HINDUJA BANK (SWITZERLAND) LTD

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1 HINDUJA BANK (SWITZERLAND) LTD BUILDING WEALTH, ENABLING ENTERPRISE 23 July 2014 WEEKLY MARKET COMMENTS SNAPSHOTS Michel Menoud USD/JPY has been frustratingly stable but we expect it to break lower. The Boj kept policy on hold last week and gave no indication that it is about to increase its asset purchases. Valuations are stretched. Purchasing Power Parity suggests that USD/JPY is overvalued by more than 20%. Sentiment indicators show excessive pessimism towards the yen. Long Nikkei/short yen trades have not been rewarding for investors over the past year. Also, recent events in Ukraine/Russia highlight, global risk aversion could spike without warning. However, fundamentals and technical point to a downside break in USD/JPY supporting the Japanese stock market. Positive stance maintained. Short update on Gold. We stick to our view that an underweight stance in Gold should be maintained within the commodity complex. Looking back, the key drivers of gold since 2008 real interest rates, the U.S. dollar and investor risk aversion have stabilized. These drivers should remain trendless in the second Half of 2014, although an equity correction could cause an intermediate-term shift. However, ETF volumes already have adjusted downward, minimizing any downside for Gold. What could nevertheless trigger a gold bull market? A growth scare rather than an inflation scare is the most likely candidate, as it would put pressure on central banks to boost liquidity aggressively, just like in However, that probability is unlikely. Despite the poor first quarter GDP growth, a U.S. recession is unlikely. The annualized 2.9% contraction in first quarter U.S. GDP was among the worst of the post-war era and the only one of its size that did not occur during a recession. But leading indicators suggest that a recession is highly unlikely. The pickup in the pace of hiring, modest as it has been, contrasts with the deceleration of payroll gains that have regularly preceded recessions. Moreover, there has been no sign of the overheating in cyclical segments that typically precedes recessions. The conclusion for investors is that soft growth will preserve accommodative policy settings. As long as recession is avoided, any pullback in stock prices should be viewed as a buying opportunity, not the end of the bull market.

2 FOREX Sproule Ian Alexander There is a growing consensus in the FX market that EUR/USD is finally moving into bear territory and opinions differ only as to the speed of the decline. The technical indicators are certainly pointing that way and we have posted a new low for the year. The moving averages are trending lower with the 100 day at approaching the 200 day at ; according to the technical analysis once the 100 day crosses over the 200 day, EUR/USD should fall much lower and a September close of is within sight. On the macro side, during two days of testimony last week Fed Chairwoman Yellen delivered little new news and reiterated her dovish stance on the economy and the continuing need for extraordinary policy. While we are seeing signs that the acceleration of growth is underway, the Fed s 2014 GDP central tendency estimate (2.1% - 2.3%) looks optimistic after the weak Q results but yesterday s slightly softer than expected US CPI did nothing to dent US 10 year yields and the taper by October picture remains intact. Given the consistency of the US data and the fact that the taper programme is now on forward guidance auto pilot, the speed of the EUR/USD decline will, in large part,be governed by the market s perception of the speed of the Fed rate hikes ( that they will hike is now generally accepted). Financial analysts have a tendency to underestimate the political considerations underpinning the Keynesian thrust of Fed policy and its focus on an improving labour market. Reports of strong payroll growth in 33 states have been picked up to mean that we will see a more hawkish tone from the Fed in Q2 much sooner than expected. We think this is premature and it would be inconsistent with the continuity in Fed policy we have seen from Bernanke to Yellen. The Fed has reminded the market time and again that they need to see regular, sustainable growth and employment rates before they will hike rates. For that reason whilst we are in line with consensus that EUR/USD will be lower in Q2, we envision a more tortuous and slower descent. In USD/USD the Swiss trade balance showed a significant deterioration, with the surplus for June declining sharply. This was a result of a steep rise in imports, with exports also showing some improvement. Overall, we expect USDCHF to keep the pressure on the upside, with a retest of the recent highs anticipated in the coming days. A move above here would open upside potential towards the area and on to VIEWS FROM THE EQUITY TRADING FLOOR Ben Morton The S&P has continued trading within the 1965 to 1985 range, (the former having now settled as a support level) after a multitude of mixed earnings have hit the tapes. With a lack of direction from that news source, investors are focusing on geopolitical instability in Eastern Europe and Palestine, after news flow from the Fed, ECB and China dried up. Volumes equally dry, any move towards 1985 has triggered overbought signals. In contrast 1965 is now triggering an oversold Buy signal, but with the moving averages at 1940, 1903 and 1846 and the mid-june 1930 low ready to do the the same in the event of a nasty corporate report or macroeconomic figure causing the sellers to push the S&P under the current range. Though the market is mildly concerned that a geopolitical influenced sell-off could materialise, we maintain that events in the Ukraine will continue to be largely overshadowed by the

3 market technicals. There is a solid foundation of support levels, and amongst the bears, every time a new record high on the S&P approaches, short covering is rife. With so many market participants absent, its difficult to see a collaboration of the remaining bears forcing enough of a sell off to re-write the current market trends. This could of course change in time, but we feel we re in a stage of the trading calendar where any down tick will be seen as a buy opportunity and any uptick is being seen as an effort to move the market into a new and higher trading range. We want to be on that train when it reaches the station, and therefore remain bullish.

4 HINDUJA BANK (SWITZERLAND) LTD BUILDING WEALTH, ENABLING ENTERPRISE 23 July 2014 WEEKLY MARKET COMMENTS INDIA SUMMARY Benchmark indices rose in the week as latest data showing retail inflation easing in June 2014, decent growth in merchandise exports in June 2014 and Reserve Bank of India's (RBI) incentives for banks to raise long term bonds for financing infrastructure projects boosted sentiment. Easing inflation provides space for the Reserve Bank of India (RBI) to cut policy rates to revive economic growth. Telecom stocks rose after the Telecom Regulatory Authority of India (TRAI) said on Monday, 21 July 2014, in its recommendations on the guidelines on sharing of spectrum by telecom operators that all access spectrum will be shareable provided that both the licensees are having spectrum in the same band. Next batch of Q1 earnings will set the tone on the domestic bourses amid lack of any major macroeconomic data in the week ahead. Metal stocks will be in focus on Thursday, 24 July 2014 as Markit Economics will announce on that day a preliminary reading of China's HSBC PMI index for July. INDUSTRY NEWS & TRENDS Power sector continues to face challenges which include falling thermal plant load factors (PLFs), rising subsidy for state owned distribution utilities & uncertainty over resolution of tariff compensation for the affected private sector independent power producers. ICRA in its latest report said thermal PLFs at an all India level have declined to 65.6% during FY14 from 69.9% in FY13, primarily due to backing down of generation units due to low demand from distribution utilities as well as a fall in generation from gas based power plants following stoppage of natural gas availability from KG basin of RIL since March The Indian airline industry suffered a total operating loss of over Rs bn, including over Rs bn of Air India. However, the losses to Air India as well as the private carriers have shown a declining trend since till IndiGo was the only airline to have reported profits during this period, barring when it made a loss of about Rs 880 mn. Sector In a move that could help companies significantly reduce cost of mobile services, telecom regulator TRAI recommended allowing sharing of all categories of airwaves held by operators including spectrum allocated at old price of Rs bn or assigned without auction. Auto BFSI Construction Consumer Goods Energy Industrial Manufacturing IT Metals Telecom Average trend for the week

5 ECONOMIC AND POLITICAL HEADLINES A surge in gold imports in June widened India's trade deficit to an 11-month high, adding to the uncertainty from global oil prices that could pile more pressure on its current account balance. The trade deficit jumped to $11.76 billion last month from $11.23 billion in May, government data showed on Wednesday, boosted by a 65% annual rise in gold imports. The bullion is India's second-biggest import item after oil and was one of the principal factors in putting it on the brink of a full-scale balance of payments crisis last year. Moody's, the global rating agency, said the new regulations for issuing long-term local currency bonds are credit-positive for banks in India, as the money so raised will help to reduce their costs. Under the new norms, long-term bonds (tenor of more than seven years) will be exempt from the Reserve Bank's cash and statutory reserve requirements if the proceeds are used to fund new long-term infrastructure projects and affordable housing. Also, loans funded by this mechanism are exempt from the computation of adjusted net bank credit for the purpose of calculating priority sector lending requirements. Finance Minister Arun Jaitley said India will not levy any tax with retrospective effect that creates additional burden and existing anomalies in this regard would be corrected. He blamed the previous United Progressive Alliance (UPA) government of creating such an anomaly and said the National Democratic Alliance (NDA) government under Prime Minister Narendra Modi was trying to rectify it. CORPORATE NEWS Reliance Industries has reported 13.7% growth, on a consolidated basis, in net profit at Rs bn for the first quarter ended June 30, The company's turnover during the period has gone up by 7.2% to Rs 1.08 tn. HDFC Bank reported on Monday a 21% rise in quarterly profit, lagging estimates, although asset quality remained stable. The Mumbai-based bank said net profit rose to Rs bn for its fiscal first quarter to end-june from Rs bn a year earlier. Analysts had on average forecast a net profit of Rs bn. Axis Bank posted a Q1 net profit of Rs bn compared to bn in the year ago period, an uptick of 18.3%. The bank's gross NPA was 1.34% compared to 1.22% sequentially. Asian Paints reported a consolidated net profit of Rs 3.38 bn on the back of net sales of Rs bn for the first quarter ended June 30. In the same period of the previous fiscal, the company had posted a net profit of Rs 2.75 bn and net sales of Rs bn. TCS yet again managed to surprise the street with better-than-expected numbers, with a topline dollar growth of 5.5% and volume growth of 5.7%. TCS reported net profit of Rs bn up 26.9% on a y-o-y basis. Revenue for the quarter at Rs bn was up 22.9% and 2.6% sequentially. Hit by sluggish sales in its home market Bajaj Auto reported a near unchanged net profit during the first quarter ended June 30 posting Rs 7.40 bn. Analysts tracking the company had estimated net profit to be around Rs 8.15 bn. Net sales of the company grew 6.75% to Rs bn. ING Vysya Bank reported 18.1% decline in net profit at Rs 1.43 bn for the first quarter ended June 30, 2014 compared to Rs 1.75 bn in the corresponding quarter lastyear.

6 INDICES WEEKLY PERFORMANCE Asian Indices Weekly Performance Var. % S&P BSE Sensex 26,026 25, China Shanghai Comp 2,075 2, Hong Kong Hang Seng 23,782 23, Indonesia Jakarta Comp 5,084 4, Japan Nikkei ,343 15, Malaysia KLCI Comp 1,871 1, Pakistan Karachi ,402 29, Philippines PSEi 6,870 6, South Korea Kospi 2,029 2, Singapore Straits Times 3,317 3, Sri Lanka All Share 6,796 6, Thailand SET 1,521 1, Indian Benchmark Indices Weekly Performance Var. % S&P BSE Sensex 26,026 25, CNX Nifty 7,768 7, S&P BSE 100 7,852 7, S&P BSE 200 3,168 3, S&P BSE Smallcap 10,269 9, CNX Midcap 10,996 10,

7 Nifty Gainers & Losers Weekly Performance Var. % TCS 2,586 2, Wipro Hindalco HDFC 1, Bharti Airtel DLF GAIL IDFC Maruti Suzuki 2,490 2, BHEL 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.