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HDFC Bank Research
Presentation
October 2019
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Aggressive Moderate Conservative
Equity Funds 75% 55% 25%
Debt Funds 20% 40% 70%
Gold 5% 5% 5%
Equity MF Strategy & Recommended Asset Allocation
The Q1FY20 GDP growth at 5% YoY was quite unexpected and showed the slowing nature of the economy
The government came back with a slew of measures to stem the deceleration and to revive the economy.
The biggest among them was a big cut in the corporate tax rates and massive corporate tax incentive for manufacturing
entities setting shop in the next 4 years.
Strong government response and easy liquidity regime builds in a potent combination for economic revival in the medium
term.
Macro indicators continued with mixed signals in near term as lower inflation, lower interest rate, improved domestic liquidity
conditions, indications of steady volume growth continuing in many sectors seem to be offset by weak IIP and GDP on the
other.
With the huge supply side measures of the government, improved monsoons and upcoming festive season, stagnation of
consumer demand and lower corporate margins could reverse.
We believe that in the next five years the government would accelerate the process of reforms and decision making to take
advantage of the solid base that has been built over the past five years.
From an Equity Mutual Fund perspective, investors should look at Large Cap and Multicap Funds for fresh investments and
SIP into Midcap and Small caps funds can begin with a longer horizon (12-15 months). Given the huge tax stimulus given by
the government we change our investment strategy to 60% lump sum and rest 40% staggered over the next 3-4 months.
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Debt Mutual Fund Strategy
Investments in Medium Duration Funds can be considered with a horizon of 15
months and above.
Investments into Short Duration Funds can be considered with an investment
horizon of 12 months and above.
Investors who are comfortable with intermittent volatility, can also look at
strategies that have allocation to the longer end of the yield curve, through
Dynamic Bond Funds with an investment horizon of 24 months and above.
Investors looking to invest with a horizon of up to 3 months can consider Liquid
Funds, while Ultra Short Duration Funds and Arbitrage can be considered for a
horizon of 3 months and above.
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Research Presentation – Contents September
Big bang reforms from government… a much needed impetus to corporate India for reviving the economy
Space ceded by China due to trade war being grabbed by other economies…India could benefit, post tax cuts announcement
A level playing field for global and domestic companies may drive investment demand and exports in India
A recovery in consumption demand may lead to faster GDP growth
However, fiscal space for the government tightened
Above normal monsoon rainfall and high reservoir water levels may result rising rural growth and help in reviving rural demand
Valuations have moderated as we move towards FY21… Demand revival could lead larger upmove…
However, global economy continues to remain in slow growth trajectory…
While commodity prices remain steady…Crude oil spiked due to attack on Saudi Aramco
While global growth is worrisome… reform momentum by the government has brought positivity to domestic markets
Key concerns to watch out ….
Large Cap and Midcap valuations have converged after a long time
Nifty 50 rolling returns for last 15 years
S&P BSE Sectoral Indices monthly performance for September 2019
Status of key macro variables …
Market Round Up – September 2019
Market Outlook
Fixed Income
G-secs Yields rise in September 2019…tracking fears of higher fiscal deficit and borrowings
Govt. announces Corporate Tax cuts to bolster economic growth…Fiscal math takes centre stage
Government‟s sticks to budgeted borrowing for H2FY20…
Headline Inflation remains muted…Core CPI inflation declined
Balance of Payments remained in surplus…CAD and Forex Reserves also remained comfortable
System Liquidity remained in surplus zone…RBI to review current liquidity framework
Bond spreads – An Update
While shorter end of the yield curve declined tracking rate cut and surplus liquidity…the longer end rose due to fiscal concerns
Fixed Income Outlook
Equity Mutual Funds
Fixed Income Fund Options
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Big bang reforms from government… a much needed impetus to corporate India
for reviving the economy
Taking cognizance from a six year low GDP growth, the Indian government came out with big bang reform and announced one
of the biggest tax stimulus (Rs.1.45 trillion) in the country‟s history, which would provide a much needed impetus to
corporate India for reviving the economy.
Following are the key announcements
New provision in income tax act allows any domestic company to pay income tax at the rate of 22% (earlier the
maximum tax rate was 30%) subject to condition that they will not avail any incentive or exemptions – Effective Tax
Rate – 25.17%
New Manufacturing companies to get option to pay 15% tax, if set up after Oct 1, 2019 and commence production
by Mar 31, 2023 subject to condition that they will not avail any incentive or exemptions - Effective tax rate - 17.01%
inclusive of surcharge & tax
A MAT relief was announced for companies availing of concessions and benefits - MAT rate reduced from 18% to 15%.
Companies currently enjoying tax holidays and concessions can opt for lower tax rate after expiry of benefits that
they are availing now
Tax on buyback of shares will not be charged for listed companies that have announced buyback before
July 5, 2019.
Enhanced surcharge will not apply to capital gains arising on equity sale or equity-oriented funds liable to Securities
Transaction Tax (STT) stabilize flow of funds into capital markets.
Higher surcharge will also not apply on capital gains on sale of security including derivatives held by of Foreign Portfolio
Investors (FPIs)
CSR 2% spending to include government, PSU incubators and public funded education entities and IITs.
The changes in tax rates are likely to increase the earnings (only from lower taxation perspective) for MNCs and
companies in Banking, Metal, FMCG, Auto & Auto Ancillary sectors. In addition, higher savings for corporates may also
push capex and in turn be positive for infrastructure and capital goods companies.
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Reforms continued…
The government also announced other reforms in the past few weeks pertaining to individual sectors especially where concerns of slowdown was severe
Automobile – Positive
Bharat Stage-IV vehicle purchased till March 31, 2020 would remain operational for entire period of registration
Revision of one-time registration fees is being deferred till June 2020
Additional 15% depreciation on all vehicles, to increase it to 30% acquired during the period from now till March 31, 2020
Banks/Financials – Positive
Upfront release of Rs.700 bn. capital to Public Sector Banks (PSBs)
Banks to launch Repo rate/external benchmark linked loan products
Additional liquidity support of Rs.200 bn to Housing Finance Companies (HFCs) by National Housing Bank (NHB)
Partial Credit Guarantee scheme for purchase of pooled assets of NBFCs/HFCs upto Rs.1 trillion - to be monitored at highest level in each bank
To support decision making and to prevent harassment for genuine commercial decisions by bankers, CVC has issued directions that Internal
Advisory Committee (IAC) in banks to classify cases as vigilance and non-vigilance.
Decision of the IAC and bank Chief Vigilance Officer (CVO)/ DA to be treated as final
Merger of 10 PSU banks into four banks
Infrastructure – Steps in the right direction
To establish an organization to provide Credit Enhancement for infrastructure and housing projects
An inter-ministerial task force is being formed by Department of Economic Affairs to finalize the pipeline of infra projects
Medium, Small and Micro Enterprises (MSMEs) – Positive
GST refund due to MSMEs
Pending refund to be paid in a stipulated time frame
Future GST refunds shall be paid within 60 days from the date of application
TReDS to use GSTN system in medium term to enhance market for bill discounting for MSMEs
Single air and water clearance for MSMEs
Single consent to establish a factory by MSMEs
the coverage of insurance under export credit guarantee corporation to 90 per cent from the existing 60 per cent, especially for MSME sector.
Boost for exports
New tax refund scheme, Remission of Duties or Taxes on Export Product, to replace the current Merchandise Exports from India Scheme on
January 1, 2020, which is likely to incentivize exporters more than adequately
Rebuilding real estate
To set up a fund with Rs.100 bn to provide credit to under-construction homes, which are not non-performing assets or have gone into the
insolvency process.
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Space ceded by China due to trade war being grabbed by other economies…
…India could benefit, post tax cuts announcement
Source: The Hindu Business Line
30%28%
25% 25% 25% 25%24% 23.2%
22%20% 20% 20% 20%
17%
10%
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25%
30%
35%
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Corporate Tax rate of various economies post India's
recent tax cut announcement
Source: Media Reports
Sr.No. Commodity wise India's export to USA FY19 (USD Bn)
1 Precious Metals/Stones 10.42 Pharmaceutical products 5.43 Nuclear reactors, Boilers and Machinery 4.04 Vehicles other than Railways 2.95 Made up textiles 2.56 Petroleum products 2.47 Apparels and Clothing (Non Knitted) 2.28 Fish and other acqu products 2.09 Apparels which are knitted or corcheted 1.910 Organic Chemicals 1.811 Electronic equipments 1.812 Iron and steel products 1.713 Cappets and other floor textiles 0.914 Plastic articles 0.815 Other Chemical products 0.816 Aluminium articles 0.817 Furniture and Bedding articles 0.718 Leather articles 0.619 Optical and photography equipments 0.620 Aircraft, Spacecraft and other parts 0.621 Building materials 0.522 Rubber and rubber aticles 0.523 Lac, Gums, Resins and others 0.524 Footwear 0.425 Meat and Fish and other prepartions 0.3
Export of top 25 products to US 47.1
India's total export to US 52.4Source: M inistry of Commerce
Sr.No. Country wise India's exports FY19 (USD Bn) %Share
1 U S A 52.4 15.9
2 UAE 30.1 9.1
3 China 16.8 5.1
4 Hong Kong 13.0 3.9
5 Singapore 11.6 3.5
6 UK 9.3 2.8
7 Bangladesh 9.2 2.8
8 Germany 8.9 2.7
9 Netherland 8.8 2.7
10 Nepal 7.8 2.4
Exports to top 10 countires 167.9 50.9
India total export to all countries 330.1 100.0
Source: Ministry of Commerce
The United States has been attempting to squeeze favourable trade deal with China, using several ways such
as tariff hikes and as well as targeting its tech companies via sanctions.
As per media reports, many major international firms that invested in China are now examining options to
spread their risks and shift some of their existing and new investments to other countries.
Meanwhile, Thailand has announced a package of incentives in the start of Sept‟19, including a 50% tax cut for
companies planning to relocate production to Thailand from China.
India’s recent announcement to cut corporate tax rate to 22% from 30% currently and tax rate of 15%
for new manufacturing companies have further improved the case for India as compared to other
Emerging Markets.
China’s CY18 exports to the US stood at ~USD 540 bn, which is nearly double of India’s total exports
for FY19 of USD 330 bn. A small shift in key items exported from China (like Apparels, Machinery, Electrical
equipment apart from key inputs like Plastic, Leather, Rubber and Fabricated metal articles) to other Asian
countries like India have opened small pockets of opportunity for India to become a global manufacturing hub.
Thus, any further escalations of tariff war between these two large trading nations can prove to be beneficial
for other nations like India, Indonesia, Brazil, Mexico, Thailand and Vietnam, as all have relatively easier
access to large markets.
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A level playing field for global and domestic companies may drive
investment demand and exports in India India‟s GDP growth continued to decelerate for four consecutive quarters to a six
year low at 5.0% YoY in Q1FY20.
One of the major reason for slowdown in GDP growth was due to slowdown
investment demand, i.e, growth in Gross Fixed Capital Formation (GFCF), due to
lower government spending and large part of private companies staying on the
sideline waiting for revival in demand and pricing scenario.
On one hand domestic consumption took hit due to multiple factors like delay in
onset of monsoon and subdued buying sentiment, growth in exports also saw
volatility owing to ongoing trade war between US and China and global
slowdown.
However, the recent announcement on the reduction in corporate tax rate for
existing companies and higher cut in tax rates for new manufacturing companies
are likely to provide a level playing field for global companies operating from
India in terms of taxation as compared to its Asian peers.
With global companies likely to shift their manufacturing base to India,
investment demand would see a huge impetus in near to medium term. In
addition, once demand and pricing scenario improves, domestic
companies would also start to announce new capex.
Moreover, India having exports of USD 330 bn (FY19) is likely to see a huge
surge in exports even if a small portion of China’s exports (USD 2.48 trillion
in 2018) moves to India, which in turn boost the overall economic growth in
India.
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20
Trend in growth in Gross Fixed Capital Formation (% YoY)
Source: MOSPI
Growth (% YoY) in Sectoral GVA at basic prices
Industry Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20
Agriculture, Forestry & Fishing 5.1 4.9 2.8 (0.1) 2.0
Mining & quarrying 0.4 (2.2) 1.8 4.2 2.7
Manufacturing 12.1 6.9 6.4 3.1 0.6
Electricity, Gas, Water supply & other Utility Services6.7 8.7 8.3 4.3 8.6
Construction 9.6 8.5 9.7 7.1 5.7
Trade, Hotel, Transport, Communication &
Services Related To Broadcasting7.8 6.9 6.9 6.0 7.1
Financial, Insurance, Real Estate &
Professional services6.5 7.0 7.2 9.5 5.9
Public administration, defence & other services 7.5 8.6 7.5 10.7 8.5
GVA at Basic Price 7.7 6.9 6.3 5.7 4.9
Source: Mospi
0
500
1000
1500
2000
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3000
China (CY18) India (FY19)
Exports comparison between China and India (USD in Bn.)
Source: Media Reports
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Amid slowdown in investment, a downward pressure on the consumption demand (i.e.
lower growth in Private Final Consumption Expenditure), helped in suppressing GDP
growth further in Q1FY20.
However, some green shoots have emerged post Q1FY20 in terms of gradual revival in
domestic air passenger growth, improvement in liquidity scenario, sequential
improvement in inquiries for auto sales ahead of festive season.
In addition, the government is also working on reducing the stress for quality NBFCs by
providing some guarantee on their pooled assets which can be sold to banks to ease
liquidity issues. This can help in reviving the urban demand.
The government also took cognizance of slowdown in auto sector and announced various
sector specific measures like deferral of revision of one-time registration fees and
increase in depreciation on all vehicles purchased till March 31, 2020.
A reduction in corporate tax rate would also lead to higher savings to corporates which
they may use to lure customers by offering better discounts or create awareness about
their products which in turn may help in demand growth.
In addition to government‟s efforts, the RBI is on a rate cutting spree and has so far
reduce the interest rate by ~135 bps in CY19 so far to spur the growth in the economy.
If the consumption demand revives from hereon owing to a corroborative efforts
from the government and RBI, then it would give huge boost to economic growth
and would lead to sharp growth in corporate earnings.
0.0
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6.0
8.0
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12.0
14.0
Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20
Trend in growth in Private Final Consumption Expenditure
(% YoY)
Source: MOSPI
A recovery in consumption demand may lead to faster GDP growth
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-19
YoY
%
Domestic airline passenger growth data
Source: DGCA
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The government has pegged its FY20 fiscal deficit at 3.3% of the GDP in the union
budget. However, fiscal deficit was already under pressure due to slow growth in tax
collection revenue.
After touching Rs.1.13 trillion in April 2019, GST collections have fallen to
~Rs.980 bn in August 2019. Overall growth in GST collection was budgeted at
~10% YoY, while so far only 6.4% YoY growth has been achieved.
Overall, direct tax collections have grown by a mere 6.5% YoY so far as against a
budget target of 18% YoY for the fiscal year.
In this, corporate tax collections have averaged at Rs.221 bn between Apr-Jul‟19 in
comparison to a required monthly run-rate of Rs.638 bn.
While the government has announced a booster for corporate India by announcing tax
cut, it has further tightened its fiscal space as this tax cuts would lead to reduction in
revenue to the tune of Rs.1.45 trillion.
While a surplus transfer from RBI could help in alleviate some of the stress on fiscal
deficit, sharp improvement in tax collection would be one of the key to maintain the
fiscal discipline for the government.
Rise in tax base and improvement in economic growth post reforms undertaken by the
government, may drive overall tax revenue in medium term.
The receipt from divestment of public sector companies would also be an important
tool for the government which can help in reducing the stress on government balance
sheet.
A group of secretaries had cleared the disinvestment in five public sector undertakings
(PSUs) namely Bharat Petroleum Corporation (BPCL), Shipping Corporation of India
(SCI), Concor, North Eastern Electric Power Corporation (NEEPCO), and THDC,
which may fetch over Rs.600 bn, ~60% of Rs.1.05 trillion budgeted and keep the fiscal
deficit in check.
If the government is able to increase its divestment receipts more than it has
budgeted then it may be able to curb the rise in fiscal deficit arising due to rise
in recent reform announcements.
However, fiscal space for the government tightened
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Source: IMD
From a delayed onset of monsoon to a 6% above normal monsoon rainfall
as of September 25, 2019, hopes of recovery in rural demand has revived.
With monsoon season recording above normal rainfall, sowing of Kharif
crops also reached to last year‟s level, despite a deficit of 9.5% YoY till June
28, 2019, according to the government data.
As per reservoir storage bulletin dated September 26, Water levels in 113
major reservoirs of the country was 146.20 bn cubic metres (BCM), which is
115% of the live storage of corresponding period of last year and 121% of
storage of average of last ten years, which would be helpful in the sowing of
Rabi crops.
Top tractor manufacturers have also given positive outlook in their
quarterly earnings call for the growth in tractor sales in H2FY20.
Above normal monsoon rainfall and Kharif sowing reaching to last
year’s level are potential signs of recovery in rural demand. Moreover,
higher reservoirs water levels augurs well for Rabi crop sowing, which
is a positive sign and may give further impetus to recovery in
consumption demand.
Above normal monsoon rainfall and high reservoir water levels may result rising rural
growth and help in reviving rural demand
Crop (Lakh
hectar)
Area sown in
FY20
Area sown in
FY19Growth (%)
Rice 382.3 386.9 -1.2
Pulses 134.0 136.4 -1.7
Coarse Cereals 179.9 176.9 1.7
Oilseeds 179.5 179.3 0.1
Sugarcane 52.5 55.5 -5.5
Jute & Mesta 6.8 7.2 -5.0
Cotton 127.7 121.1 5.5
Total 1062.7 1063.2 0.0
Kharif Crop Sowing
Source: Min. of Agriculture, data as on 27 September 2019
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A six year low GDP data led to a negative opening in the domestic indices, however a series of reforms including one of the biggest tax
stimulus (Rs.1.45 trillion) in the history coupled with FPI and DII buying led to sharp recovery in the market.
After the tax rate cut, earnings are expected to upgrade. Moreover, valuations seem to have moderated as we moved towards FY21. The S&P
BSE Sensex trading at 16.5x FY21E Bloomberg consensus EPS of Rs.2350. (S&P BSE Sensex price as on 30.9.2019). The Valuations of the
Midcap indices have once again converged with large caps.
Considering the recent stimulus measures by the government and surplus transfer by the RBI coupled with hopes of better festive
season, a lot more depends on demand led earnings recovery, which is expected to bunch up in H2FY20 and would drive the
markets and lead to a larger upmove in the markets.
On the consumption demand, interest rate cuts and steady efforts to improve liquidity scenario by the RBI may give some impetus to
consumption demand and if corporates are able to manage the cost then revenue and earnings growth should improve over the time.
With improvement in earnings growth owing to the expected acceleration in growth in investment demand (especially after the recent reforms)
and gradual recovery in consumption demand, earnings downgrades are likely to abate over the near to medium term and thus give markets
decent valuation support going forward.
In addition, the trend of financialization of saving especially money channelized into mutual fund investment, as seen post the NDA government
came into power for the first time, is expected to continue in future as well, which would augur well equity markets.
Valuations have moderated as we move towards FY21… Demand revival could lead
larger upmove.
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45000
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-16
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Jul-1
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7
Ma
y-18
Oct-
18
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Sep
-19
S&P BSE Sensex & Trailing P/E
S&P BSE Sensex (LHS) P/E (RHS)Source: Capitaline
14
6.5
52
.06
95
.3
95
.3
54
.5
68
.6
60
.8
83
.6
74
.2
74
.1
10
4.9
76
.6
74
.7
0
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160
De
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De
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De
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De
c-18
Sep
-19
Mkt Cap to India GDP (curr prices)
Source: Bloomberg, data as on 31 July 2019
Bubble Territory -Previous peak with Sensex at ~21000
Mkt cap to GDP highest in last
seven year
13601540 1472
2000
2350
0
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2500
FY17 FY18 FY19* FY20E FY21E
S&P BSE Sensex Consensus EPS (Rs.)
Source: Bloomberg, *Note: Impacted by one time loss in Tata Motors
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13
However, global economy continues to remain in slow growth trajectory…
The International Monetary Fund (IMF) expects global growth to slowdown in CY19 on the back of rising trade tensions between the US
and China which has started to hit economic activity worldwide.
The IMF forecasted global economy to grow by 3.2% YoY in CY19 vs 3.6% YoY growth seen in CY19.
IMF has highlighted that the GDP releases so far in CY19, together with generally softening inflation, point to weaker-than anticipated
global activity.
OECD also expects that rising trade tensions and policy uncertainty is likely to weaken the global growth to 2.9% YoY in CY19 from 3.6%
YoY in CY18.
OECD has highlighted that CY19 growth is the weakest annual growth rate since the financial crisis of 2008, with downside risks
continuing to mount.
Recently, IMF has guided that investment and demand for consumer durables have been subdued across advanced and emerging
market economies as firms and households continue to hold back on long-term spending.
Going forward, many factors like trade tensions, protracted increase in risk aversion exposing certain advanced economies to
risk of financial vulnerabilities, mounting disinflationary pressures impacting the debt servicing ability and constrain in
monetary policy space to counter downturns are likely to remain key factors affecting global growth.
Apart from these, factors like global central banks’ policies, US Fed policy stance on interest rates and global trade
negotiations along with any political uncertainty in the major economies like Euro area and Middle East are likely to be the key
determinants for global growth.
6.8 6.6
1.4
2.9
1.9
0.8
7.0
6.2
1.3
2.6
1.30.9
7.2
6.0
1.41.9
1.6
0.4
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8.0
India China United Kingdom United States Euro Area Japan
in %
IMF growth forecast for major economies world wide
CY18 CY19P CY20P
Source: IMF World Economimc Outlook July 2019
4.8
3.8
2.4
4.5
3.6
2.2
4.1
3.2
1.9
4.7
3.5
1.7
0
1
2
3
4
5
6
Emerging and Developing Economies World Advanced Economies
in %
Global growth expected to slow down in 2019 across all the regions
CY17 CY18 CY19F CY20F
Source: IMF July 2019 World Economic Outlook
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14
While commodity prices remain steady
…Crude oil spiked due to attack on Saudi Aramco
Industrial metals like Steel, Copper and Aluminum witnessed a sharp fall in their prices in the early part of CY19 on the back of global growth
concerns and a stronger dollar.
However, production curbs by China on the back of environmental concerns and other major producer nations have helped in sustaining the prices.
Brent crude oil on the other hand, spiked more than 15% on a single day in September 2019 following the attacks on Saudi Arabian oil processing
facilities – “Saudi Aramco”.
Saudi Arabia had shut down half of its oil production facility after a series of drone strikes hit its largest oil processing facility. As per media reports,
the closure impacted ~5.7 mn barrels of crude production a day, which is ~5% of the world‟s daily oil production.
However, after reaching a high of ~USD 65/bbl in mid-September, Brent crude oil prices have come off slightly towards the end of the September,
primarily impacted by concerns of global growth.
Also, earlier than expected restoration of production capacity by Saudi Aramco has also provided comfort on the oil availability.
The International Energy Agency has also recently, cut its CY19 forecast for global oil-demand growth owing to muted global growth expectation.
Going ahead, oil supply by OPEC and Non OPEC member nations and geo-political conditions in Middle East on one hand and global growth
trajectory and U.S. Shale gas production and export on the other are likely to direct the crude oil prices in the near to medium term. Also,
uncertain economic outlook world wide and global growth challenges may direct the industrial metal prices, going ahead.
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Ma
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r-1
9
Ap
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Ma
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Ma
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exe
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00
Industrial metal prices have remained steady in last few months
LME Aluminium LME Copper LME Steel LMEX Index
Source: Bloomberg
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19
Jul-
19
Au
g-19
Au
g-19
Sep-
19
Sep-
19
USD
/bb
l
Brent crude oil prices spiked during Sept -2019 on the back of attack on Saudi Aramco
Source: Bloomberg
______________________________________________________________________
15
Amid uncertainty and worries around global growth, reform
announcement by the government brings positivity in the
domestic markets.
Announcement on reduction in corporate tax cuts and
revocation of higher surcharge imposed during budget led
to positive FPI flows during the month and led to sharp
upmove in key indices.
DIIs continued with steady buying, which has also helped
in recovery some of the early losses on indices and ending
on a positive note during the month.
While global growth is worrisome… reform momentum by the government has brought
positivity to domestic markets
Sensex saw sharp upmove post reform announcement… … FPI outflow turned positive post the announcement on tax cuts
DIIs continued to support Indian markets
-100
-50
0
50
100
150
200
Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19
Trend in Domestic Institutional Investors flow (Rs in Bn)
Source: SEBI, Data as on 29 August 2019
-300
-200
-100
0
100
200
300
400
Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19
Foreign Portfolio Investment flow trend (Rs in Bn)
Source: NSDL, Data as on 29 August 2019
32000
33000
34000
35000
36000
37000
38000
39000
40000
41000
Jan-
19
Jan-
19
Jan-
19
Feb
-19
Feb
-19
Mar
-19
Mar
-19
Ap
r-19
Ap
r-19
May
-19
Ma
y-1
9
Jun-
19
Jun-
19
Jul-
19
Jul-
19
Jul-
19
Au
g-19
Aug
-19
Sep
-19
Sep
-19
S&P BSE Sensex
Source: Capitaline
______________________________________________________________________
16
Key concerns to watch out ….
Global factors
Weak economic growth which trigger demand for safe
haven assets
Rising trend of protectionism across economies leading to
trade war situation could pose a risk to overall global growth.
Worsening in geo-political situations (Brexit, trade wars, etc)
across globe.
Rise in volatility in commodity prices could put pressure on
the global financial markets.
Rising global food prices may lead to rise in food inflation.
Domestic factors
If Rupee continues to depreciates (so far 1.6% depreciation in CYTD Sept‟19), then it may impact the country‟s twin deficit
Tightening of corporate credit cycle may lead to delay in capex cycle due to funding requirement
Delay in revival of domestic consumption demand
Lower government spending
Large slippage in fiscal deficit target
150
155
160
165
170
175
180
185
Jan
-17
Feb
-17
Ma
r-17
Ap
r-1
7M
ay-
17
Jun
-17
Jul-
17
Au
g-1
7Se
p-1
7O
ct-1
7N
ov-
17
De
c-17
Jan
-18
Feb
-18
Ma
r-18
Ap
r-1
8M
ay-
18
Jun
-18
Jul-
18
Au
g-1
8Se
p-1
8O
ct-1
8N
ov-
18
De
c-18
Jan
-19
Feb
-19
Ma
r-19
Ap
r-1
9M
ay-
19
Jun
-19
Jul-
19
Au
g-1
9
Global Food Price Index
Source: Bloomberg
______________________________________________________________________
17
Large Cap and Midcap valuations have converged after a long time
0.0
10.0
20.0
30.0
40.0
50.0Ja
n-0
8
Jun
-08
No
v-08
Ap
r-09
Au
g-09
Jan-
10
Jun
-10
Oct
-10
Mar
-11
Au
g-11
Dec
-11
May
-12
Sep
-12
Feb
-13
Jul-
13
No
v-13
Ap
r-14
Sep
-14
Jan-
15
Jun
-15
No
v-15
Mar
-16
Au
g-16
Jan-
17
May
-17
Oct
-17
Mar
-18
Jul-
18
Dec
-18
May
-19
Sep
-19
Valuation differential between Large Cap and Midcap Indices corrected
Trailing P/E S&P BSE Midcap Trailing P/E S&P BSE Sensex
Source: Capitaline
0.70.7 0.8 0.8
1.0
0.9
1.3 1.3
1.4
1.9
1.0
0.0
0.5
1.0
1.5
2.0
Jan
-08
Jun
-08
No
v-0
8
Ap
r-0
9
Au
g-0
9
Jan
-10
Jun
-10
Oct
-10
Ma
r-11
Au
g-1
1
De
c-11
Ma
y-1
2
Sep
-12
Feb
-13
Jul-
13
No
v-1
3
Ap
r-1
4
Sep
-14
Jan
-15
Jun
-15
No
v-1
5
Ma
r-16
Au
g-1
6
Jan
-17
Ma
y-1
7
Oct
-17
Ma
r-18
Jul-
18
De
c-18
Ma
y-1
9
Sep
-19
Valuation Premium of Midcap over Sensex
Source: Capitaline
______________________________________________________________________
18
Nifty 50 rolling returns for last 15 years …
Source for entire data stated above is ICRA Online Ltd. (For Disclaimer of ICRA Online Ltd, refer http://www.icraonline.com/legal/standard-disclaimer.html)
-80
-60
-40
-20
0
20
40
60
80
100
120
Sep
-05
Sep
-06
Sep
-07
Sep
-08
Sep
-09
Sep
-10
Sep
-11
Sep
-12
Sep
-13
Sep
-14
Sep
-15
Sep
-16
Sep
-17
Sep
-18
Sep
-19
Nifty 50: 1-year rolling return (%) for last 15 years
1 YearSource: ICRA Online
-10
0
10
20
30
40
50
60
70
Sep
-05
Sep
-06
Sep
-07
Sep
-08
Sep
-09
Sep
-10
Sep
-11
Sep
-12
Sep
-13
Sep
-14
Sep
-15
Sep
-16
Sep
-17
Sep
-18
Sep
-19
Nifty 50: 3-year rolling return (%) for last 15 years
3 YearsSource: ICRA Online
-10
0
10
20
30
40
50
Sep
-05
Sep
-06
Sep
-07
Sep
-08
Sep
-09
Sep
-10
Sep
-11
Sep
-12
Sep
-13
Sep
-14
Sep
-15
Sep
-16
Sep
-17
Sep
-18
Sep
-19
Nifty 50: 5-year rolling return (%) for last 15 years
5 YearsSource: ICRA Online
______________________________________________________________________
19
S&P BSE Sectoral Indices monthly performance for September 2019
______________________________________________________________________
20
Status of key macro variables … Many macro economic data like declining GDP, exports and auto sales are showing weakness
However, certain macro indicators like lower CAD, double digit credit growth data, lower interest rates and improving IIP growth are positive
While tepid growth in GST collection and PMI data and recent depreciation of rupee are concerning
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
De
c-1
7
Jan
-18
Fe
b-1
8
Ma
r-1
8
Ap
r-1
8
Ma
y-1
8
Jun
-18
Jul-
18
Au
g-1
8
Se
p-1
8
Oct
-18
No
v-1
8
De
c-1
8
Jan
-19
Fe
b-1
9
Ma
r-1
9
Ap
r-1
9
Ma
y-1
9
Jun
-19
Jul-
19
IIP growth data seen improving in last few months (YoY %)
Source: MoSPI
6.0
6.8
7.78.1 8.0
7.06.6
5.8
5.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20
in %
India's GDP growth slips to multi-year low of 5% YoY in Q1FY20
Source: MoSPI
-15
-10
-5
0
5
10
15
20
25
Ma
y-18
Jun-1
8
Jul-1
8
Aug
-18
Sep
-18
Oct-
18
Nov-1
8
Dec-1
8
Jan-1
9
Fe
b-1
9
Ma
r-1
9
Apr-
19
Ma
y-19
Jun-1
9
Jul-1
9
Aug
-19
Exports showing weakness in the last few months(Change YoY %)
Source: Ministry of Commerce & Industry
0
2
4
6
8
10
12
14
16
Ma
y-1
7
Jun
-17
Jul-
17
Au
g-1
7
Se
p-1
7
Oct
-17
No
v-1
7
De
c-1
7
Jan
-18
Fe
b-1
8
Ma
r-1
8
Ap
r-1
8
Ma
y-1
8
Jun
-18
Jul-
18
Au
g-1
8
Se
p-1
8
Oct
-18
No
v-1
8
De
c-1
8
Jan
-19
Fe
b-1
9
Ma
r-1
9
Ap
r-1
9
Ma
y-1
9
Jun
-19
Jul-
19
Au
g-1
9
Se
p-1
9
Ch
an
ge
Yo
Y %
Credit growth continue to see double digit growth in last few months (YoY %)
Source: RBI
65
66
67
68
69
70
71
72
73
74
75
Jan
-19
Jan
-19
Jan
-19
Fe
b-1
9
Fe
b-1
9
Ma
r-1
9
Ma
r-1
9
Ap
r-1
9
Ap
r-1
9
Ma
y-1
9
Ma
y-1
9
Jun
-19
Jun
-19
Jul-
19
Jul-
19
Jul-
19
Au
g-1
9
Au
g-1
9
Se
p-1
9
Se
p-1
9
INR
/USD
Rupee has depreciated against USD on last few months
Source: Bloomberg
52.6
54.7
52.452.1
51.051.6
51.2
53.1
52.351.7
52.2
53.1
54
53.2
53.954.3
52.6
51.8
52.752.1
52.5
51.4 51.4
48
49
50
51
52
53
54
55
56
No
v-1
7
De
c-17
Jan
-18
Feb
-18
Ma
r-18
Ap
r-1
8
Ma
y-1
8
Jun
-18
Jul-
18
Au
g-1
8
Sep
-18
Oct
-18
No
v-1
8
De
c-18
Jan
-19
Feb
-19
Ma
r-19
Ap
r-1
9
Ma
y-1
9
Jun
-19
Jul-
19
Au
g-1
9
Sep
-19
Manufacturing PMI seen coming off in last few months
Source: Bloomberg
2.5%
1.1%
2.1%1.9%
2.3%
2.9%2.7%
0.7%
2%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20
Current Account Deficit declines on YoY basis to 2% in Q1FY20 (as % of GDP)
Source: RBI
268503
198091
0
50000
100000
150000
200000
250000
300000
Sept 2018- Sept 2019-
Auto sales for top six car manufacturer in September contiues to fall
Source: Bloomberg, Media Reports
956 956941 933
838 843
898
860
922
1035
940956 965
940 944
1007976
947
1025
972
1066
1139
10039991021
982
919
800
850
900
950
1000
1050
1100
1150
Jul-
17
Au
g-1
7
Se
p-1
7
Oct-1
7
No
v-1
7
De
c-1
7
Jan
-18
Fe
b-1
8
Ma
r-1
8
Ap
r-1
8
Ma
y-1
8
Jun
-18
Jul-
18
Au
g-1
8
Se
p-1
8
Oct-1
8
No
v-1
8
De
c-1
8
Jan
-19
Fe
b-1
9
Ma
r-1
9
Ap
r-1
9
Ma
y-1
9
Jun
-19
Jul-
19
Au
g-1
9
Se
p-1
9GST revenue collection showing weakness in last few months (Rs. Bn)
Source: Ministry of Finance
4
5
6
7
8
9
10
Mar
-03
Sep
-03
Mar
-04
Sep
-04
Mar
-05
Sep
-05
Mar
-06
Sep
-06
Mar
-07
Sep
-07
Mar
-08
Sep
-08
Mar
-09
Sep
-09
Mar
-10
Sep
-10
Mar
-11
Sep
-11
Mar
-12
Sep
-12
Mar
-13
Sep
-13
Mar
-14
Sep
-14
Mar
-15
Sep
-15
Mar
-16
Sep
-16
Mar
-17
Sep
-17
Mar
-18
Sep
-18
Mar
-19
Sep
-19
RBI has cut Repo rate by 135 bps since the start of the year (in %)
Source: Bloomberg
______________________________________________________________________
21
Market Round Up – September 2019
Indices 30 Sept 2019 30 Aug 2019 Chg %
S&P BSE Sensex 38,667 37,333 3.6
S&P BSE Mid Cap 14,104 13,468 4.7
S&P BSE Small Cap 13,171 12,535 5.1
S&P BSE 100 11,581 11,140 4.0
S&P BSE 500 14,810 14,234 4.0
Net Flow (Rs. Bn) FPI DII
CY19* 562 522
CY18 (340) 1204
CY17 513 1188
CY16 151 475
Source: BSE, NSDL (CY19 FPI data and DII data as on 27 September 2019)
Indian equity markets saw sharp volatility during the month of September
2019 and ended on a positive note with S&P BSE Sensex index and
Nifty 50 index ending with the gain of 3.6% MoM and 4.1% MoM,
respectively.
The S&P BSE Midcap index and the S&P BSE Smallcap index also
ended higher by 4.7% MoM and 5.1% MoM, respectively.
On the sectoral indices front, S&P BSE Oil & Gas index and S&P BSE
Consumer Durable index were top two outperformers with a gain of
11.2% MoM and 10.5% MoM, respectively. The S&P BSE Realty index
and S&P BSE IT index were top two underperformers as they declined
by 3.4% MoM and 3.0% MoM, respectively.
During the month of Sept‟19, Foreign Portfolio Investors (FPIs) were net
buyers to the tune of ~Rs.75 bn while Domestic Institutional Investors
(DIIs) were net buyers to the tune of ~Rs.174 bn (as of Sept 27, 2019).
22000
25000
28000
31000
34000
37000
40000
43000
Sep
-15
Feb-
16
Jul-1
6
Dec
-16
Apr
-17
Sep
-17
Feb-
18
Jul-1
8
Dec
-18
Apr
-19
Sep
-19
S&
P B
SE
Sen
sex
Leve
ls
BSE Sensex Price Earning (PE) 1 year forward
19x
21x
17x
23x
Source: Bloomberg
______________________________________________________________________
22
Market Outlook Amid domestic slowdown, the government came out with big bang reforms like corporate tax rate cut, which were much needed impetus to corporate India for reviving the
economy.
Post these reforms, India would also be one of the key beneficiary in getting the space ceded by US-China trade war, which was earlier being grabbed by other economies.
Tax cut has also created a level playing field for global and domestic companies, which may drive investment demand and exports in India going ahead.
Corporate may use the savings from tax cut to lure customers, which may result in recovery in consumption demand and lead to faster growth in GDP.
However, a tax stimulus of Rs.1.45 trillion tightened the fiscal scenario of government and hence other source of revenue like divestment would play a pivotal role.
Meanwhile, an above normal monsoon rainfall and high reservoir water levels may result in rising rural growth and help in reviving rural demand.
After the tax rate cut, earnings are expected to upgrade. Moreover, valuations seem to have moderated as we moved towards FY21. The S&P BSE Sensex trading at 16.5x
FY21E Bloomberg consensus EPS of Rs.2350. (S&P BSE Sensex price as on 30.9.2019). The Valuations of the Midcap indices have once again converged with large caps.
On the global markets, multilateral agencies continued to expect global economy to remain in slow growth trajectory.
On the commodity front, prices of many industrial metals remained steady in last few months. However, crude oil spiked post the attack on Saudi Aramco, which led to shut
down of half of Saudi Aramco‟s production facility.
While global growth is worrisome, reform momentum by the government has brought positivity to domestic markets with FPIs turning positive and DII continuing their buying
spree, which led to sharp upmove in key indices.
However, key macro-economic indicators are showing a mixed trend with negative bias, where declining GDP, exports and auto sales are showing weakness, data pertaining
to credit growth and lower interest rates are giving soothing effects in otherwise a gloomy scenario.
Going ahead, considering the recent stimulus measures by the government and surplus transfer by the RBI coupled with hopes of better festive season, a lot more depends
on demand led earnings recovery, which is expected to bunch up in H2FY20 and would drive the markets and lead to a larger upmove in the markets.
On the consumption demand, interest rate cuts and steady efforts to improve liquidity scenario by the RBI may give some impetus to consumption demand and if corporates
are able to manage the cost then revenue and earnings growth should improve over the time.
With improvement in earnings growth owing to the expected acceleration in growth in investment demand (especially after the recent reforms) and gradual recovery in
consumption demand, earnings downgrades are likely to abate over the near to medium term and thus give markets decent valuation support going forward.
In long term, India is likely to see a steady growth on the back of improvement in Rural economy, higher urbanization, rising government expenditure, revival of private capex
and higher disposable income in the hands of consumers. With strong demographic dividend that India is seeing, we expect the economic growth and demand conditions in
the country to remain strong for a long period. This is likely to augur well for investment in equities. Hence, investors should use any major volatility in the equity markets as
an opportunity to adding into their exposure in line with their risk profile with a 2-3 years investment horizon.
Some of the key global events like Rising demand for safer assets, Rising trend of protectionism across economies, Slowdown in global growth, Rising food prices and Rise in
volatility in commodity prices amongst few other reason would be key to watch out for in CY19. Certain domestic events like Rupee movement, Corporate credit cycle
tightening, Lower government spending, Large fiscal slippage and Weakening of discretionary consumption demand are key to watch out for in near term.
We believe that in the next five years the government would accelerate the process of reforms and decision making to take advantage of the solid base that has been built
over the past five years.
Given the huge tax stimulus given by the government we change our investment strategy to 60% lump sum and rest 40% staggered over the next 3-4 months. From an
Equity Mutual Fund perspective, investors should look at Large Cap and Multicap Funds for fresh investments and SIP into Midcap and Small caps funds can begin with a
longer horizon (12-15 months), with an investment time horizon of 2-3 years.
______________________________________________________________________
23
Fixed Income
______________________________________________________________________
24
G-sec Yields rise in September 2019… …tracking fears of higher fiscal deficit and borrowings
Amidst volatility the 10 year benchmark G-sec closed on a negative note with the yield on the 7.26% G-sec 2029 bond closing at 6.70% on 30 September 2019
compared to 6.56% on 30 August 2019.
On the negative side the volatility was on account of,
Fears of fiscal slippage by the government; wherein the government announced corporate tax rate cuts, resulting in Rs. 1.45 trillion of tax revenues
forgone.
Rise in crude oil prices due to attack on a Saudi Arabian oil facility.
Volatility in US Treasury yields; wherein the 10 year US treasury yield traded in the range of 1.46%-1.90% during September 2019.
On the positive side the volatility was on account of,
Dovish comments from the RBI Governor suggesting that there is still room for interest rate cuts amidst moderate inflation and economic growth slowdown.
CPI Inflation for August 2019 continued to remain within the RBI‟s comfort zone of 4% and Core CPI also moderated.
Government maintained its market borrowings for H2FY20 at the budgeted levels at Rs. 2.68 trillion. Which alleviated fears of excess borrowings.
Reports that the government is still considering the overseas sovereign issuance of G-secs for FY20 eased fears of additional market borrowings.
Government announces tax cuts for corporates with Rs.1.45 trillion
of tax forgone for FY20
______________________________________________________________________
25
Govt. announces Corporate Tax cuts to bolster economic growth… …Fiscal math takes centre stage
The Finance Minister (FM) announced cuts in
corporate tax rates, in order to revive economic growth.
FM also said the total impact on the revenue on
account of the lower taxes would be Rs.1.45 trillion.
The impact of the decline in tax revenues could lead to
higher fiscal deficit, from budget estimates of 3.3%.
The government however seems to be maintaining the
existing deficit targets.
Fiscal deficit for the period April-August 2019 stood at
78.7% of the budget estimates.
Tax revenues on the other hand stood at for the period
April-August 2019 stood at 24.5% of budget estimates.
Monthly GST collections have also not been very
encouraging and for the Financial Year so far have
averaged at ~Rs. 101 bn. Source:- cga.nic.in
Particulars Rs. Bn 2018-19 RE 2019-20 BE % Change
A. Revenue Receipts 17296.82 19627.61 13.48%
Tax Revenue (net to centre) 14844.06 16495.82 11.13%
Non-tax Revenue 2452.76 3131.79 27.68%
B. Capital Receipts 7275.53 8235.88 13.20%
Total Receipts (A+B) 24572.35 27863.49 13.39%
Total Expenditure 24572.35 27863.49 13.39%
Revenue Expenditure 21406.12 24477.8 14.35%
Capital Expenditure 3166.23 3385.69 6.93%
Revenue Deficit 4109.30 4850.19 18.03%
as a % of GDP -2.20 -2.30
Fiscal Deficit 6343.98 7037.6
as a % of GDP -3.40 -3.30
GDP 188407.31 211006.07
Budget Estimates announced in the Union Budget Presentation in July 2019
Source:-cga.nic.in Source:- Government
______________________________________________________________________
26
Government’s sticks to budgeted borrowing for H2FY20…
Amidst high anticipation, the Finance Ministry announced the borrowing
calendar for H2FY20 and to everyone‟s surprise stuck to the budgeted
numbers.
The government is slated to raise Rs. 2.68 trillion through market borrowing
in H2FY20.
In terms of maturity wise breakup of securities, the government will borrow
6.7% through 1-4 year G-secs, 17.91% through 5-9 years G-secs and
40.67% through 10-14 year G-secs.
While the government sticking to the budgeted borrowing numbers so far,
does not take away the possibility of additional borrowings, later in the year.
In the previous financial year the RBI had conducted Open Market
Operations (OMO) purchase of G-secs to the tune of Rs. 3.085 trillion.
Typically OMO purchases are done more frequently in second half of a
financial year as demand for funds is higher.
Given that the RBI has been looking at reviewing the current liquidity
framework, the quantum of OMOs will be very critical, as OMOs also act as
demand-Supply balancers apart from being a liquidity management tool.
Source:- RBI Source:- RBI
Source:- RBI
______________________________________________________________________
27
Headline Inflation remains muted… …Core CPI inflation declined
Inflation based on Consumer Price Index (CPI) for August 2019 came in at 3.21% YoY as compared with 3.15% YoY in July 2019 and continued to stay
within the RBI‟s comfort zone for about 19 months.
The rise in the CPI inflation was largely on account of rise in retail food prices. Retail food prices rose by 2.99% YoY in August 2019 as against a rise of
2.36% YoY in July 2019.
The Core CPI (Ex Food and Fuel) inflation declined in August 2019 and came in at 4.27% YoY as against 4.31% YoY in July 2019 and 4.16% YoY in June
2019.
Within the food basket, prices of vegetables rose sharply by 6.90% YoY in August 2019 as against a rise of 2.82% YoY in July 2019.
While items like „Milk and products‟, Fruits, Vegetables, „Pulses and products‟ and Spices witnessed an increase in inflation on a year on year basis, other
items witnessed a decline in the food segment; which shows that the rise in inflation within the food segment was not broad-based.
Most of the internal items of Core CPI witnessed a broad-based decline in annual inflation, barring certain items like „Personal care and effects‟ wherein
inflation witnessed a rise as compared to July 2019.
The „Fuel and light‟ segment continued to witness deflation for the second month in a row. Prices in the „Fuel and light‟ segment, deflated annually by
1.70%, as against a deflation of 0.29% YoY in July 2019; reflecting the impact of muted international crude oil prices.
Source:-Ministry of Statistics and Program Implementation Source:-Ministry of Statistics and Program Implementation
______________________________________________________________________
28
Balance of Payments remained in surplus… …CAD and Forex Reserves also remained comfortable
Current Account Deficit for Q1FY20 stood at 2% of GDP which was lower than
that for Q1FY19 at 2.3% of GDP. While Q1FY20 CAD was higher than the
previous quarter it continued to remain in the comfort zone.
Balance of Payments (BoP) stood at surplus of USD 14 bn for Q1FY20 against a
deficit of USD 11.3bn in Q1 FY19. However, the BoP surplus declined marginally
from USD 14.2 Bn, for Q4FY19.
India‟s Forex Reserves continued to remain robust at USD 429 bn as on 20
September 2019.
INR Strengthened during September 2019 by 0.75% MoM as against a
depreciation of 3.79% MoM in August 2019.
Source:- RBI
Source:- Bloomberg
Source:- Bloomberg
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System Liquidity remained in surplus zone… …RBI to review current liquidity framework
Domestic system liquidity surplus declined marginally during the month, compared to the previous month, tracking outflows on account of advance tax
payments, payments towards Goods and Services Tax (GST) as well as festival season demand for funds.
Liquidity as measured by the RBI‟s Liquidity Adjustment Facility (LAF) stood at a daily average surplus of ~Rs.1.12 trillion in September 2019,
compared to a daily average surplus of ~Rs. 1.32 trillion during August 2019.
During the month the RBI released the Report of the Internal Working Group to Review the Liquidity Management Framework.
Some of the important points discussed in the report included,
The framework should be flexible. While the corridor system would normally require the system liquidity to be in a small deficit, if financial
conditions warrant a situation of liquidity surplus, the framework should be adaptable.
The current provision of assured liquidity – up to 1% of NDTL - is no longer necessary since the proposed liquidity framework would entirely
meet the system‟s liquidity needs.
Build-up of a large deficit or surplus, if expected to persist, should be offset through appropriate durable liquidity operations. In addition to
OMOs and forex swaps, the Group recommended longer term repo operations at market related rates.
Source - RBI
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30
Bond spreads – An Update
Credit Spreads in Bps
Credit spreads continued to remain higher than the pre-September 2018 period.
However, spread on AAA rated bonds declined in September 2019 as compared to
the previous month.
However, spreads on lower rated bonds increased as credit events continued to
unfold in September 2019, indicating continued caution in the lower credit space.
Additionally, the corporate bond yield curve continued to remain steep between the
short to medium term segment of the yield curve.
Thus, at this juncture, the AAA rated corporate bonds in the short to medium term
space continue to remain attractive.
Spread between AAA corporate bonds and G-secs of similar tenure as on 26 August 2019. Source:- Bloomberg and Reliance MF
Date
3 Year AAA/
G-sec
3 Year AAA
PSU/G-sec
3 Year AA/
G-sec
3 Year A/
G-sec
Aug-18 77 72 124 279
Sep-18 78 72 123 281
Oct-18 111 100 163 303
Nov-18 134 117 189 307
Dec-18 149 142 205 314
Jan-19 108 85 165 291
Feb-19 127 105 181 292
Mar-19 119 89 173 291
Apr-19 93 73 154 297
May-19 114 92 173 295
Jun-19 116 94 185 295
Jul-19 104 74 168 301
Aug-19 102 80 159 292
Sep-19 99 71 166 298
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Source:- IDFC Mutual Fund
While the very shorter end of the yield curve declined in September 2019 tracking comfortable liquidity, the longer end yields rose
tracking caution on the government‟s fiscal deficit situation.
The yield curve steepened further in September 2019 with term spreads widening during the month.
Spread between the 1 and 10 years G-secs widened to 105 bps in September 2019 from 86 bps in August 2019; whereas spread
between 1 and years G-sesc widened to 72 bps from 57 bps.
Further steepening between the very short, short and medium term segments of the yield curve continues to keep these segments
attractive from risk reward perspective.
While shorter end of the yield curve declined tracking rate cut and surplus liquidity… …the longer end rose due to fiscal concerns
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32
Liquidity surplus may witness decline in the second half of the financial year, given the demand from festival season and later the last quarter demand
for funds at the end of the financial year. However, with the RBI‟s positive liquidity stance, it is likely to keep liquidity in the surplus mode in order to 1.)
lead to effective transmission of rate cuts; 2.) to keep liquidity available for the key sectors of the economy. Thus, the overall outlook on liquidity seems
to be comfortable at this point.
The monsoon rainfall being above normal, it augers well for crop production in the country. Additionally crop sowing is in line with the previous year‟s
level. A strong monsoon and better crop production is likely to be positive for food prices and food inflation, which may help the overall inflation to remain
muted.
Crude oil prices have also remained contained despite the recent geo-political tensions which threatened to disrupt oil supply. Additionally after rising in
July 2019 Core CPI inflation declined in August 2019, and this continues to reflect weak demand conditions in the economy. All these factors give
comfort on the inflation trajectory going forward.
Despite announcing stimulus package by reducing corporate tax rate cuts, the government seems to be committed to following the glide path for fiscal
deficit consolidation. This augers well for lower interest rates in the economy. However it will be important to track whether the government gives into the
expanding the fiscal deficit later in the financial year in order to revive economic growth. Uncertainty on this front may keep the longer end of the yield
curve volatile.
The US and UK are both in interest rate easing mode; wherein in its latest monetary policy the ECB reduced interest rate for deposits by 10 basis points
and also re-stared its bond purchasing program. This could also reflect in the interest rate as well as monetary actions of the RBI. While the RBI has
reduced interest rates sharply over the past few months, given the current low economic growth scenario, the RBI could ease more going forward.
In terms of the G-sec yield curve the, shorter end of the yield curve continued to decline in September 2019 as well, as liquidity remained structural
positive. Given that the RBI‟s liquidity stance continues to remain positive, and that there could be still more interest rate easing by the RBI, short term
rates could decline further. The longer end on the other hand has been volatile in line with expectations. Additionally, there has been further steepening
of the yield curve especially between the short and medium term segments. Thus, with liquidity expected to remain positive and the steepness of the
yield curve, the short and the medium term segments of the yield curve continues to remain attractive from risk reward perspective.
Thus, we recommend investments in Medium Duration Funds can be considered with a horizon of 15 months and above.
Investments into Short Duration Funds can be considered with an investment horizon of 12 months and above.
Investors who are comfortable with intermittent volatility, can also look at strategies that have allocation to the longer end of the yield curve, through
Dynamic Bond Funds with an investment horizon of 24 months and above.
Investors looking to invest with a horizon of up to 3 months can consider Liquid Funds, while Ultra Short Duration Funds and Arbitrage can be
considered for a horizon of 3 months and above.
Fixed Income Outlook
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33 33
We recommend investors to rebalance/realign the portfolios according to the recommended asset allocation
On Equity Funds:
The Q1FY20 GDP growth at 5% YoY was quite unexpected and showed the slowing nature of the economy
The government came back with a slew of measures to stem the deceleration and to revive the economy.
The biggest among them was a big cut in the corporate tax rates and massive corporate tax incentive for manufacturing entities setting
shop in the next 4 years.
Strong government response and easy liquidity regime builds in a potent combination for economic revival in the medium term.
Macro indicators continued with mixed signals in near term as lower inflation, lower interest rate, improved domestic liquidity conditions,
indications of steady volume growth continuing in many sectors seem to be offset by weak IIP and GDP on the other.
With the huge supply side measures of the government, improved monsoons and upcoming festive season, stagnation of consumer
demand and lower corporate margins could reverse.
We believe that in the next five years the government would accelerate the process of reforms and decision making to take advantage of
the solid base that has been built over the past five years.
From an Equity Mutual Fund perspective, investors should look at Large Cap and Multicap Funds for fresh investments and SIP into Midcap
and Small caps funds can begin with a longer horizon (12-15 months). Given the huge tax stimulus given by the government we change our
investment strategy to 60% lump sum and rest 40% staggered over the next 3-4 months.
On Fixed Income Funds:
Investments in Medium Duration Funds can be considered with a horizon of 15 months and above.
Investments into Short Duration Funds can be considered with an investment horizon of 12 months and above.
Investors who are comfortable with intermittent volatility, can also look at strategies that have allocation to the longer end of the yield curve,
through Dynamic Bond Funds with an investment horizon of 24 months and above.
Investors looking to invest with a horizon of up to 3 months can consider Liquid Funds, while Ultra Short Duration Funds and Arbitrage can
be considered for a horizon of 3 months and above.
Investment Strategy
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34
Equity Mutual Funds – Based on SEBI Categorisation
Large Cap Fund
1. HDFC Top 100 Fund – An actively managed large cap equity fund
2. ICICI Prudential Bluechip Fund - An actively managed large cap equity fund
3. Reliance Large Cap Fund – An actively managed large cap equity fund
Multi Cap Funds
1. Kotak Standard Multicap Fund - An actively managed multi cap fund investing across select sectors with large cap bias
2. HDFC Equity Fund - The fund is a multi cap equity fund that invests across market capitalisation with large cap bias
3. Aditya Birla Sun Life Equity Fund – An actively managed multi cap fund investing across market capitalisation and sectors
Large & Mid Cap Fund
1. Sundaram Large and Mid Cap Fund – An actively managed large and midcap fund that invests minimum 35% in both large cap and mid cap companies
Dynamic Asset Allocation/Balanced Advantage Funds
1. HDFC Balanced Advantage Fund - A hybrid fund that dynamically manages exposure to equity and debt within a certain range
2. ICICI Prudential Balanced Advantage Fund – A hybrid fund that dynamically manages exposure to equity and debt depending upon market valuations
Equity Savings Fund
1. HDFC Equity Savings Fund – The un-hedged equity exposure of the fund is maintained upto 40% of the portfolio with flexibility to invest across market capitalisation
Arbitrage Fund
1. IDFC Arbitrage Fund – The fund buys securities in spot market while selling the same in derivate market simultaneously to take the advantage of a temporary price differential .
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35
Recommended Equity Oriented Mutual Funds – Performance
Returns (%) as on 30 September 2019.Returns are absolute for < = 1year and CAGR for > 1 year.
Source for entire data stated above is ICRA Online Ltd. (For Disclaimer of ICRA Online Ltd, refer http://www.icraonline.com/legal/standard-disclaimer.html)
Scheme Name SEBI Categorisation 1M 3M 6M 1Y 2Y 3Y
HDFC Top 100 Fund - Growth Large Cap Fund 2.99 -7.38 -5.01 4.15 6.10 9.26
Nippon India Large Cap Fund - Growth Large Cap Fund 6.19 -6.22 -5.13 3.40 5.91 9.61
ICICI Prudential Bluechip Fund - Growth Large Cap Fund 4.81 -2.02 0.28 4.42 6.24 9.88
Kotak Standard Multicap Fund - Reg - Growth Multi Cap Fund 4.81 -1.97 0.29 8.70 6.56 10.46
HDFC Equity Fund - Growth Multi Cap Fund 3.30 -8.00 -5.62 4.76 5.46 8.84
Aditya Birla Sun Life Equity Fund - Growth Multi Cap Fund 5.24 -1.78 -2.23 5.30 2.11 7.00
Sundaram Large and Mid Cap Fund - Reg - Growth Large & Mid Cap Fund 7.30 0.31 2.14 9.30 8.56 12.44
Axis Midcap Fund - Growth Mid Cap Fund 6.36 2.77 3.80 9.95 11.02 12.10
HDFC Small Cap Fund - Growth Small cap Fund 4.21 -7.54 -12.38 -6.46 1.31 8.55
Invesco India Contra Fund - Growth Contra Fund 4.31 -3.04 -4.12 1.58 6.71 10.35
Tata Equity P/E Fund - Reg - Growth Value Fund 4.04 -1.15 -1.67 2.09 0.47 8.78
Axis Focused 25 Fund - Growth Focused Fund 6.69 2.53 8.18 9.80 9.60 14.01
SBI Focused Equity Fund - Growth Focused Fund 7.56 0.08 3.36 13.83 10.47 11.71
ICICI Prudential Equity & Debt Fund - Growth Aggressive Hybrid Fund 2.82 -4.03 -2.26 3.04 4.35 7.76
HDFC Balanced Advantage Fund - Growth Dynamic Asset Allocation or Balanced Advantage 2.71 -6.49 -3.87 5.60 4.34 7.80
ICICI Prudential Balanced Advantage Fund - Reg - Growth Dynamic Asset Allocation or Balanced Advantage 3.46 0.98 3.18 9.08 6.85 8.31
IDFC Arbitrage Fund - Reg - Growth Arbitrage Fund 0.30 1.51 3.32 6.41 6.23 6.10
HDFC Equity Savings Fund - Growth Equity Savings 1.71 -1.59 0.01 4.21 4.16 7.00
Kotak Taxsaver - Reg - Growth ELSS 4.97 -3.46 0.43 8.56 5.44 8.75
L&T Infrastructure Fund - Reg - Growth Sectoral 7.81 -3.75 -4.41 -3.63 -3.34 8.06
Nifty 50 4.09 -2.61 -1.28 4.95 8.26 10.04
Nifty Midcap 100 2.39 -9.03 -12.16 -6.54 -5.92 1.31
S&P BSE 200 4.02 -2.63 -2.30 3.49 5.82 8.83
Nifty Infrastructure 6.91 -4.67 0.02 8.08 -0.57 4.73
NIFTY 50 Hybrid Composite Debt 65:35 Index 2.65 -0.40 1.97 9.06 9.00 10.15
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36
Fixed Income Mutual Fund Options
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37
Performance of recommended Debt Funds
Please note that returns data for Crisil indces is not available.
Returns (%) as on 30 September 2019. Returns are absolute for < = 1year and CAGR for > 1 year. Portfolio as of 30 August 2019.
Source for entire data stated above is ICRA Online Ltd. (For Disclaimer of ICRA Online Ltd, refer http://www.icraonline.com/legal/standard-disclaimer.html)
3 Mths 6 Mths 1 Year 2 Years 3 Years
IDFC Bond Fund - Income Plan - Reg - Growth Medium to Long Duration Fund 100.00% 7.59 6.81 2.80 6.47 14.04 6.71 7.24
ICICI Prudential Long Term Bond Fund - Growth Long Duration Fund 92.96% 10.78 7.38 2.10 7.27 15.81 7.58 7.76
IDFC D B F - Reg - Growth Dynamic Bond 100.00% 7.16 6.66 3.08 6.67 14.26 7.08 7.56
Kotak Dynamic Bond Fund - Reg - Growth Dynamic Bond 77.93% 5.16 7.68 2.42 5.65 12.96 8.17 8.02
IDFC Bond Fund - Short Term Plan - Reg - Growth Short Duration Fund 100.00% 2.12 6.96 2.73 4.54 10.51 7.32 7.26
IDFC Bond Fund - Medium Term Plan - Reg - Growth Medium Duration Fund 100.00% 3.76 6.71 2.55 5.00 10.81 6.95 7.11
Reliance Banking & PSU Debt Fund - Reg - Growth Banking and PSU Fund 100.00% 2.94 6.98 3.16 5.41 11.43 7.55 7.61
Aditya Birla Sun Life Banking & PSU Debt Fund - Reg - Growth Banking and PSU Fund 93.02% 3.83 7.08 2.65 5.16 10.68 7.44 7.42
HDFC Corporate Bond Fund - Growth Corporate Bond Fund 100.00% 4.08 7.26 2.65 5.04 11.35 7.61 7.78
Aditya Birla Sun Life Corporate Bond Fund - Reg - Growth Corporate Bond Fund 95.67% 2.84 7.22 2.43 4.76 10.57 7.66 7.76
3 Mths 6 Mths 1 Year 2 Years 3 Years
IDFC Low Duration Fund - Reg - Growth Low Duration Fund 100.00% 297 6.35 2.26 4.14 8.90 7.53 7.54
ICICI Prudential Savings Fund - Reg - Growth Low Duration Fund 86.10% 350 6.94 2.26 4.25 8.91 7.61 7.68
UTI Money Market Fund - Reg - Growth Money Market Fund 100.00% 179 6.16 2.10 4.04 8.57 7.88 7.50
Aditya Birla Sun Life Money Manager Fund - Reg - Growth Money Market Fund 100.00% 164 6.04 2.18 4.13 8.72 8.01 7.61
HSBC Cash Fund - Growth Liquid Fund 100.00% 33 5.83 1.55 3.37 7.20 7.18 7.03
Reliance Liquid Fund - Growth Liquid Fund 100.00% 33 5.88 1.56 3.41 7.29 7.20 7.05
ICRA Composite Bond Fund Index -- -- -- 2.87 6.88 14.87 7.75 7.97
NIFTY Short Duration Debt Index -- -- -- 2.64 4.56 10.24 7.31 7.47
ICRA Liquid Index -- -- -- 1.57 3.38 7.17 7.11 6.94
Returns (%)
SEBI CategorisationAAA or
Equivalent
Avg.
Maturity
(Days)
Scheme Name Portfolio
Yield (%)
Returns (%)
Scheme Name AAA or
Equivalent
Avg.
Maturity
(Yrs)
Portfolio
Yield (%) SEBI Categorisation
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38
Disclaimer: This document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. HDFC Bank Limited ("HDFC Bank") does not warrant its completeness and accuracy. This information is not intended as an offer or solicitation for the purchase or sale of any financial instrument / units of Mutual Fund. Recipients of this information should rely on their own investigations and take their own professional advice. Neither HDFC Bank nor any of its employees shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this material. HDFC Bank and its affiliates, officers, directors, key managerial persons and employees, including persons involved in the preparation or issuance of this material may, from time to time, have investments / positions in Mutual Funds / schemes referred in the document. HDFC Bank may at any time solicit or provide commercial banking, credit or other services to the Mutual Funds / AMCs referred to herein. Accordingly, information may be available to HDFC Bank, which is not reflected in this material, and HDFC Bank may have acted upon or used the information prior to, or immediately following its publication. HDFC Bank neither guarantees nor makes any representations or warranties, express or implied, with respect to the fairness, correctness, accuracy, adequacy, reasonableness, viability for any particular purpose or completeness of the information and views. Further, HDFC Bank disclaims all liability in relation to use of data or information used in this report which is sourced from third parties. HDFC Bank House, 1 st Floor, C.S. No. 6 \ 242, Senapati Bapat Marg, Lower Parel, Mumbai 400 013. Phone: (91)-22-66521000, ext 1311, Fax: (91)-22-24900983 \ 24900858
