Market Review International Asia-Pacific: Europe & Middle East: Americas:

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1 Market Review WEEK ENDED AUGUST 23, 2013 International Financial markets remained under the influence of global reallocation between markets and asset classes, as investors looked to position themselves for the potential impact of reduced liquidity.weakness in Europe and emerging markets dragged the MSCI AC World Index down by 0.3%. The decline in EM equities was also exacerbated by the weakness in EM currencies.the US dollar index gained against a basket of currencies, but lost ground against the Euro, and the Japanese Yen weakened. Bond yields remained firm in US, Europe and Japan, but the long yield of the curve witnessed marginal easing. The Reuters CRB index fell marginally despite gains witnessed by precious metals and energy. IMF has called for more co-ordination amongst policymakers and the need to evaluate local as well as global implications of policy decisions. Asia-Pacific: Equity markets in Indonesia, Singapore and Hong Kong underperformed, while those in Japan and India did relatively well. The Indian Rupee and Indonesian Rupiah led other regional currencies down against the US dollar. This was led by concerns about potential outflows as US Federal Reserve s starts reducing liquidity as well as weak economic newsflow. Data out of Japan pointed towards a slow start to the quarter with exports and department store sales falling, but business sentiment for August showed improvement. Malaysia s GDP grew by 4.3% in Q2 driven by strong pre-election government spending while current account surplus fell sharply. Thailand s GDP growth slowed to 2.8% in Q2 due to weaker private consumption and exports, and the central bank of Thailand left rates unchanged at 2.5%. Indonesia s current account deficit widened sharply in Q2 to 4.4% of GDP (from 2.4% of GDP in Q1). Europe & Middle East: Despite positive economic newsflow, European equity markets witnessed pressure during the week (with the exception of Germany).The Euro area economy has continued to mend with flash manufacturing and services PMI increased to 51.3 and 51 in August. In terms of specific countries, estimates for Germany indicated expansion while France witnessed contraction. Central Bank of Turkey raised the upper end of its interest rate corridor by 50 bps to 7.75% (for nonprimary dealer banks) and cancelled 1 week repo auctions to support its currency and curb inflation. Bank of Israel issued new rules to cool down the property market lending, including linking of repayments to income levels. Atlas has entered into an agreement to acquire British vacuum pump specialist Edwards Group for $1.6bln. Americas: US equity markets, especially technology stocks, rallied during the week, amidst continued rise in treasury yields. 10-year yields eased from a 2-year high towards the end of the week, after housing starts came in weak. Minutes of the FOMC meeting didn t provide clarity on the timing of Fed tapering, but indicated the likelihood of a start later this year. Canadian currency came under pressure on concerns about growth slowdown after latest data showed a fall in retail and wholesale sales. Mexico s GDP grew by 1.5% in Q2 (0.8 in Q1) prompting the government to cut 2013 growth forecast to 1.8% from 3.1%. Brazil intensified its currency intervention programme and the central bank announced a fresh program through which it will provide $60 bln worth of cash and insurance to the forex market by year-end. Petrobras raised $2.1 bln by selling stakes in several petrochemical and oil exploration projects.

2 Weekly Weekly change (%) change (%) MSCI AC World Index Xetra DAX 0.30 FTSE Eurotop CAC MSCI AC Asia Pacific FTSE Dow Jones Hang Seng Nasdaq 1.53 Nikkei 0.08 S&P KOSPI India - Equity Domestic equity markets managed to close a volatile week on a strong note, as late-week gains helped in reducing the declines for the week. Mid and small cap stocks underperformed, and Metals index registered double digit gains. On the corporate front, Baring Private Equity Asia is acquiring controlling stake in Hexaware Technologies for around $420 million. Policy: Apart from its efforts to bring down long term bond yields, RBI announced various measures to help banks impacted by Mark to Market (MTM) losses in their investment portfolio - Banks can continue to hold up to 24.5% of G-Secs in the held to maturity (HTM) category as against the earlier plan to reduce this exposure to 23% by March It has allowed a one-time transfer of G-Secs from available for sale (AFS) / held for trading (HFT) categories to HTM at their cost or value as on 15th July whichever is lower. The loss if any can also be amortised equally over the coming 3 quarters of FY14. We expect these measures to help those banks (especially PSU banks) that were facing significant treasury losses due to the hardening of yields. BSE Sensex 12 month forward PE Source: CLSA Asia-Pacific Markets. As of August 2013 Valuation Dispersion: The recent market volatility and the wide range of valuations clearly make it a stock pickers market. The recent market declines have pulled down valuations well below historical means, but the sectoral trends vary widely. Notwithstanding the earnings pressure expected due to the market environment, quite a few sectors are attractively valued compared to their growth potential.

3 As on PE PBV Div Yield S&P BSE Metal S&P BSE Bankex S&P BSE CG S&P BSE HC S&P BSE FMCG S&P BSE TECK S&P BSE IT Index S&P BSE CD S&P BSE PSU S&P BSE AUTO S&P BSE OILGAS S&P BSE REALTY S&P BSE POWER We continue to believe that defensive sectors such as consumer goods and healthcare are witnessing stretched valuations. Consumer staples PE is more than twice broad markets and well-above historic mean. In comparison, industrial stocks trade well below mean levels as also financials.valuations are much below long term average levels and attractive vis-à-vis long term fundamentals. Weekly change (%) S&P BSE Sensex CNX Nifty CNX CNX Midcap S&P BSE Smallcap India - Debt RBI measures and comments to alleviate pressure at the long end of the curve provided investors comfort and yields declined from last year s highs. The improved sentiment helped in strong demand at the scheduled auctions. Source: Bloomberg, JP Morgan

4 Yield Movements: The 10-Yr benchmark yield fell by 34 bps. The 5-yr Gilt yield fell 24 bps while the 5 yr AAA corporate bond yields rose by 32 bps and the spread reduced to 108 bps.yields for 1 yr gilts fell by 32 bps, while 30 yr gilts fell 30 bps and the yield curve remained negative. Liquidity/Borrowings: Liquidity remained tight with repos averaging around Rs. 38,000 crore and the overnight rates remained around 10.2% levels. Four securities were auctioned and received competitive bids for Rs. 29,000 crs against the Rs.15,000 crs. Forex: The rupee fell to record lows and breached the 65 level against the US dollar, before recovering on Friday to close at RBI appears to have intervened in the foreign exchange markets towards the end of Friday. Forex reserves as of August 16th were marginally at around $279 bln. Source: RBI, Morgan Stanley Macro/Policy: Credit growth accelerated to 16.6% YoY as of August 9, 2013 and deposit growth moved lower to 13.0% YoY from 13.4% last fortnight. RBI looked to minimise the collateral damage due to the rise in yields, on the back of various measures to support rupee. Apart from providing banks succour on the MTM losses, it also announced an open market operation (OMO of Rs.8000 crs) and indicated that it will aim to keep the money market rates around the MSF rate, but will calibrate the issue of cash management bills (including scaling down). The OMO along with RBI comments on adopting a calibrated approach to cash management bills helped in improving sentiment in the markets. At this stage, there is clearly more certainty that yields at the long end will not spike too much and RBI would like the curve to remain inverted until it achieves its objective of rupee stability. Hence, investors with a longer investment horizon can look at long dated portfolios and others can add to their exposure in corporate bond focused funds, to benefit from the relatively higher yields

5 Exchange rate (Rs./$) Average repos (Rs. Cr) 38,425 38,671 1-yr gilt yield (%) yr gilt yield (%) yr gilt yield (%) Source: Reuters, CCIL. The information contained in this commentary is not a complete presentation of every material fact regarding any industry, security or the fund and is neither an offer for units nor an invitation to invest.this communication is meant for use by the recipient and not for circulation/reproduction without prior approval.the views expressed by the portfolio managers are based on current market conditions and information available to them and 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 depending upon the factors and forces affecting the securities market.the past performance of the mutual funds managed by the Franklin Templeton Group and its affiliates is not necessarily indicative of future performance of the schemes. Please refer to the Scheme Information Document carefully before investing. Statutory Details: Franklin Templeton Mutual Fund in India has been set up as a trust by Templeton International Inc. (liability restricted to the seed corpus of Rs.1 lac) with Franklin Templeton Trustee Services Pvt. Ltd. as the trustee (Trustee under the Indian Trust Act 1882) and with Franklin Templeton Asset Management (India) Pvt. Ltd. as the Investment Manager. Copyright 2013 Franklin Templeton Investments. All rights reserved