42
HDFC MF Yearbook 2019 Contents 1. Global Economy and markets 2. Key Future trends 3. Indian economy 4. Equity markets 5. Fixed Income markets
HDFC MF Yearbook 2019
Contents
1. Global Economy and markets
2. Key Future trends
3. Indian economy
4. Equity markets
5. Fixed Income markets
Global Economy and Markets
“There are two kinds of forecasters: those who don’t know, and those whodon’t know they don’t know” --- Economist John Kenneth Galbraith
Range bound global growth continues
• Global growth
– In 2018 was supported by robust US (fastest growing G10
economy) and stable Emerging Markets (EMs) growth
– Normalisation of accommodative monetary policies poses
risk going forward
• United States (US)
– Impact of rate hikes and tapering of bonds purchase
program was offset by fiscal stimulus /tax cuts
– Effect of rising rates and unwinding of monetary stimulus
needs to be monitored
• Euro Area
– Growth slowed down in major economies in 2018
– As QE has ended in 2018, its impact needs to be
monitored
• China
– Economy is maturing after rapid growth over last 20
years, hence growth rates are moderating
– Deleveraging efforts moderated economic growth in 2018
– Trade war, monetary easing and tax breaks are key
events to watch out for in 2019Source: Morgan Stanley estimates
Growth in GDP (%) 2012-16 2017 2018E 2019E 2020E
G10 1.7 2.2 2.2 1.9 1.6
United States 2.2 2.2 2.9 2.3 1.9
Euro Area 0.9 2.5 1.9 1.6 1.5
United Kingdom 2.1 1.7 1.2 1.3 1.6
Japan 1.2 1.7 0.8 1.3 0.6
Emerging Markets 4.8 4.8 4.8 4.7 4.8
Brazil (0.3) 1.0 1.3 2.3 2.5
Russia 0.7 1.5 1.6 1.5 1.6
India 6.7 6.2 7.7 7.6 7.5
China 7.3 6.9 6.6 6.3 6.1
South Africa 1.7 1.3 0.7 2.0 1.5
3.7 3.83.6 3.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2013 2014 2015 2016 2017 2018 (E) 2019 (E) 2020 (E)
% Real Global GDP Growth (YoY, %)
3
Falling unemployment rates
Source: Bloomberg; Data updated till Nov’18 for US, Euro Area and Japan. Data for China available till Sep’18
2.0
4.0
6.0
8.0
10.0
12.0
De
c-1
0
Ma
y-1
1
Oct-
11
Ma
r-1
2
Aug-1
2
Jan-1
3
Jun-1
3
No
v-1
3
Apr-
14
Sep-1
4
Fe
b-1
5
Jul-1
5
De
c-1
5
Ma
y-1
6
Oct-
16
Ma
r-1
7
Aug-1
7
Jan-1
8
Jun-1
8
No
v-1
8
% US Unemployment Rate
2.02.53.03.54.04.55.05.56.0
De
c-1
0
Ma
y-1
1
Oct-
11
Ma
r-1
2
Aug-1
2
Jan-1
3
Jun-1
3
No
v-1
3
Apr-
14
Sep-1
4
Feb
-15
Jul-1
5
De
c-1
5
Ma
y-1
6
Oct-
16
Ma
r-1
7
Aug-1
7
Jan-1
8
Jun-1
8
No
v-1
8
% Japan Unemployment Rate
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
De
c-1
0
Ma
y-1
1
Oct-
11
Ma
r-1
2
Aug-1
2
Jan-1
3
Jun-1
3
No
v-1
3
Apr-
14
Sep-1
4
Feb
-15
Jul-1
5
De
c-1
5
Ma
y-1
6
Oct-
16
Ma
r-1
7
Aug-1
7
Jan-1
8
Jun-1
8
No
v-1
8
% Euro Area Unemployment Rate
3.4
3.6
3.8
4.0
4.2
4.4
Ma
r-1
1
Sep-1
1
Ma
r-1
2
Sep-1
2
Ma
r-1
3
Sep-1
3
Ma
r-1
4
Sep-1
4
Ma
r-1
5
Sep-1
5
Ma
r-1
6
Sep-1
6
Ma
r-1
7
Sep-1
7
Ma
r-1
8
Sep-1
8
% China Unemployment Rate (Quartely)
4
Global Liquidity – Background of Quantitative Easing
US Federal Reserve (US Fed)
• Post Global Financial Crisis
(GFC) in 2008, US Fed
embarked on Quantitative Easing
(QE) to support economic growth
• Over 2010-15, US Fed Balance
sheet grew by ~USD 3.0 trillion
• With US economy strengthening,
US Fed began unwinding its
Balance sheet in 2017 and is
likely to continue in 2019
European Central Bank (ECB)
• ECB embarked on asset
purchase program in
March 2015
• ECB purchased bonds
worth ~EUR 2.6 trillion
• Though bond purchases
have ended in 2018,
rollover of bonds on
maturity is likely
Since 2010, combined balance sheet of these 3 Central banks increased by ~USD 8 trillion,
which supported global growth. This phase is now ending and may impact growth
• Commenced asset purchase
program in 2012
• BoJ is estimated to have bought
bonds worth USD 3 trillion
• Likely to continue this program in
2019, though pace might reduce
Bank of Japan (BoJ)
5
*change in assets
Source: Kotak Economics Research estimates
• US Fed to continue unwinding and shrinking its balance sheet
• EU stopped QE in Dec’18, though likely to roll over bonds on maturity
• Japan expected to continue QE, albeit at slower pace
• In 2019, combined balance sheets of these central banks likely to shrink
• This may impact interest rates, capital flows and global growth
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
%Central Bank Policy Rates and Inflation
US
Euro Area
US CPI
Euro Area CPI
Strong global growth,
Rise in Yields
GFC,
Sharp
rate
cuts
Low interest rates and expanding Balance
sheets of Central Banks
Normalization of
liquidity and rising
yields
Source: Bloomberg, Data beyond Sep 18 is Morgan Stanley estimate
Global liquidity – Likely to tighten in 2019; Policy rates might go up
(1,000)
0
1,000
2,000
3,000
2011 2012 2013 2014 2015 2016 2017 2018E 2019E
USD bn Net injection of liquidity* by Global central banks
Fed ECB BoJ Total liquidity injection
6
Yields across major economies declined in 2018, except US
2.00
2.25
2.50
2.75
3.00
3.25
3.50
Dec-17 Mar-18 Jun-18 Sep-18 Dec-18
% US 10 Year Yield
0.00
0.05
0.10
0.15
0.20
Dec-17 Mar-18 Jun-18 Sep-18 Dec-18
Japan 10 Year Yield
0.10
0.25
0.40
0.55
0.70
0.85
Dec-17 Mar-18 Jun-18 Sep-18 Dec-18
German 10 Year Yield
3.00
3.25
3.50
3.75
4.00
4.25
Dec-17 Mar-18 Jun-18 Sep-18 Dec-18
China 10 Year Yield
%
% %
US 10Y yields increased on the back of increase in fed rate, steady growth,
historically low unemployment and unwinding of asset purchase program
Source: Bloomberg. Data updated till 31st December 2018
Japan’s 10Y Yields remained range bound with benign inflation
outlook. BoJ adjusted QE to allow yields movement within wider
range
Growth and Inflation in Europe remained muted. Uncertainty over Brexit and
concerns in Italy led to fall in yields
Escalation of trade wars & slow down in domestic growth resulted in
PBoC easing monetary policy with Reserve Ratio Requirement cut
7
Real Yields for major economies near two decade lows
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Jan/98 Aug/00 Mar/03 Oct/05 May/08 Dec/10 Jul/13 Feb/16 Sep/18
%US Real Yield
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
Jan/98 Aug/00 Mar/03 Oct/05 May/08 Dec/10 Jul/13 Feb/16 Sep/18
%
Japan Real Yield
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
Jan/06 Aug/07 Mar/09 Oct/10 May/12 Dec/13 Jul/15 Feb/17 Sep/18
%China Real Yield
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
Jan/98 Aug/00 Mar/03 Oct/05 May/08 Dec/10 Jul/13 Feb/16 Sep/18
% German Real Yield
Low real yields create uncertainty for future interest rates
Real Yields = Month-end 10Y GSec Yield and CPI; Source: Bloomberg. Data updated till 30th Nov’188
Global Equity Markets deliver negative returns in 2018
Major equity markets delivered negative returns
• Impact of high base given the strong returns of past 2 years
• Escalation of Trade war between China and US
• Emerging markets faced capital outflows on strong USD and unwinding of QE
* Global Market Cap to GDP ratio is calculated using world market cap from bloomberg and GDP from world bank. For 2018, current market cap is divided by world bank’s estimated global GDP.
^Returns for Calendar year 2018; Returns as on 31st Dec 2018. All returns are calculated in local currency. Source: Bloomberg, World Bank, MFI;; LTA – Long term average
India’s equity market (Nifty 50) significantly outperformed despite delivering low returns
-7.1
-9.8
-12.0
-12.1
-12.4
-18.3
-25.0 -20.0 -15.0 -10.0 -5.0
S&P 500 (US)
Strait Times (Singapore)
CAC 40 Index (France)
Nikkei (Japan)
FTSE (UK)
DAX (Germany)
%
Developed Markets^
15.0
3.1
-2.5
-5.9
-8.6
-13.5
-17.3
-24.7
-40.0 -25.0 -10.0 5.0 20.0
Ibovespa Sao Paulo Index(Brazil)
Nifty 50 (India)
Jakarta Composite Index(Indonesia)
KLSE (Malaysia)
Taiwan Weighted (Taiwan)
HangSeng (Hong Kong)
Kospi (South Korea)
SSE Composite (China)
%
Emerging Markets^
50.0
60.0
70.0
80.0
90.0
100.0
110.0
2018E20152012200920062003
%Global market Cap to GDP Ratio
corrected sharply in 2018*
World Market Cap toGDP Ratio
LTA
US Marketcap/GDP & Profits/GDP are above long term average
0
20
40
60
80
100
120
140
160
180
Dec-03 Dec-06 Dec-09 Dec-12 Dec-15 Dec-18
% US Market Cap to GDP Ratio*
US Market Cap to GDPLTA
• US market cap to GDP remains higher than the long term average; though corporate profits to GDP is also high
Source: Bloomberg, Morgan Stanley. * Data updated till 31st December 2018
Recent correction in US equity markets should be viewed in the context of US Market Cap to
GDP ratio being above long term average and bottoming out of yields in US
1.0
2.0
3.0
4.0
5.0
6.0
7.0
92 93 94 95 97 98 99 00 02 03 04 05 07 08 09 10 12 13 14 15 17
US Corporate Profits
Corporate Earnings as a % of GDP(US)
%
FY
10
Global commodity prices softened in 2018
Source: Bloomberg. CRY Index, Brent Crude oil prices and JOC-ECRI Industrial Price index updated till 31st Dec 2018. FAO Index is updated till 30th Nov 2018.
Softening in global commodities is positive for net commodity importers like India
160
170
180
190
200
210
220
Jan-17 Apr-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18
CRY Index*
40
45
50
55
60
65
70
75
80
85
Jan-17 Apr-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18
USD / bblBrent Crude Oil
160
165
170
175
180
Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18 Nov-18
FAO Index#
90
95
100
105
110
115
120
Jan-17 Apr-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18
JOC-ECRI Industrial Price Index^
* CRY index i.e. Thomson Reuters/CoreCommodity CRB Commodity Index acts
measures the aggregated price direction of various commodity sectors.
^ index indicating weighted price movement of industrial
materials like cotton, burlap, steel, aluminum, zinc etc.
# UN Food and Agriculture World Food price index – Tracks the change in prices
consumers pay for food at the retail level
11
USD strengthened against most currencies in 2018
• USD appreciation is due to:
• Rising interest rates in the US
• Strong US economic growth
• Repatriation of USD 570 bn in 9MCY18 &
more expected in 2019 under Tax Cuts and
Jobs Act of 2017
• INR fall has been largely in line with other EM
currencies
Most currencies depreciated vs the USD in CY18
-39.3
-20.2
-17.2
-15.9
-9.7
-9.2
-8.5
-6.2
-5.7
-5.6
-4.5
-4.1
0.0
2.7
-45.0 -40.0 -35.0 -30.0 -25.0 -20.0 -15.0 -10.0 -5.0 0.0 5.0
Turkish Lira
Russian Ruble
Brazilian Real
South African Rand
AUD
Indian Rupee
Canada
Indonesian Rupiah
Chinese Yuan
Pound
Euro
South Korean Won
Mexico
Japanese Yen
%
Movement of Major currencies vs USD
50
55
60
65
70
75
8060
65
70
75
Dec/17 Mar/18 Jun/18 Sep/18 Dec/18
Ind
ex
INR
INR and EM Index movement Vs USD
USD INR (Inverted Scale,LHS)
JP Morgan EM Currency Index (RHS)
Source: Bloomberg, Data updated till 31st Dec, 2018 12
Key Future Trends
1. Electric Vehicles
2. Solar energy
3. Changing supply dynamics of Oil
13
Electric Vehicles (EVs), fully charged
• EV growth drivers:
• Policy push led by environmental concerns
• Declining battery prices
• ICE costs are expected to move up due to tightening environment norms
• Global EV sales are projected to grow at a CAGR of 40% between
2016-2025 with sales crossing 17.5 million vehicles in 2025 (Source:UBS)
• China is taking the lead, penetration (in PVs) to reach 9% in next 3 years
(Source:UBS)
Declining battery price outlook
US
D /
KW
H
China taking the lead in EVs
Source: UBS
Source: UBS
Electrification is one of the key pillars of the Group’s Strategy, By 2025, BMW
Group will have 12 all-electric models BMW CEO Harald Krüger^
Company will help electric cars go mainstream using its new MEB platform,
which is developed for the mass market. Volkswagen‘s CEO Herbert Dies*
Toyota envisions to sell 5.5 million traditional hybrids, EVs and hydrogen fuel
vehicles by 2030. Toyota EVP Shigeki Terashi +
Success of EVs is positive for India. Net oil Imports in India are 4% of GDP and CAD is 2%. As EV penetration increases in India, oil imports
should moderate in long term
Global growth in EVs should also keep pressure on oil prices, benefitting India
% of new car sales 2015 2020E 2025E
China 1.0% 6.7% 27.4%
US 0.7% 2.5% 5.3%
Europe 1.0% 4.1% 28.5%
World 0.6% 3.4% 16.6%
Source: UBS
PV – Passenger vehicle, ICE - Internal combustion engine, ^dated Nov 07, 2018, *dated Oct 10, 2018, + dated Dec 25, 2017 14
Solar energy is emerging as a key power source
• Global solar capacity has been growing 50% CAGR since 2000
• Solar energy installed capacity in India has grown at CAGR of
~70% between FY14 and FY18. Target to reach ~97 GW by 2022
• Share of Solar energy in India
• Rose from 8% to 33% in renewal energy capacities
• Stands at ~7% of total power capacity
• Key Drivers for the rise in Solar energy
• Fall in the solar panels costs
• Policy push from Government and tax incentives/subsidy
• Easy Implementation and higher certainty of power / costs
Source: ICICI Securities
3 4 7 12
22
45
62
80
97
0
20
40
60
80
100
FY14 FY15 FY16 FY17 FY18 FY19T FY20T FY21T FY22T
Total Solar Installed Capacity in India
17.9
12.0
8.47.0
6.5 5.14.3
3.3 2.4 2.52.4
02468
101214161820
Min
imu
m B
id (
In R
s/k
Wh
r)Source: ICICI Securities
GW
Total Capital Costs
per MW
Unit FY14 FY15 FY16 FY17 Current
Rs lakh 806 691 606 501 391
Global solar capacity installed (cumulative) , GW
Source: Goldman Sachs
Source: ICICI Securities,
T – Government of India targets
India has an estimated potential of about 750 GW of solar power (Source: MNRE).
To put things in perspective India’s total capacity from all sources is 350 GW
1 GW (Gigawatt) = 1000 MW (Megawatt)
Fall In Solar Power Tariffs
15
Oil – Changing Demand / Supply Dynamics
• US, on the back of increase in shale oil production, has become largest
oil producer in world
• US share in world supply has increased from 9% in 2009 to 14% in 2017
Source: ^British Petroleum (BP), above chart Includes crude oil, shale oil, oil sands and NGLs (natural gas liquids)
7
8
9
10
11
12
13
14
2009 2010 2011 2012 2013 2014 2015 2016 2017
US
Russian Federation
Saudi Arabia
mill
ion b
arr
els
per
day
Oil demand to peak by 2030 as per BP^US becomes largest oil producer
• Demand has peaked in developed markets like the US, EU and Japan
• EV push, slowing demand growth in India / China should lead to global
oil demand peaking by 2030
Rising shale oil production, peaking global demand driven by EVs indicates moderate long term
trends for oil prices. Positive for India
Million Barrels
Per Day
United
StatesEU China India World
1990 17 14 2 1 66
1995 18 14 3 2 70
2000 20 15 5 2 77
2005 21 15 7 3 84
2010 18 14 9 3 87
2016 19 13 12 4 94
2020 19 12 14 5 99
2025 18 11 16 6 103
2030 18 10 16 8 106
2035 16 9 17 9 106
2040 15 8 16 10 105
1990-2016
(CAGR)0.3% -0.4% 6.7% 5.2% 1.4%
2016-2040
(CAGR)-0.8% -1.9% 1.0% 3.5% 0.5%
16
Indian Macro Economy Outlook – India remains a long term secular growth story
India set to become world’s third largest economy in 2028 – Bank of America Merrill Lynch*
*Report “India 2028: The last BRIC in the wall” dtd 10th Nov 2017 17
Indian economy –Breaking into top 5 economies
United States
China
Japan
Germany
India
France
United
Kingdom
19,485 bn
12,015 bn
4873 bn
3700 bn
2602 bn
2587 bn
2628 bn
2017 GDP USD
Source: IMF, *From 2018 onwards figures are IMF estimates.
Ranks in terms of size of economy*
India’s rank has jumped from 11th to 5th
largest economy in just 12 years
18
India’s Ease of Doing Business ranking - Targets to be in top 50
Source: World Bank, Economic times article dtd. 2nd Nov 2018; DIPP Department of Industrial Policy and Promotion
Parameters2016
ranking
2017
ranking
2018
ranking
Overall 130 100 77
Starting a business 155 156 137
Construction permits 185 181 52
Getting electricity 26 29 24
Registering property 138 154 166
Getting credit 144 29 22
Protecting minority investors 13 4 7
Paying taxes 172 119 121
Trading across borders 143 146 80
Enforcing contracts 172 164 163
Resolving insolvency 136 103 108
Key reforms that have made this possible
• Replacement of majority of state and central sales
taxes with one nationwide Goods & Services Tax
(GST)
• Faster and less expensive to obtain a construction
permit.
• Strengthening legal rights and access to credit by
amending insolvency law
• Reduction in the time and cost to export and
import
• Upgradation of port infrastructure
• Electronic submission of documents
• Reduction in procedures / documentations and time
for starting new business
World Bank has recognized India as one of the top improvers for the year 2018
19
Steady economic growth, stable macro economic parameters
Improving macros FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
Real GDP at market price (% YoY) 5.5 6.4 7.5 8 7.1 6.7 7.1 7.2
Centre's fiscal deficit (% GDP) 4.8 4.4 4.1 3.9 3.7 3.5 3.5 3.3
Current Account Deficit (CAD) (% GDP) 4.7 1.7 1.3 1.1 0.7 1.9 2.7 2.6*
Balance of Payment 0.2 0.8 3.0 0.9 0.9 1.7 (0.8) (0.2)
Net FDI (% of GDP) 1.1 1.2 1.5 1.7 1.6 1.2 1.2 1.1
Consumer Price Inflation (CPI) (Average) 9.9 9.4 6.0 4.9 4.5 3.6 3.6 4.1
Foreign Exchange Reserves (USD bn) 292.6 303.7 341.4 359.8 370.0 424.4 393.3^ na
Source: CEIC, Kotak Institutional Equities; Economic Survey, E-Estimates, ^ as of 21st Dec’18. na – not available
* Calculated by assuming crude prices at USD 72.5 per barrel. With oil at USD 60 / barrel, CAD is estimated to be ~2.0% of GDP
Key Reforms / Initiatives taken over past 4 years have created a favourable economic environment
• Introduction of Goods & Services Tax (GST)
• Introduction of Indian Bankruptcy Code (IBC)
• RERA and Housing for all
• Liberalisation of FDI in various sectors including railways, defense, coal mining, construction, aviation, pharma etc.
• Direct Benefit Transfer (DBT), UJJAWALA – LPG for poor households
• Power - Focus on Transmission and Distribution, Target 24*7 electricity, Saubhagya scheme
• Make in India - Focus on domestic manufacturing and design
• Transparent auctioning of natural resources
20
Revival in capex to support growth
Source: CMIE, RBI, SA: Seasonally Adjusted
70
72
74
76
78
80
Jun-11 May-12 Apr-13 Mar-14 Feb-15 Jan-16 Dec-16 Nov-17
%Rising capacity utilisation driving capex
recovery
Capacity Utilisation
Capacity Utilisation (SA)
Long term Average
• Consumption expenditure grew faster than capex in FY16 & FY17
• Capex grew faster than consumption in FY18
- It should further accelerate in FY19
- This should be positive for economic growth
• Infrastructure capex has improved over last few years led by roads etc.
• Signs of private capex recovery with capacity utilisation increasing
• Cement and Steel majors have announced significant capex
-5.0
0.0
5.0
10.0
15.0
20.0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 H1FY19
%Signs of capex reviving, consumption stable
Real GDP Growth
Consumption
Gross Capital Formation
21
Sustained low inflation led by benign food prices
Source: CMIE, Bloomberg, World Bank
• Over the past 4 years, average inflation has been less than 4.3% as compared to 9.4% in 5 earlier years
– Food inflation has fallen significantly to 3.4% from 9.7%
– Driven by high agriculture growth in India and low global food prices (refer slide 11) , food inflation in India
has been low over past 4 years as compared to previous10 years
• Average non-food inflation over past 4 years has been ~5%, significantly lower than 9% in earlier 5 years
Low food inflation has adversely impacted farmers incomes
%2000 -
2004
2005 –
2009*
2010 –
2014
2015 -
2018
Headline CPI 3.9 6.3 9.4 4.3
Non -Food CPI* 4.8 5.6 9.3 5.0
Food CPI* 2.6 9.4 9.7 3.4
Real Agriculture
growth1.7 3.2 4.1 3.3
*details of 2006 not available. Hence Food and non-food
CPI is calculated using average of 2005, 2007-09.
- CPI-IW is used for the period before 2012
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
Nov/09 Nov/12 Nov/15 Nov/18
% Sustained Low Inflation
Food CPI
Headline CPI
Average Headline CPI
Average inflation for the period
22
Summary of Indian Economic Outlook
• India remains a secular long term growth story driven by
• Excellent demographics and rich natural resources
• Large availability of skilled, young, English speaking and competitive manpower
• Low penetration of consumer goods and improving affordability
• Large unmet needs of infrastructure and strong reforms momentum
• Spate of reforms in past 4 years (refer slide 20) has created a favourable economic environment for sustained
growth over medium to long term
• Macro economic indicators are stable and healthy
• Infrastructure capex continues to gain momentum; Definite signs of revival in industrial / private capex
• By 2028, India is likely to become the third largest economy in the world*
Source: *Bank of America Merrill Lynch Report “India 2028: The last BRIC in the wall” dtd 10th Nov 201723
Equity Markets
“What the wise man does in the beginning, the fool does in the end.”
Warren Buffett
24
2018 – An eventful year for Indian Equities
Markets end flat despite volatility
32000
33000
34000
35000
36000
37000
38000
39000
40000
Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18
S&P BSE Sensex
IL&FS
Default
Oil reached
$86/b, rupee
closed at all
time high of
74.4 per $
NASDAQ reached
all time high of
8109
Strong Q4FY18
Earnings GrowthOil at $50/b, corrected by ~40%
First correction in
15 months due to
trade war
US Fed rate
Hike
Introduction of
LTCG in Equity
Source: Bloomberg. Data updated till 31st December 2018
Volatility due
to weak
global cues,
US Fed rate
hike
Q1 earnings majorly
in line with
expectations
Indian equity markets outperformed global markets in 2018 (slide 9)
25
Sharply Divergent Performance across sectors and Large / Mid / Small caps
• IT, FMCG and Private banks Outperformed while Auto,
Metal & PSU Banks underperformed
• IT was the top performing sector driven by weak INR,
while Realty was the worst performing sector.
• Large caps outperformed mid and small caps;
Performance of small and mid caps indices should be
viewed in the context of strong performance over past 3
and 5 years
Source: MFI; Returns for Calendar year 2018. Data updated till 31st Dec 2018
23.7
13.6
8.1
6.3
3.1
0.6
-2.3
-7.8
-12.6
-16.5
-19.8
-23.0
-25.8
-32.8
Nifty IT
Nifty FMCG
Nifty Private Bank
Nifty Bank
Nifty 50
Nifty Energy
Nifty India Consumption
Nifty Pharma
Nifty Infrastructure
Nifty PSU Bank
Nifty Metal
Nifty Auto
Nifty Media
Nifty Realty
%
Sectoral Performance
3.11.1
-15.3
-28.9-35.0
-30.0
-25.0
-20.0
-15.0
-10.0
-5.0
0.0
5.0
Nifty 50 Nifty 100 Nifty Midcap100
NiftySmallcap 100
% 2018 returns across Large/Mid/Small cap indices
Absolute Returns %
As on December 31, 2018 1 year 3 years 5 years
Nifty 50 (A) 3.1% 36.7% 72.3%
Nifty Midcap (B) -15.3% 33.4% 121.5%
Nifty Smallcap (C) -28.9% 14.1% 89.5%
26
2018 – A watershed year for Indian Equity markets
The Power of Retail investors
• Strong domestic flows have reduced impact of FII selling and thus volatility
• Since Jan 17, FII were net sellers (greater than USD 2.5 bn on 90 days cumulative basis) on three occasions but unlike in the
past, Indian equity markets held up well on each of these three occasions as seen in table below
• This was due to sustained domestic flows into equity funds – currently (Rs 10,000-12,000 crs a month)^, of which SIPs flows
itself are Rs 7,000-8,000 crores (25 million SIPs of Rs 3,000 each on an average)
* Maximum outflow on a 90 days rolling period and greater
than USD 2.5 bn
# 6 months returns till the date
90 Days Period
ending
FII Outflows
(In USD Bn)*
Indian Market
capitalization (USD bn)
FII outflows as %
of Market cap
Fall in
Sensex #
03-Apr-08 -4.5 1,270 0.4% -10.9%
03-Dec-08 -5.7 543 1.1% -43.6%
24-Oct-11 -2.5 1,208 0.2% -13.5%
04-Sep-13 -3.9 917 0.4% -5.7%
22-Jan-16 -3.1 1,362 0.2% -13.1%
05-Jan-17 -5.1 1,589 0.3% -1.2%
24-Oct-17 -4.2 2,154 0.2% 8.9%
14-Nov-18 -5.6 1,956 0.3% -0.7%
Source: Bloomberg
A shift in power in capital markets from offshore players to domestic individual investors !
Source: AMFI; ^considering the average flows in past 6 months ending Nov18 27
Equity Markets – Valuations
• Market Cap to GDP for 2018E to 2020E are based on current market cap and GDP estimate by Kotak Institutional Equities
• Marketcap to GDP at 63% is attractive, specially at time when NIFTY EPS growth is estimated at 17% CAGR over FY18-21E (slide 29)
• Markets are trading at CY20(E) P/E of ~14x, which is reasonable, especially given improving earnings outlook
India market cap to GDP ratio, calendar year-ends 2005-20E (%)
Data Source: Kotak Institutional Equities, updated till 30th Dec, 2018, From 2005-18, NIFTY50 PE is based on 12 month forward estimated EPS. For 2019E, by Kotak Institutional Equities has calculated PE based on EPS
numbers as of Mar-20 end and for 2020E based on EPS of Mar-21 end
Given depressed earnings, Marketcap to GDP is a better valuation parameter
69
88
149
56
99 98
61 71 64 81 76
72 92
79 71
63
13
15
23
11
17 16
13 14
16
20 18 17
19 17.4
16.5
14.2
-
5
10
15
20
25
0
20
40
60
80
100
120
140
160
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E
Mcap/GDP (%) NIFTY 12M forward P/E (X)
28
Strong earnings growth ahead
HDFC Mutual Fund/AMC is not guaranteeing any returns
FY13 FY14 FY15 FY16 FY17 FY18NIFTY EPS
CAGR 13-18FY19E FY20E FY21E
NIFTY EPS
CAGR 18-21E
NIFTY EPS 377 410 398 384 439 448
3.5
513 629 722
17.2
Growth % 8.8 -2.9 -3.5 14.4 2.0 14.2 22.7 14.8
Earnings - The worst is behind, strong improvement ahead
Source: Kotak Institutional Equities, E: Estimates
Reasons for weak NIFTY Earnings growth in FY13-18
Metals & Mining
Low prices in China and rest of the World
Low demand growth & large imports in India
Corporate Banks & Financials
Significant increase in stress in steel, power & infra sectors
Higher provisioning on NPAs impacted profitability sharply
Utilities
Change in CERC (Central Electricity Regulatory Commission)
regulations
Metals & Mining
• Higher prices led by MIP (Minimum Import Price) in steel and higher global prices
across metals & INR depreciation
• Growing Infra / Housing spends / improving volume growth
Corporate Banks & Financials
• Recognition phase of NPAs is largely over, GNPA provisioning is at 54% as on Sep 18
• With falling slippages and increasing resolution of NPAs provisioning costs are
expected to fall sharply
Utilities
• Capacity led growth
Earnings growth in FY18-21E should be driven by
Interestingly, most of the sectors that witnessed weak profit growth / declining profits are the ones expected to
witness healthy growth going ahead
NIFTY EPS growth of 17%
CAGR expected between
FY18 and FY21
29
Convergence of Largecap and Midcap Indices and valuations
Source: CLSA, Bloomberg, Midcap refers to NIFTY Midcap 100 . Largecap refers to NIFTY 50,
data updated till Dec 29, 2018
Revenue growth 5 year CAGR 10 year CAGR
NIFTY Midcap 4.7 11.6
NIFTY 50 5.6 9.7
• No material difference in revenue growth of largecaps and
midcaps
• Large caps underperformed midcaps in last few years due to
weak NIFTY EPS growth (refer slide 29)
• With improving prospects of NIFTY EPS growth and correction in
Mid Cap stocks, Largecaps and Midcap indices have now
converged
• After correction in 2018, midcaps valuations have also converged
with largecaps
(80)
(60)
(40)
(20)
0
20
40
05 06 07 08 09 10 11 12 13 14 15 16 17 18
NSE Midcap premium to Nifty 50
0
100
200
300
400
500
600
05 07 08 09 10 12 13 14 15 17 18
NSE Midcap
NIFTY 50
30
Source: Sensex : www.bseindia.com, Election Commission of India for election years, Returns computation internal
Elections and equity returns
Spot the pattern* !
*As can be noticed there is no pattern in S&P BSE Sensex returns during the year in which elections were held or in years before or after the elections
**The base year of S&P BSE Sensex is 1978-79 and the base value is 100
HDFC Mutual Fund / AMC is not guaranteeing or promising or forecasting any returns on investments
Represents year of elections
Year Ending BSE S&P Sensex** 1 year absolute returns
Mar-79 100
Mar-80 129 29
Mar-81 173 35
Mar-82 218 26
Mar-83 212 -3
Mar-84 245 16
Mar-85 354 44
Mar-86 574 62
Mar-87 510 -11
Mar-88 398 -22
Mar-89 714 79
Mar-90 781 9
Mar-91 1168 50
Mar-92 4285 267
Mar-93 2281 -47
Mar-94 3779 66
Mar-95 3261 -14
Mar-96 3367 3
Mar-97 3361 0
Mar-98 3893 16
Mar-99 3740 -4
Mar-00 5001 34
Mar-01 3604 -28
Mar-02 3469 -4
Mar-03 3049 -12
Mar-04 5591 83
Mar-05 6493 16
Mar-06 11280 74
Mar-07 13072 16
Mar-08 15644 20
Mar-09 9709 -38
Mar-10 17528 81
Mar-11 19445 11
Mar-12 17404 -10
Mar-13 18836 8
Mar-14 22386 19
Mar-15 27957 25
Mar-16 25342 -9
Mar-17 29621 17
Mar-18 32969 11
Worried about elections ?
Above chart is illustrative and for general information. Historical performance indications and financial market scenarios are not reliable indicators of current or future performance. HDFC Mutual Fund/AMC is not guaranteeing any returns on investments made. In view of the individual circumstances and risk profile, each investor is advised to consult his / her professional advisor before making a decision to invest 31
Equity Markets Summary
• Strong outlook for economic growth and earnings growth (NIFTY EPS growth estimated at 17% CAGR over FY18-21E (Slide 29)
• Markets are trading at CY20(E) P/E of ~14x and Marketcap to GDP ratio of 62% CY20E (Slide 28)
• Strong profit growth outlook, steady local flows and reasonable valuations lead to a positive view of markets
• Post correction in 2018, midcaps valuations have converged with largecaps
• Trade wars, rise in oil prices , sharp increase in US rates, sharp deterioration in local / FII flows, setback to NCLT etc. are
key risks in near term
32
Fixed Income Markets
“It doesn’t matter how slow you go so long as you do not stop”
33
2018 Fixed Income markets – Flat ending to a volatile year
Source: Bloomberg
5.5
5.7
5.9
6.1
6.3
6.5
6.7
6.9
7.1
7.3
7.5
7.0
7.2
7.4
7.6
7.8
8.0
8.2
8.4
Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18
% 10-Year G-Sec Yield and Repo Rate
India 10 Yr G-Sec Repo Rate,RHS
1) Reduced H1FY19 borrowing program 2) Dovish RBI commentary
Oil prices continue to riseFII remains net sellers
1) RBI Pause;2) Muted Inflation3) Larger OMOs Purchases 4) Sharp correction in oil prices
Concern of fiscal slippagesRising oil prices and weak INRFII turns net sellers
• G-Sec yields remained volatile - High sensitivity to INR & Oil, RBI OMO purchases and FII outflows
• RBI hiked policy rates twice by 25 bps each in 2018 and also changed its stance from neutral to calibrated tightening
• US yields remained at elevated level for most part of the year
• Headline CPI remained lower than RBI’s forecast led by benign food prices
34
Build-up of risks in NBFC Sector; Increased reliance on MFs for funding
MFs contributed 40% of incremental funding since Mar 14
HFC & NBFC's ex PFC/REC (Borrowing) Mar-14 Mar-16 Mar-18 Aug-18
Bank Funding (Rs bn) 4,333 5,504 7,197 7,602
MF Funding (Rs bn) 939 1,792 3,938 4,678
Insurance/Pension/Deposit (Rs bn) 2,073 3,243 4,101 4,226
Total 7,345 10,539 15,236 16,506
Bank Funding % 59 52 47 46
MF Funding % 13 17 26 28
Insurance/Pension/Deposit (%) 28 31 27 26
MFs Non Equity AUM 4,542 7,213 11,986 13,443
MF Funding as % of MFs non equity AUM 21 25 33 35
• 15% CAGR growth in NBFCs/HFCs asset book over
past 3 years. NBFCs’ share in total credit increased to
21% in FY18 from 18% in FY14
• Banks exposure to NBFCs/HFCs has also increased
to 13.8% in FY18 from 11.7% in FY14
• MF’s exposure to NBFCs has increased to 35% in
Aug18 from 21% in Mar14
• Sharp increase in share of CPs in the borrowing mix
of NBFCs and HFCs (ex- PFC and REC) – from 5.3%
in FY14 to 16.3% in Aug18 leading to Asset Liability
mismatch (ALM) concerns
Source: Nomura , Global Markets Research , Sept 2018 , RBI
PFC- Power Finance Corporation Limited; REC – Rural Electrification corporation Limited
Refer disclaimer on slide 41
HFC & NBFC's ex PFC/REC Mar-14 Mar-16 Mar-18 Aug-18
Commercial Papers (INR bn) 392 830 1,685 2,691
% of total borrowing 5.3 7.9 11.1 16.3
35
Liquidity concerns for NBFCs addressed, outlook is mixed
75
125
175
225
275
325
Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18
bpsNBFC Spread rises post IL&FS default*
Average AAA Spread
Average AA Spread
Source: Daily valuation provided by ICRA/CRISIL; Bloomberg; Data is updated till 31st Dec 2018. Refer disclaimer on slide 41
• Liquidity concerns post IL&FS default addressed by
• Timely actions by RBI and Government
• Securitisation / asset sale, unutilised bank lines etc.
• Growth expected to moderate for NBFCs
• Cost of funds rising with widening of spreads
• Risk aversion amongst lenders
• Corporate bond spreads have also widened during this period
* AAA Average spread is average spread of 10 large AAA rated NBFCs 3 Yr. bond yields over 3 Yr benchmark Gsec. AA Average spread is average spread of 5 large AA rated NBFCs 3
Yr. bond yields over 3 Yr benchmark Gsec
^ AAA spread is spread of 3 Year AAA rated corporate bond yields over 3 Yr benchmark Gsec yields. AA spread is spread of 3 Year AA rated corporate bond yields over 3 Yr benchmark
Gsec yields
40
90
140
190
Sep/18 Oct/18 Nov/18 Dec/18
bps Corporate bond spreads widens^
3 yr AAA Spread
3 yr AA Spread
36
Interest Rates Outlook – Conflicting Forces at Play
Positives
• High Real yields in India
• Healthy real rates differential between India & US
• Soft oil, commodity and food prices (refer slide 11)
• Low rural wages growth
• Expectation of large OMO purchases by RBI
• Headline CPI outlook remains benign
Negatives
• Higher Credit growth vs Deposit growth
• Capex recovery should boost credit demand
• Excess SLR securities holding of PSU banks
• Concerns over fiscal slippages
• Global liquidity tightening & increase in yields
• Core inflation sticky at elevated level
Yields likely to fall at the short end
37
Interest Rates Outlook - Forces favouring lower Interest rates
• Real Yields in India at historical high
• CPI outlook remains benign
led by food inflation
• Healthy Differential with US Real yields
• Sharp fall in oil prices eases pressure on CAD
• Fall in oil prices beneficial for CAD and INR
outlook
• Every USD 10 per barrel fall in crude prices
results in CAD falling by ~0.4% of GDP
• US Federal Governor’s comment that rates are “just
below” neutral rate indicates benign outlook for rise in
Fed rates
• US 10Y yields have come off materially from the
high made in Nov’18
Real Yields = Month-end 10Y GSec Yield and CPI; Updated till 30th Nov’18. CPI-IW is used to calculate real yields for period
before 2012
FY16 FY17 FY18 H1FY19
Crude prices (USD /bbl) 50.2 48.8 56.7 75.0
CAD as % of GDP -1.1 -0.7 -1.9 -2.7
2.00
2.50
3.00
3.50
Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18
%US 10 Year Yield
Source: Bloomberg, RBI, Kotak Institutional research.
-12.0
-7.0
-2.0
3.0
Jan/03 Sep/05 May/08 Jan/11 Sep/13 May/16
% Healthy spread between US and India Real Rates
-14.0
-9.0
-4.0
1.0
6.0
Jan/03 Sep/05 May/08 Jan/11 Sep/13 May/16
% India's Real Rates at near historic high
38
Interest Rates Outlook - Forces adversely impacting interest rate outlook
• Bank credit growth accelerating
• Outpacing the deposit growth
• Recovery in capex cycle likely to accelerate credit
growth further
• Excess SLR Investments, especially with PSU banks
• Incremental demand for G-sec could remain muted
• Debt FII Flows remain volatile on back of rising USD and
global liquidity unwinding
• Net FII Debt Outflows CY18 stood at USD 6.9 bn
8.0%
15.1%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18
Credit Growth Vs. Deposit Growth
Deposit growth %Credit growth %
Source: RBI, Kotak Institutional research, NSDL
18.0%
23.0%
28.0%
33.0%
Jun/15 Dec/15 Jun/16 Dec/16 Jun/17 Dec/17 Jun/18
Excess SLR Securities with PSU Banks Regulatory Requirement # Adj SLR*
* Adj SLR = Investments in Statutory Liquidity Ratio (SLR) Securities adjusted for securities under LAF
# Regulatory Requirements = SLR + Liquidity coverage requirement requirements (~15-17% of NDTL) – carve out allowed
from SLR
1.3
-0.0
-1.4 -1.5
-2.9
-1.6
0.0 0.5
-1.4 -1.3
0.8 0.7
-4.0
-3.0
-2.0
-1.0
-
1.0
2.0
3.0
Jan
18
Fe
b18
Ma
r18
Ap
r18
Ma
y18
Jun
18
Jul1
8
Au
g18
Se
p18
Oct1
8
Nov18
Dec18
USD bn Net FII Debt flows
39
Fixed Income Summary
• Some factors support lower yields, while others don’t (refer slide 37)
• Yields likely to fall at the short end (upto 3-5 years)
• Immediate liquidity concerns of NBFCs reduced; ALM mismatch still remains a challenge
• Asset quality of NBFCs needs to be monitored
• Cautious approach on credit and duration recommended
• Key risks to yields
• Sharp rise in global yields & oil prices
• FII flows remain uncertain
Wish you and your family a very Happy New Year
- HDFC Mutual Fund
Refer disclaimer on slide 4140
Disclaimer & Risk Factors
This presentation dated 2nd January 2019 has been prepared by HDFC Asset Management Company Limited (HDFC
AMC) based on internal data, publicly available information and other sources believed to be reliable. Any calculations
made are approximations, meant as guidelines only, which you must confirm before relying on them. The information
contained in this document is for general purposes only. The document is given in summary form and does not purport to
be complete. The document does not have regard to specific investment objectives, financial situation and the particular
needs of any specific person who may receive this document. The information/ data herein alone are not sufficient and
should not be used for the development or implementation of an investment strategy. The statements contained herein
are based on our current views and involve known and unknown risks and uncertainties that could cause actual results,
performance or events to differ materially from those expressed or implied in such statements. Past performance may or
may not be sustained in future. Stocks/Sectors referred in the presentation are illustrative and should not be construed as
an investment advice or a research report or a recommended by HDFC Mutual Fund / AMC. The Fund may or may not
have any present or future positions in these sectors. HDFC Mutual Fund/AMC is not guaranteeing any returns on
investments made in the Scheme(s). The data/statistics are given to explain general market trends in the securities
market, it should not be construed as any research report/research recommendation. Neither HDFC AMC and HDFC
Mutual Fund nor any person connected with them, accepts any liability arising from the use of this document. The
recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate
professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information
contained herein.
Mutual fund investments are subject to market risks, read all scheme related documents
carefully.
41
Thank You
