs. Indian corporate leaders have welcomed the landslide victory of the Aam Admi Party in New Delhi and say the change will lead to good governance. The CEOs are hoping the new Chief Minister will abandon confrontationist approach towards the corporates and make it easier for companies to do business in the capital city. ARC Ratings, one of the agencies that have given India the lowest investment grade, says the country's higher economic growth - as revealed by the new gross domestic product (GDP) methodology - will not alter its ratings for the economy. The agency, however, says it has high hopes from the Indian economy's performance. ARC Ratings had in December assigned its first ever rating to India, of BBB+, a notch above junk. CORPORATE NEWS FMCG firm Godrej Consumer Products (GCPL) reported 34.63% growth in its consolidated net profit at Rs 2.63 bn for the quarter ended December on account of robust sales. Consolidated net sales rose 12.47% to Rs 22.25 bn. Auto component maker Motherson Sumi Systems (MSSL) reported a 1.84% rise in consolidated net profit at Rs 2.54 bn for the third quarter ended December 31, 2014. Net sales during the quarter under review stood at Rs 89.49 bn, up 13.42%. Reliance Industries has claimed that allegations that its Chairman Mukesh Ambani has illegal Swiss bank accounts are not true and said it operates many GENEVA Place de la Fusterie 3bis P.O. Box 1011 1211 Geneva 1 • Switzerland T. +41 58 906 08 08 F. +41 58 906 08 00 LUCERNE Pilatusstrasse 35 P.O. Box 2960 6002 Lucerne • Switzerland T. +41 58 906 02 02 F. +41 58 906 02 62 international accounts for its business purposes which are as per the law. In a communication to its employees, RIL referred to the Indian Express report and said the International Consortium of Investigative Journalists (ICIJ) has released "unsubstantiated stolen information," which is already available with authorities in India. Engineering major ABB India reported 42% growth in net profit to Rs 840 mn for December-end quarter on the back of better project execution and cost saving measures. Revenue growth was muted and the company registered a mere 1.5% growth in revenue to Rs 22.38 bn but order inflow rose 50% to nearly Rs 25 bn in the quarter under review. LUGANO Via Serafino Balestra 5 P.O. Box 5877 6901 Lugano • Switzerland T. +41 58 910 43 43 F. +41 91 923 55 73 ZURICH Florastrasse 7 P.O. Box 8034 Zurich • Switzerland T. +41 58 906 05 05 F. +41 58 906 05 06 INDICES WEEKLY PERFORMANCE Weekly Performance Asian Indices Var. % 10-02-2015 03-02-2015 S&P BSE Sensex 28,356 29,000 2.22 China Shanghai Comp 3,142 3,205 1.98 Hong Kong Hang Seng 24,528 24,555 0.11 Indonesia Jakarta Comp 5,321 5,292 0.56 Japan Nikkei 225 17,653 17,555 0.56 Malaysia KLCI Comp 1,811 1,781 1.68 Pakistan Karachi 100 34,342 34,826 1.39 Philippines PSEi 7,723 7,613 1.44 South Korea Kospi 1,936 1,952 0.82 Singapore Straits Times 3,434 3,407 0.79 Sri Lanka All Share 7,305 7,180 1.74 Thailand SET 1,595 1,603 0.47 Weekly Performance Indian Benchmark Indices Var. % 10-02-2015 03-02-2015 S&P BSE Sensex 28,356 29,000 2.22 CNX Nifty 8,566 8,757 2.18 S&P BSE 100 8,651 8,850 2.25 S&P BSE 200 3,536 3,622 2.37 S&P BSE Smallcap 10,899 11,427 4.62 CNX Midcap 12,617 13,102 3.71 GENEVA Place de la Fusterie 3bis P.O. Box 1011 1211 Geneva 1 • Switzerland T. +41 58 906 08 08 F. +41 58 906 08 00 LUCERNE Pilatusstrasse 35 P.O. Box 2960 6002 Lucerne • Switzerland T. +41 58 906 02 02 F. +41 58 906 02 62 LUGANO Via Serafino Balestra 5 P.O. Box 5877 6901 Lugano • Switzerland T. +41 58 910 43 43 F. +41 91 923 55 73 ZURICH Florastrasse 7 P.O. Box 8034 Zurich • Switzerland T. +41 58 906 05 05 F. +41 58 906 05 06 Weekly Performance Nifty Gainers & Losers Var. % 11-02-2015 Infosys 03-02-2015 2,288 2,121 7.9 Coal India 372 357 4.3 Asian Paints 843 815 3.5 ACC 1,561 1,509 3.5 Wipro 641 621 3.1 BHEL 255 297 14.0 Zee Entertainment 345 373 7.5 Tata Motors 560 603 7.2 L&T 1,607 1,722 6.7 DLF 159 170 6.5 The information in this publication was developed using data which Hinduja Bank (Switzerland) Ltd assumes to be accurate; nevertheless, Hinduja Bank (Switzerland) Ltd accepts no liability and offers no guarantee. The availability of such information does not constitute a recommendation to buy or sell any of the securities discussed therein. Statements made in this publication can be changed without prior notice. Moreover, the content is not intended for individuals (or entities) who (which), by reason of their nationality or domicile or for any other reason, are subject to foreign regulations prohibiting access to banking services or investment instruments via one or several distribution channels, or prohibiting or restricting the use of any information provided in this document. GENEVA Place de la Fusterie 3bis P.O. Box 1011 1211 Geneva 1 • Switzerland T. +41 58 906 08 08 F. +41 58 906 08 00 LUCERNE Pilatusstrasse 35 P.O. Box 2960 6002 Lucerne • Switzerland T. +41 58 906 02 02 F. +41 58 906 02 62 LUGANO Via Serafino Balestra 5 P.O. Box 5877 6901 Lugano • Switzerland T. +41 58 910 43 43 F. +41 91 923 55 73 ZURICH Florastrasse 7 P.O. Box 8034 Zurich • Switzerland T. +41 58 906 05 05 F. +41 58 906 05 06