Major and Minor Music Compared to Excited and Subdued Speech (2009)
Equity & Debt Strategy - Kotak Mahindra Bank · the budget; subdued Q1 FY20 earnings have also...
Transcript of Equity & Debt Strategy - Kotak Mahindra Bank · the budget; subdued Q1 FY20 earnings have also...
Equity & Debt Strategy
Mid July – August’ 2019
Equity Market Update &
Equity MF Strategy
Confidential | 3
Equity Strategy - Highlights of the month
Exhibit 1: India has significantly under-performed global markets
in June and post budget in July
Exhibit 2: Declining bond yields has made relative valuations of
equities slightly less expensive
Nifty earnings yield = 1 / Nifty Fwd PE
Source: Bloomberg; All data are as of 22nd July 2019
Exhibit 1:-• Indian markets have reversed their CYTD out-performance in the month of June
and post the budget in July. Some of the uncertainty regarding FPI taxationseems to have spooked market participants.
• Commentary from some companies which have declared results so far have notbeen very strong either and has raised concerns on the strength of the earningsrecovery. Midcap stocks have continued to under-perform large caps.
• While the domestic weakness could continue for the next two quarters orlonger, the fact that these realities are getting reflected in stock prices makesthe current market conditions less risky. In contrast, prior to elections marketswere largely ignoring signs of a slowdown and expecting ample liquidity andstimulus to support prices.
Exhibit 2:-• The gap between 10 Yr. Govt. Bond Yield & Nifty Earnings Yield has
declined from the peak of ~2.7% during Sept’2018 to ~0.7% currently –which is lowest level since June 2017. A major part of the currentnarrowing of the gap has happened post budget announcement due todecline in 10 Yr. Govt. Bond Yield.
• The yield gap was negative during July’05-Feb’06, Sep’08-May’09, May’13-June’13 & Nov’16-Dec’16 all of which were very lucrative entry points forequities – the last two being a very short window.
• A high yield gap indicates that an equity investor is relatively better offearning risk-free returns than taking equity risk. While the gap is not yetnegative which would indicate extreme pessimism, the current level doesnot indicate a dangerous euphoria either.
-6
-4
-2
0
2
4
0.00
3.00
6.00
9.00
12.00
15.00Yield Gap (%) Nifty Earnings Yield % 10 Yr Govt. Bond Yield %
8.2%
5.4%
4.0%4.9%
7.7%
2.6%
0.3%
6.7%
1.0%
-4.3%
-0.4%
3.6%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%Market performance from 1st Jun to 22nd Jul 2019
Confidential | 4
Equity Strategy - Highlights of the month
Exhibit 4: While midcaps have outperformed large-caps over the
long term, they are prone to cycles of out / under-performance
Exhibit 3: The Nifty stocks which have outperformed in the last 1 year
have also seen a sharp correction post Budget (except RIL)
Exhibit 4:-• Markets have seen a series of controlled explosions in individual companies
due to issues ranging from auditor resignations to panics caused bypledged shares. Some mid-caps have seen severe price reactions toquarterly results which were below market estimates.
• Over the last month, the weak sentiment in large-caps have affected mid-caps even more, creating opportunity for bottom-up stock pickers. Theimmediate effect though has been significant price erosions acrossportfolios. As market participants recover and re-asses their investmentthesis, selective buying should emerge.
• We see this is a natural progression of the third mid-cap cycle in the last~15 years. Extreme apathy for mid & small-cap stocks in late 2013 set thestage for a strong bull market. However, the timing is always hard to call.
Exhibit 3:-• The leaders of the recent past saw a sell-off post the budget. The high
valuations came off a bit and the earnings outlook for some of thesecompanies have also weakened given the muted commentary on quarterlyresults.
• Financials have corrected post commentary by some banks like RBL Bank, DCBBank & HDFC Bank and Bajaj Finance. The managements struck a cautiousnote and highlighted risks in some segments of their loan book. Markets arealso now expecting a moderation in Bajaj Finance’s growth momentum.
• With the recent price correction in these stocks and weak performance ofstocks like Page Industries, Eicher Motors, & Maruti for quite some time now,many stocks are beginning to reflect lower earnings expectations, if not lowvaluations.
0.70
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50 3 year returns of Nifty Midcap 100 / 3 year returns of Nifty 100
Apr-09, Aug-13, 0.77
Oct-16, 1.46
July-19, 0.85
Source: Bloomberg; All data are as of 22nd July 2019
-5.8%
-14.1%
-3.8%
-9.7%
-16.4%
-2.5%
-5.6%
-15.3%
0.0%
-9.8%
-18.0%
-15.0%
-12.0%
-9.0%
-6.0%
-3.0%
0.0%
ICIC
I Ban
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Baj
aj F
inan
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UP
L
Axi
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ank
Tita
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Wip
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Stat
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Ind
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Baj
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inse
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Rel
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L&T
Performance during 5th July to 22nd July
Confidential | 5
Market Performance: Domestic Markets witnessed sharp sell-off in the aftermath of the Union Budget
Source: Bloomberg; All data are as of 22th July 2019
Market Performance: Domestic markets witnessed a sharp sell-off post
the budget; subdued Q1 FY20 earnings have also contributed to the fall
Sectoral Indices: Most of the indices have fallen post the budget;
Banking & Auto Indices have seen the sharpest fall
Top 10 Nifty stocks: The Nifty stocks which have outperformed in the last
1 year have also seen a sharp correction post Budget (except RIL)10 Yr Govt. Bond Yield: 10 yr Yield rallied as a result of the Govt’s
announcement to borrow overseas; reducing the supply in domestic market
-4.2% -4.5% -4.1%
-7.2% -7.1%-8.0%-7.0%-6.0%-5.0%-4.0%-3.0%-2.0%-1.0%0.0%
Nifty Index Nifty 500 Index S&P BSE 200Index
Nifty Midcap 100Index
S&P BSE SmallCap Index
Performance during 5th July to 22nd July
-0.7%
-4.0%
-6.8%-8.3%
-7.2%
-0.4%
2.5%
-7.7%
-9.6%
-3.6%
-12.0%
-9.0%
-6.0%
-3.0%
0.0%
3.0%
6.0%
Nifty ITIndex
NIFTYFMCGIndex
NIFTYFinancialServices
Index
NIFTYAutoIndex
NIFTYBankIndex
NIFTYMediaIndex
NIFTYPharma
Index
NIFTYPrivateBankIndex
NIFTYPSU Bank
Index
NIFTYRealtyIndex
Performance during 5th July to 22nd July
6.70
6.43
6.10
6.20
6.30
6.40
6.50
6.60
6.70
6.80
5-Jul 8-Jul 11-Jul 14-Jul 17-Jul 20-Jul
10 Year Govt Bond Yield
-5.8%
-14.1%
-3.8%
-9.7%
-16.4%
-2.5%
-5.6%
-15.3%
0.0%
-9.8%
-18.0%
-15.0%
-12.0%
-9.0%
-6.0%
-3.0%
0.0%
ICICIBank
BajajFinance
UPL Axis Bank Titan Wipro StateBank of
India
BajajFinserv
RelianceIndustries
L&T
Performance during 5th July to 22nd July
Confidential | 6
Market Performance: Markets fell in June-July; underperforming global markets; tepid Q1 earnings have also contributed to the downfall
Index Performance1st July to 22nd July
Till 30th June’2019
1m 3m 6m 12m CYTD
US S&P 500 1.2% 6.9% 3.8% 17.3% 8.2% 17.3%
UK FTSE 100 1.6% 3.7% 2.0% 10.4% -2.8% 10.4%
Japan Nikkei 225 0.7% 3.3% 0.3% 6.3% -4.6% 6.3%
Germany (DAX) -0.8% 5.7% 7.6% 17.4% 0.8% 17.4%
Singapore Straits 1.1% 6.5% 3.4% 8.2% 1.6% 8.2%
Korea KOSPI -1.7% 4.4% -0.5% 4.4% -8.4% 4.4%
Malaysia KLCI -1.0% 1.3% 1.7% -1.1% -1.1% -1.1%
Brazil IBOV 2.5% 4.1% 5.8% 14.9% 38.8% 14.9%
Russia MOEX -2.7% 3.8% 10.8% 16.7% 20.5% 16.7%
India SENSEX -3.5% -0.8% 1.9% 9.2% 11.2% 9.2%
China SHCOMP -3.1% 2.8% -3.6% 19.4% 4.6% 19.4%
Indonesia Jakarta 1.2% 2.4% -1.7% 2.6% 9.6% 2.6%
Broader Markets1st July to 22nd July
Till 30th June’2019
1m 3m 6m 12m CYTD
Nifty-50 -3.6% -1.1% 1.4% 8.5% 10.0% 8.5%
Nifty-500 -4.1% -1.5% -0.1% 5.3% 5.4% 5.3%
S&P BSE 200 -4.1% -1.2% 0.4% 5.9% 6.9% 5.9%
Nifty Midcap 100 -7.4% -1.7% -3.3% -1.2% -2.9% -1.2%
S&P BSE Smallcap -7.7% -4.2% -5.2% -3.2% -11.2% -3.2%
Market Performance: India has underperformed most global
markets in the period of June-July
Sectoral Indices: Auto Sector has seen a battering due to no major relief
in the budget; banks are falling post Q1 commentaries of some banks
Currency: INR appreciated against the USD in June-July; Dollar
weakened against other currencies as well in June-July
Source: Bloomberg; All data are as of 22nd July 2019
-4.34%-3.76%
-4.32%
-11.63%
-6.64% -6.61%
-3.92%
-8.30%-7.54%
-3.73%
-15.00%
-12.00%
-9.00%
-6.00%
-3.00%
0.00%
Nifty IT NiftyFMCG
NiftyFinancialServices
NiftyAuto
NiftyBank
NiftyMedia
NiftyPharma
NiftyPrivateBank
NiftyPSUBank
NiftyRealty
1st June to 22nd July Performance
92
93
94
95
96
97
98
67
69
71
73
75 INR/USD US Dollar Index Spot Rate
Confidential | 7
Market Valuation & Earnings: Trailing PE of the Nifty is near all time highs thanks
to a low earnings base | Discount Between Mid caps and Large Caps deepens
Trailing PE: FY19 earnings were fairly weak for the index driven by
large drags from a few heavyweights
Forward PE: Earnings for the index should improve substantially in FY20
and FY21 as the corporate facing banks revert to normalized profitability
Relative Valuations: Nifty Midcap 100 Index now trades at 14.6 times
forward PE vs Nifty’s 18.10 times forward PE, reflecting a ~24% discount
Nifty Earnings: FY20 earnings growth for the index is expected to
be a sharp 35.3% on the back of a disappointing FY19
24% discount
25.3431
0
5
10
15
20
25
30
Jun
-01
Jun
-02
Jun
-03
Jun
-04
Jun
-05
Jun
-06
Jun
-07
Jun
-08
Jun
-09
Jun
-10
Jun
-11
Jun
-12
Jun
-13
Jun
-14
Jun
-15
Jun
-16
Jun
-17
Jun
-18
Jun
-19
Nifty Trailing 12M PE ratio
0
5
10
15
20
25Nifty 1 Year Forward PE ratio
Significant expansion in valuations post the GFC across the world
460 459
620
734
400
500
600
700
800
FY18 EPS FY19 EPS FY20E EPS FY21E EPS
Nifty EPS
-0.3%
35.3%
18.3%
Source: Bloomberg; All data are as of 22nd July 2019
0
5
10
15
20
25
30Nifty 1 Year Forward PE ratio
Nifty Midcap 100 One Year Forward PE ratio
Confidential | 8
Flows: Multi Cap & Large Cap Funds did see strong inflows during June; Equity
inflows on a whole picked up pace post the election results
FPI Flows: Foreign investor flows have been strong over the last few months. So far in CY2019, the FPI inflows into Equity have been to the tune of INR 78,647 crores
Domestic Flows: For last 7 Months (except March), inflows into Equity Mutual Funds have been negative if we exclude SIPs. Multi Cap & Large Cap Funds saw decent inflows in June with their contribution being ~44% of the total Net Equity Inflows in comparison to ~14% in May
INR Cr
Note: Net Equity Inflows includes Open & Closed Ended Equity Funds including ELSS excluding ETFs
13781
-11423
11654
-5552-10060
-4831
2264 1775
-10825
-28921
5981 3143
-4262
17220
33981
21193
79202596
-40000
-30000
-20000
-10000
0
10000
20000
30000
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 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19
FPI Equity Inflows (INR Crs)
11171 113509660 9452
8375
1117212622
8414
6606 61585122
11756
42294968
75856690 7304 7554 7554 7658 7727 7985 7985 8022 8064 8095 8055 8238 8183 8122
0
5000
10000
15000
Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19
Net Equity Inflows SIP Flows
Source: NSE, AMFI; All data are as of 30th June 2019
Confidential | 9
India’s Industrial Production : Industrial Output increased by 3.1% in
May mainly on account of improvement in power generation
Macro Indicators: GDP growth slowed in March quarter; manufacturing activity softened a bit in June while services continued to slip
Real GDP growth Rate : Q4 GDP grew at a 5 year low of 5.8%;
GDP growth rate for FY19 is 6.8%
India Manufacturing PMI : Growth was led by consumer goods;
Capital goods did not see any see any significant rise in output
Services PMI : Survey participants blamed unfavourable taxation* &
increased compliance cost in the GST era for the contraction in
activities
7
6
6.8
7.7
8.1 8
7
6.6
5.8
5
6
7
8
9
Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19
Real GDP Growth Rate%
51.651.2
53.1
52.3
51.7
52.2
53.1
54
53.2
53.954.3
52.6
51.8
52.7
52.1
49
50
51
52
53
54
55India Manufacturing PMI
51.4
49.6
52.6
54.2
51.550.9
52.2
53.753.2
52.2 52.552
5150.2
49.6
47
48
49
50
51
52
53
54
55India Services PMI
*Under GST, services are taxed at 18%, higher than 15% levied earlier
3.09%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
Jan
-18
Feb
-18
Mar
-18
Ap
r-1
8
May
-18
Jun
-18
Jul-
18
Au
g-1
8
Sep
-18
Oct
-18
No
v-1
8
De
c-1
8
Jan
-19
Feb
-19
Mar
-19
Ap
r-1
9
May
-19
IIP YoY%
Source: NSE, AMFI; All data are as of 30th June 2019
Confidential | 10
Passenger Vehicles Domestic: Car market; primarily driven by urban
disposable income, is indicating severe stress in job & loan finance market
Domestic Highlights: CPI rose due to increase in food prices; core CPI continued to moderate | Govt. missed the tax collections target for FY19 by over 1 lac crores
CPI Inflation : CPI Inflation hit eight-month high at 3.18% in June mainly
due to rise in food prices; core CPI continued to remain subdued
Two Wheelers Domestic :Higher insurance costs & lack of liquidity due to the NBFC
situation have driven the slowdown in two-wheelers
13 months 12 months 7 months
Source: NSE, AMFI, Bloomberg; All data are as of 30th June 2019
999.36
Apr18
May18
Jun18
Jul 18 Aug18
Sep18
Oct18
Nov18
Dec18
Jan19
Feb19
Mar19
Apr19
May19
Jun19
900
920
940
960
980
1000
1020
1040
1060
1080
1100
1120
1140GST Collections (Rs Bn)
GST collections: The collections have come below INR 1 lac crores in
the month of June
3.18
4.33
2.21
0
1
2
3
4
5
6
Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18 Nov-18 Feb-19 May-19
CPI Inflation % CPI Inflation (Urban) CPI Inflation (Rural)
-40.0%
-20.0%
0.0%
20.0%
40.0%
60.0%
80.0% Domestic Passenger Vehicles Sales YoY%
17 months12 months
-40.0%
-20.0%
0.0%
20.0%
40.0%
60.0%
80.0% Domestic Two-Wheeler Sales YoY%
Confidential | 11
Global Macro: US treasury yields price-in rate cuts from the Fed in response to a slowing economy
US FOMC Dots Median of the Longer Run Projections: This data is taken from the Projection Materials, released at the end of every FOMC meeting
US Treasury Yields: Bond markets are anticipating a significant slowdown in US growth and price in rate cuts by the Fed
US CPI: Core CPI at 2.1% YoY in June was more than expectations; reduces the chance of a 50 bps rate cut by Fed
US GDP Growth rate: US GDP grew at a faster face than expected in the first quarter; expectation was 2.5%
Median of the FOMC’s projections for the Federal Reserve’s target overnight rate over their longer term
0
1
2
3
4
5
Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19
US 10 Yr Govt. Bond Yield
More than 100 bps fall since it made its high in Oct’2018
2.5
2.00
2.50
3.00
3.50
4.00
Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19
US FOMC Dots Median of the Longer Run Projections
-1.00
0.00
1.00
2.00
3.00
4.00
Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19
US CPI YoY%
Source: Bloomberg; All data are as of 30th June 2019
3.10
0.00
1.00
2.00
3.00
4.00
5.00
Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19
United States GDP YoY%
Confidential | 12
Global Macro: China’s GDP grew at the weakest pace in past 27 years; ECB and BOJ assets continues to expand
ECB Assets:The European Central Bank continues to maintain an accommodative monetary policy given the continued weak growth
China GDP Growth: China’s GDP grew at a faster pace than expected in the first quarter; expectation was 6.3%
US Fed Assets: US will slow the slimming of the Balance Sheet by September which should help in stimulating the economy by injecting liquidity
Bank of Japan Assets:BOJ has been in the realm of unconventional monetary policy since 1999 and has expanded its ETF purchases repeatedly
6.2
5.80
6.20
6.60
7.00
7.40
Mar
-15
Jun
-15
Sep
-15
De
c-1
5
Mar
-16
Jun
-16
Sep
-16
De
c-1
6
Mar
-17
Jun
-17
Sep
-17
De
c-1
7
Mar
-18
Jun
-18
Sep
-18
De
c-1
8
Mar
-19
Jun
-19
China GDP YoY%
4693
0
1000
2000
3000
4000
5000ECB Assets (Euro Bns)
Source: Bloomberg; All data are as of 30th June 2019
0
1000000
2000000
3000000
4000000
5000000 US Fed Assets (USD Mns)
0
100000
200000
300000
400000
500000
600000 Bank of Japan Assets (JPY Bns)
Confidential | 13
10,199
10,494
10,935
11,377
9000
9500
10000
10500
11000
11500
12000
12500
13000
Jul '19 Sep '19 Dec '19 Mar '20
Current Nifty level(11,350)
10.1% Downside(Immediate)
Equity allocation of INR 100 Jul-19 Aug-19 Sep-19 Oct-19 Total
• Staggered deployment of INR 90• Hold INR 10 in cash; deployment basis market level & outlook
22.5 22.5 22.5 22.5 90.00
Risk-Reward ratio unfavourable at current Nifty level, and there is concern on the strength of earnings recovery with domestic weakness expected to continue over 1-2 quarters, we therefore continue to maintain “10% Underweight” stance on equities
9.9% Upside(By Mar 20)
Equity Deployment Strategy10% underweight on equities to hold in cash, 90% to be deployed in staggered manner
Confidential | 14
India Equities: Valuations & Strategy – 10% Underweight Stance Continues
Indian markets touched all time highs at the start of June, however it gave up all its gains post budget in July. Last month, Indianmarkets had outperformed global markets post the decisive mandate to the NDA government, however most of these gains havebeen washed out post the budget. Some uncertainty regarding FPI taxation seems to have spooked market participants.
On the global front, post the G20 summit, US and China agreed to keep trade war from escalating and restart trade negotiations.The US Fed left interest rates on hold and signaled a rate cut in the near future.
Midcap stocks have continued to under-perform large caps. The high valuations came off a bit and the earnings outlook for someof these companies have also weakened given the muted commentary on quarterly results. While the domestic weakness couldcontinue for the next two quarters or longer, the fact that these realities are getting reflected in stock prices makes the currentmarket conditions less risky. In contrast, prior to elections markets were largely ignoring signs of a slowdown and expecting ampleliquidity and stimulus to support prices.
With the General Elections & Budget behind us now, crude prices, consumption slump along with global growth concerns takefront seat now. Therefore we maintain our stance of “10% Underweight” on equities. For fresh corpus, we recommendstaggering 90% deployment in next 4 months while keeping 10% as dry powder for deploying opportunistically.
Mutual Funds: As domestic liquidity continues to drive markets, we advise new investments to be staggered in Mutual Funds viaSIPs/STPs.Recommended allocation within equity mutual funds is as under:
• 50% Large Cap allocation
• 50% Multi Cap allocation (such funds currently have a bias toward large cap)
• 5%-10% Mid Cap allocation (only for Moderate, Growth and Aggressive risk profiles)
• For investors who want equity exposure but have low appetite for volatility, they can take equity exposure throughAggressive Hybrid Funds. Such funds have around 25% to 30% of their portfolio into Debt instruments which providescushion to the portfolio return during market volatility.
Source: EPS Estimates by KIE
Confidential | 15
Recommended Equity Funds’ Performances
Source: MFI ExplorerReturns are CAGR as on July 23, 2019 and for Regular Plans with Growth option. Corpus size is as on July, 2019.
Scheme Name Corpus (In crs.) 1 Year 3 Years 5 Years Investor Suitability
Large Cap Funds
Aditya Birla Sun Life Frontline Equity Fund 21,664 0.44 7.71 9.32 All Risk Profiles except Secure
Axis Bluechip Fund 6,303 1.16 12.88 10.89 All Risk Profiles except Secure
HDFC Top 100 Fund 17,912 10.53 11.54 9.40 All Risk Profiles except Secure
ICICI Prudential Bluechip Fund 22,117 3.13 9.93 10.02 All Risk Profiles except Secure
Mirae Asset Large Cap Fund 13,618 6.08 12.60 13.12 All Risk Profiles except Secure
UTI Nifty Next 50 Index Fund 395 -5.32 - - All Risk Profiles except Secure
Large & Mid Cap Funds
IDFC Core Equity Fund 2,970 -2.86 8.22 9.60 All Risk Profiles except Secure
Invesco India Growth Opportunities Fund 1,539 -2.68 10.57 11.21 All Risk Profiles except Secure
Multi Cap Funds (Multi Cap/ Value/ Focused/ Dividend Yield/ Contra)
Axis Focused 25 Fund 8,044 -6.40 12.70 12.82 All Risk Profiles except Secure
HDFC Equity Fund 23,688 10.02 11.38 9.23 All Risk Profiles except Secure
Kotak Standard Multicap Fund 25,845 2.58 11.15 13.67 All Risk Profiles except Secure
Mid & Small Cap Funds (Mid Cap/Small Cap)
HDFC Small Cap Fund 8,427 -7.51 10.96 13.18 All Risk Profiles except Secure
Kotak Emerging Equity Scheme 4,501 -3.02 7.34 14.21 All Risk Profiles except Secure
L&T Midcap Fund 5,026 -9.30 8.80 13.35 All Risk Profiles except Secure
Thematic/Sectoral Funds
Sundaram Rural and Consumption Fund 2,251 -6.45 6.89 12.60 All Risk Profiles except Secure
Sundaram Services Fund 1,217 - - - All Risk Profiles except Secure
Solution Oriented - Retirement Funds
Tata Retirement Savings Fund - Moderate Plan 1,092 -3.91 9.41 12.49 All Risk Profiles except Secure
Solution Oriented - Children's Funds
HDFC Children’s Gift Fund 2,840 2.44 9.63 10.45 All Risk Profiles except Secure
ICICI Prudential Child Care Fund (Gift Plan) 645 4.22 7.52 8.45 All Risk Profiles except Secure
Indices
Nifty 2.22 9.87 7.76
Confidential | 16
Recommended Hybrid Funds’ Performances
Scheme Name Corpus (In crs.) 1 Year 3 Years 5 Years Investor Suitability
Aggressive Hybrid Funds
Aditya Birla Sun Life Equity Hybrid '95 12,663 -1.67 5.85 9.22 All Risk Profiles except Secure
L&T Hybrid Equity Fund 9,044 -1.48 6.78 10.10 All Risk Profiles except Secure
Reliance Equity Hybrid Fund 10,833 -2.56 6.82 8.84 All Risk Profiles except Secure
SBI Equity Hybrid Fund 29,832 6.75 9.73 11.24 All Risk Profiles except Secure
Balanced Advantage Funds (Balanced Advantage OR Dynamic Asset Allocation)
ICICI Prudential Balanced Advantage Fund 28,709 5.74 8.10 9.41 All Risk Profiles except Secure
Kotak Balanced Advantage Fund 2,879 - - - All Risk Profiles except Secure
Indices
Nifty 2.22 9.87 7.76
Source: MFI ExplorerReturns are CAGR as on July 23, 2019 and for Regular Plans with Growth option. Corpus size is as on July, 2019.
Debt Market Update &
Debt MF Strategy
Confidential | 18
Indicators
Policy Expectation
• With growth in Q4FY19 moderating to 5Y low, inflation inJune continuing to remain below estimates andgovernment maintaining fiscal prudence in budget; thereis case for 25bps rate cut in August
• Market expectations of repo rate trajectory reflected by1Y OIS (currently at 5.41%) also indicate it pricing in atleast 25 bps cut
Inflation
• CPI inflation rose to 3.18% in June from 3.05% in May continuing to remain below estimates
• RBI’s inflation estimates stands at 3.0-3.1% for 1HFY20 and at 3.5-3.8% 2HFY20
• Risks remain broadly balanced as reducing core inflation and rising food inflation trajectory expected to converge in near term
• INR currently at 68.8/$ (up from ~69.7/$ in June end); has been buoyed by debt flows from FPI
• Near term moves likely to be volatile with global liquidity attracted to debt markets while risk sentiments weighed down by global growth concerns & FPI reaction to higher surcharge introduced in budget
Corporate and G-Sec Benchmark Yield• 10Y G-sec (now at 6.36%) rallied 50+ bps since June
end• 10Y segment has outperformed related to all other
parts of the curve. Partial profit booking and reversal likely. Likely to consolidate.
Liquidity• Banking system liquidity has improved significantly with
average levels now near INR 1.5L Cr• Govt using external borrowing (INR 0.7L Cr) has helped
reduce supply pressure causing the recent rally
INR
G-Sec Supply• Govt borrowings unchanged at INR 7.1L Cr (gross) and
INR 4.73L Cr (net) drove away apprehension on incremental borrowing
• Announcement to partly use offshore route (10% of gross borrowing) reduced concerns on supply
Debt Market: Key Variables
Source: Bloomberg, KIE
Global Trends• US 10Y stands at 2.047% below 3M yields at 2.051% with
increasing expectations of rate cuts by the Fed• Globally interest rates have fallen due to concerns of
slowdown; aggregate negative yielding debt increased from $11.01 to $13.05 Tn in 1 month; leading to incremental debt flows to EMs
Fiscal Policy• Government adhered to fiscal consolidation by lowering
fiscal deficit target to 3.3% against market expectations of 3.4%+
Confidential | 19
Global yields soften across the curve; negative yields helped flows in EMs leading to sharp rally
Note: As of 19th June 2019, Source: Bloomberg
Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19
7.00
8.00
9.00
10.00
11.00
12.00
13.00
14.00Aggregate Negative Yielding Debt ($ Tn)
Aggregate negative yielding debt has increased sharply in
FYTD20 from ~$10 tn to $13 tn
99
4740
56
154
IndiaIndonesiaKoreaThailandBrazil
0
20
40
60
80
100
120
140
160
180
Bp
s
India
Flows to EM increased with sharp rally in 10Y curve across
countries since April 2019
2.051 2.047
1.50
1.70
1.90
2.10
2.30
2.50
2.70
2.90
3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 30Y
% Y
ield
US Treasury (Current Yields)
US Treasury (3M earlier)
US 10Y yields below 3M as expectations of rate cut in July policy
strengthened with Fed officials indicating accommodative policy
ItalySpainFranceJapanGermanySwitzerland
Globally yields continued to fall with several points of yield curve
in negative territory (shown in blue below) in Europe & Japan
6M1Y2Y3Y4Y5Y6Y7Y8Y9Y
10Y15Y30Y
Fall in 10Y yields since April 2019
Confidential | 20
With GDP growth slowing, inflation continuing to remain benign Government sticks to fiscal numbers
3.183.10E3.50E
4.09
2.37
Jun18
Jul18
Aug18
Sep18
Oct18
Nov18
Dec18
Jan19
Feb19
Mar19
Apr19
May19
Jun19
Sep19
Mar20
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00CPI (YoY%) Core Inflation Food Inflation
Core inflation continued to moderate for 8th straight month
owing to weak demand; food inflation rose from 2.03% to 2.37%
Note: As of 19th July 2019, Source: Bloomberg, PTI
7.2E
6.7E
5.8
6.67.0
8.07.77.7
Mar 20Sep 19Mar 19Dec 18Sep 18Jun 18Mar 18Dec 17
4.00
5.00
6.00
7.00
8.00
9.00 Real GDP Growth Rate (% YoY)
India’s GDP growth moderated to 5.8% in Q4FY19 while FY19
GDP growth rate was 6.8%
4.6
4.13.9
3.5 3.53.3 3.3E
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
2014 2015 2016 2017 2018 2019 2020
Fiscal consolidation maintained in budget with target at 3.3%
against market expectations of 3.4%+
7.59
6.88
6.36
6.00
6.20
6.40
6.60
6.80
7.00
7.20
7.40
7.60
7.80
8.00
Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19
% Y
ield
10Y G-sec yields
10Y G-sec rallied as govt. gave comfort on supply – demand
dynamics with fiscal at 3.3% & partially borrowing through offshore
Confidential | 21
Liquidity in Debt markets improved with FPI flows turning positiveRBI OMOs and offshore borrowing supports liquidity
14.7
19.2
27.2 27.8
33.035.6 36.9
China India South Korea Russia Thailand Brazil Indonesia
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00 External Debt (% of GDP)
India’s external debt to GDP ratio is among the lowest globally;
offshore funding of Govt borrowing to help debt markets
2,521
-6,745
22,987
-6,529
7,560
CYTD2019CY2018CY2017CY2016CY2015
-10,000
-5,000
0
5,000
10,000
15,000
20,000
25,000
US
D M
illi
on
FII flows have turned positive to Indian debt markets in
CYTD19
1498.74
-1000
0
1000
2000
17-Jun 27-Jun 7-Jul 17-JulAm
ou
nt
in R
s. B
n
Banking system liquidity improved significantly from negative in
the past 3-6 months to now at a comfortable surplus of INR 1.5L Cr
10,000
20,000
20,000
36,000
52,000
50,000
50,000
37,500
60,000
35,000
25,000
12,500
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
May18
Jun18
Sep18
Oct18
Nov18
Dec18
Jan19
Feb19
Mar19
Apr19
May19
Jun19
RBI has infused INR 87,500 Cr till date in FY20 through
USD/INR swaps and OMOs
Rs cr
Note: As of 19th June 2019, Source: Bloomberg, RBI
Confidential | 22Note: As of 19th June 2019, Source: Bloomberg, RBI
7.63
5.75
Ju
l 19
Ju
n 1
9
Ap
r 19
Ma
r 19
Fe
b 1
9
Dec 1
8
No
v 1
8
Oct
18
Au
g 1
8
Ju
l 18
Ju
n 1
8
Ap
r 18
Ma
r 18
Jan
18
Dec 1
7
No
v 1
7
Oct
17
Au
g 1
7
Ju
l 17
Ju
n 1
7
Ma
y 1
7
Ma
r 17
Fe
b 1
7
Jan
17
5.00
5.50
6.00
6.50
7.00
7.50
8.00
8.50
9.00
9.501 Yr CP Repo
With yields coming off across the curve; 1Y CPs continued to
look attractive with spread of 188 bps over repo
GST collections slowing is a concern to fiscal targets; Oil prices have been volatile in FYTD20 though remaining range bound this month
834,733
185,007 111,540
38,970
670,167
185,057
106,919 38,578
Liquid Funds Short Term Funds Credit Funds Gilt / DynamicFunds
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
INR
Cro
res
May-19 Jun-19
Short term funds’ AUM remained flat while credit funds saw
~5k Cr outflows
999.36
Apr18
May18
Jun18
Jul18
Aug18
Sep18
Oct18
Nov18
Dec18
Jan19
Feb19
Mar19
Apr19
May19
Jun19
900
950
1000
1050
1100
1150 GST Collections (Rs Bn)
GST collections in April reached all-time high, increasing
hopes of meeting FY20 expectations
Rs bn
62.18
Jul 19Jun 19May 19Apr 19
58
60
62
64
66
68
70
72
74
76 Brent Oil ($/bbl)
Oil prices have been in $62-67/bbl in July due to global slowdown;
however risks remain with escalating crisis in Middle East
Confidential | 23
Debt Funds Performance – Last 1 YearStrong performance shown by long end strategies on back of sharp fall in yieldsCredit risk funds weighed down by downgrades and defaults
7.3
7
7.2
7
6.5
9
9.0
2
5.9
6
10
.45
14
.94
LIQ
UID
F
UN
DS
ULT
RA
S
HO
RT
/LO
W
DU
RA
TI
ON
…
AR
BIT
RA
GE
F
UN
DS
SH
OR
T
TE
RM
F
UN
DS
ME
DIU
M A
ND
C
RE
DIT
R
ISK
F
UN
DS
DY
NA
MIC
F
UN
DS
GIL
T
FU
ND
S
PERFORMANCE COMPARISON
Note: As of 17th June 2019, Source: MFI
Confidential | 24
24
Tenors G-Sec AAA - PSU AAA- Corp AA+ AA AA- A+
3M 5.76 6.45 6.70 6.94 7.21 7.64 8.09
6M 5.81 6.59 6.83 7.07 7.35 7.78 8.23
1Y 5.84 6.92 7.27 7.44 7.71 7.91 8.36
3Y 6.24 7.01 7.47 7.70 7.96 8.06 8.51
5Y 6.33 7.25 7.74 7.85 8.08 8.16 8.61
7Y 6.48 7.39 7.81 7.96 8.19 8.18 8.63
10Y 6.36 7.35 7.89 8.02 8.27 8.21 8.66
15Y 6.75 7.36 8.11 8.11 8.44 8.23 8.68
Credit SpreadsWhile yields have come off sharply, benign rate environment holds good for high quality short end bonds
Note: As of 19th July 2019, Source: Bloomberg
Confidential | 25
India Fixed Income: Strategy
With growth in Q4FY19 moderating to 5Y low, inflation in June continuing to remain below estimates and government maintaining fiscal prudence in budget; the case for 25bps rate cut in August policy has strengthened.
G-sec demand – supply apprehensions have reduced with borrowing remaining unchanged and announcement of partially routing (~10% of gross) them through the external borrowing
Risks: Global risk-off environment, crude prices, fiscal slippage, sharp unfavourable currency movement, call-off of sovereign bond issue
We reiterate that the current environment calls for a “caution” in credit space. Therefore we suggest no allocation to “Credit Funds” and predominate allocation to AAA oriented funds.
Investment Focus: We recommend to maintain overweight on short/medium term strategies. Remain high quality focused. 1 to 5 year corporate bonds, most
preferred.
Best played through roll-down strategies or 3 year high quality Fixed Maturity Plans (FMPs). Also selective allocation to active short term funds is advised.
Clients with a long investment horizon of at least 10 years, may look to lock in yields in high quality 10 Year roll down or hold to maturity (HTM) funds.
Source : AMCs, other Financial websites
Confidential | 26
Recommended Debt Funds’ Performances
Scheme NameCorpus (In
crs.)6m 1Yr 2Yr Investor Suitability
Short Term 1-3 yrs (Corporate Bond/ Banking & PSU/Short Duration)
Tier IAditya Birla Sun Life Corporate Bond Fund 15,662 10.94 10.15 7.50 All Risk Profiles except SecureHDFC Short Term Debt Fund 7,992 10.02 9.17 7.34 All Risk Profiles except SecureICICI Prudential Banking & PSU Debt Fund 5,930 11.88 9.45 6.48 All Risk Profiles except SecureICICI Prudential Short Term Fund 8,680 10.28 8.97 6.42 All Risk Profiles except Secure
Tier IIAxis Banking & PSU Debt Fund 6,530 11.12 10.44 8.21 All Risk ProfilesIDFC Banking & PSU Debt Fund 6,718 12.41 11.26 7.87 All Risk ProfilesL&T Triple Ace Bond Fund 1,197 19.17 13.80 8.11 All Risk ProfilesL&T Banking and PSU Debt Fund 785 9.64 8.50 6.57 All Risk ProfilesSundaram Corporate Bond Fund 662 12.33 10.65 6.16 All Risk Profiles
Dynamic Debt (Medium to Long Duration/ Dynamic Bond/Gilt)Tier I
ICICI Prudential All Seasons Bond Fund 2,750 12.54 10.14 6.10 All Risk Profiles except SecureReliance Gilt Securities Fund 1,040 20.43 16.37 7.83 All Risk Profiles except SecureSBI Magnum Gilt Fund 1,524 22.80 15.62 6.93 All Risk Profiles except Secure
Tier II
Aditya Birla Sun Life Active Debt Multi Manager FoF Scheme 11 8.14 5.08 6.72 All Risk Profiles except SecureICICI Prudential Bond Fund 3,279 12.46 10.24 5.93 All Risk Profiles
Source: MFI ExplorerReturns are CAGR as on July 23, 2019 and for Regular Plans with Growth option. Corpus size is as on June, 2019.
Confidential | 27
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