HDFC Bank Research Presentation November 2019 · Bharatiya BharatiyaJanata Party 105 Shiv Sena...
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______________________________________________________________________ 1 HDFC Bank Research Presentation November 2019
Transcript of HDFC Bank Research Presentation November 2019 · Bharatiya BharatiyaJanata Party 105 Shiv Sena...
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HDFC Bank Research
Presentation
November 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, above normal monsoons and better 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 cap funds can begin with a longer horizon (12-15 months). The equity investment strategy
continues to remain at 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 Funds can be considered
for a horizon of 3 months and above.
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Research Presentation – Contents September
Indian markets touched new all-time high levels on intra-day basis… owing to reform agenda bringing positivity to domestic markets and steady inflow from FPIs and DIIs
Government’s reform agenda was good… Recent hike in dearness allowance likely to keep momentum going
State assembly elections continued to see single largest party emerging …
Benefits of Govt’s relentless focus on reforms reflected in World Bank’s ease of doing business ranking for India …
While Kharif sowing saw sharp improvement, higher MSP for Rabi crop may bring rural growth and help in reviving rural demand
Recent tax rate cut may drive investment led demand and exports in India
Q2FY20 earnings higher than market expectation owing to lower tax rate …
Barring unforeseen global events, valuations look reasonable as we move towards FY21… demand revival could lead larger up move
However, global economy continues to remain in slow growth trajectory…with Multilateral agencies continue to cut global growth forecast
Meanwhile some positivity has emerged on US-China trade negotiations and Brexit …
In commodities, industrial commodity prices continue to remain steady…Brent crude oil prices have also come off post the spike seen in mid-Sept
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 October 2019
Status of key macro variables …
Market Round Up – October 2019
Market Outlook
Fixed Income
G-sec yields traded in a range in October 2019…
RBI cuts key policy interest rates by 25 bps…RBI also maintained its accommodative policy stance
CPI Inflation rises to 14 months high…Core CPI inflation and WPI inflation continued with declining trend
Fiscal deficit touched ~93% of budgeted target for FY20...
Some other macro-economic variables remained steady…
Liquidity surplus rose in October 2019…
Short Term rates continued to decline tracking surplus liquidity and Repo rate cut by the RBI…
Bond spreads – An Update
G-sec yield curve continued to steepen in October 2019…Yields declined across the yield curve
Fixed Income Outlook
Investment Strategy
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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
other reforms targeted to alleviate sectoral concerns led to
positive FPI flows for second consecutive month, which
helped key indices to move to all-time high levels on
intraday basis.
DIIs continued with steady buying, which has also helped
markets to move higher during the month.
Indian markets touched new all-time high levels on intra-day basis… owing to reform
agenda bringing positivity to domestic markets and steady inflow from FPIs and DIIs
Sensex touched an all time high levels of 40392 in Oct 2019… … FPI inflow continued for second consecutive month
DIIs continued steady buying in the domestic market…
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Source: Capitaline
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Trend in Domestic Institutional Investors flow (Rs in Bn)
Source: SEBI, Data as on 30 October 2019
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Foreign Portfolio Investment flow trend (Rs in Bn)
Source: NSDL, Data as on 30 October 2019
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Government’s reform agenda was good…
Recent hike in dearness allowance likely to keep momentum going
Government has taken a series of reforms in recent past in order to revive growth momentum. Some of the reforms
announcements are as follows
To increase global competitiveness, the government reduced corporate tax rates for existing domestic companies to 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%
To promote manufacturing, lower tax rate of 15% was announced, if the unit is 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
To stabilize flow of funds into capital markets, it removed enhanced surcharge on capital gains arising on equity sale or
equity-oriented funds liable to Securities Transaction Tax (STT).
To alleviate concern of auto sector, it deferred the decision of revision of one-time registration fees till June 2020 and also
provided additional 15% depreciation on all vehicles acquired during the period from now till March 31, 2020
To improve liquidity scenario, government decided to upfront release of Rs.700 bn capital to Public Sector Banks (PSBs), to
provide additional liquidity support of Rs.200 bn to Housing Finance Companies (HFCs) by National Housing Bank (NHB) and
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 and decision of the
IAC and bank Chief Vigilance Officer (CVO)/ DA to be treated as final.
To support growth of PSU banks, government announced merger of 10 PSU banks into four banks
To help Medium, Small and Micro Enterprises (MSMEs), government had directed to clear pending refund in a stipulated time
frame and future GST refunds shall be paid within 60 days from the date of application. In addition, government announced
single air and water clearance and single consent requirement for establishing a factory by MSMEs
To boost consumption demand, recently, the Union Cabinet raised dearness allowance by 5% in a move that will benefit
~5.0 mn government employees and ~6.5 mn pensioners.
While some early signs from festive demand indicates that benefits from recent reform agenda have started taking place,
recently announced hike in dearness allowance for government employees is likely to support buying momentum to
continue going ahead.
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State assembly elections continued to see single largest party emerging …
The recent State assembly election continued to see the trend of emergence of single largest party.
The outcome of these election may boost the morale of the government at the center, which came out as
single largest party in both states, to continue with its reform agenda.
The process of implementing any reform, which require both Lok Sabha and Rajya Sabha approval, may
expedite as they won the highest seats in these two states.
Maharashtra (Seat: 288) 2019
Bharatiya Janata Party 105
Shiv Sena 56
Nationalist Congress Party 54
Indian National Congress 44
Others 29
Haryana (Seat: 90) 2019
Bharatiya Janata Party 40
Indian National Congress 31
Jannayak Janta Party 10
Indian National Lok Dal 1
Others 8
Sources: Election commission, Media Reports
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Benefits of Govt’s relentless focus on reforms reflected in World Bank’s ease
of doing business ranking for India …
According to the World Bank’s Ease of Doing Business 2020 report, India
climbed another 14 places in the World Bank’s ease of doing business index
to 63rd place.
India had breached the 100th mark two years ago, jumping 30 places from
the 130th position. Last year, it gained 23 places to reach 77th, among a total
of 190 countries.
In the latest report, India managed to better its ranking on seven of the World
Bank's 10 parameters, compared to six last year. As a result, the country has
been placed in the list of 'economies with the most notable improvement' for
the third year in a row.
The biggest gain was in resolving insolvency where India climbed 56 ranks to
52nd place.
In 'Dealing with Construction Permits', where it jumped by a massive 129
places in the previous year, India has managed to continue improving and
now ranked 27th place.
The country's third best improvement was in 'Trading across borders', where
it rose 12 places to come in at the 68th spot.
However, the World Bank has observed that the country needs to do more in
areas such as enforcing contracts and registering property where it’s a
laggard at 163rd and 154th globally.
As per Commerce and industry minister, Piyush Goyal, the government
will closely work with the states to make it easier to start business,
ensure contracts are properly executed and respected, and empower
businesses with a stable policy and regulatory regime in order to reach
the top-50 ranks and targets to break into top-25 by 2024-25.
2019 63
2018 77
2017 100
2016 130
2015 131
2014 142
2013 134
Source: World bank, Media Reports
World Bank's Ease of Doing business Rankings for India
Ease of Doing business in India 2019 2018 Improvement
Construction Permits 27 52 25
Cross Border Trade 68 80 12
Resolving Insolvency 52 108 56
Getting Electricity 22 24 2
Registering Property 154 166 12
Paying Taxes 115 121 6
Source: World bank, Media Reports
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From a delayed onset of monsoon to a 10% above normal monsoon rainfall at the close of a season, 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 October 25, water levels in 120 major reservoirs of the country was 151.68 bn cubic
metres (BCM), which is 127% of both, the live storage of corresponding period of last year and also storage of average of last ten
years, which would be helpful in the sowing of Rabi crops.
The Cabinet Committee on Economic Affairs (CCEA) has approved 4-7% increase in the Minimum Support Prices (MSPs)
for Rabi Crops in Rabi Marketing Season (RMS) 2020-21.
Above normal monsoon rainfall and improvement in Kharif sowing are potential signs of recovery in rural demand.
Moreover, while higher reservoirs water levels augurs well for Rabi crop sowing, increase in MSP for Rabi crop may help
in reviving rural growth, which in turn may give further impetus to recovery in consumption demand.
While Kharif sowing saw sharp improvement, higher MSP for Rabi crop may
bring 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
CropMSP for
2020-21
MSP for
2019-20Growth (%)
Wheat 1925 1840 4.6
Barley 1525 1440 5.9
Gram 4875 4620 5.5
Lentil 4800 4475 7.3
Rapeseed & Mustard 4425 4200 5.4
Safflower 5215 4945 5.5
MSP for Rabi Crop
Source: PIB
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Recent tax rate cut may drive investment led demand and exports in
India
India's headline corporate tax rate at 30% (old) was among the highest in South Asia and ASEAN, which was making it
uncompetitive when it comes to attracting foreign investments.
However, the recent announcement on the reduction in corporate tax rate for existing companies to 22% and higher cut in
tax rates for new manufacturing companies (to 15%) is 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, which would further boost the investment led demand and thereby India’s GDP
growth.
In addition to expected improvement in investment demand, India may also witness improvement in exports.
Currently, India is having total exports of USD 330 bn (FY19), which is likely to see a huge surge even if a small
portion of China’s exports (USD 2.48 trillion in 2018) moves to India and which in turn may boost the overall
economic growth in India.
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China (CY18) India (FY19)
Exports comparison between China and India (USD in Bn.)
Source: Media Reports
30%28%
25% 25% 25% 25%24% 23.2%
22%20% 20% 20% 20%
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Corporate Tax rate of various economies post India's
recent tax cut announcement
Source: Media Reports
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Q2FY20 earnings higher than market expectation owing to lower tax rate …
The Q2FY20 aggregate corporate earnings announced so far were higher than expectations mainly due to lower tax provision.
The net sales of 83 companies in CNX 200 index grew by 2.4% YoY. However, lower commodity prices and cost cutting initiative by some of the
corporates helped in reported EBITDA growth of 7.9% YoY. Lower tax provision has largely helped companies in CNX 200 index to report a 12.7%
YoY growth in Reported PAT.
While the Auto Sector topline declined due to subdued demand environment and weak sentiments, most of automobile manufacturing companies
have indicated that demand during festive season was upbeat and are hopeful of further improvement going ahead. Metal companies also reported
a decline in topline owing to subdued commodity prices. FMCG companies witnessed steady volume growth and indicated that the rural demand
was lower as compared to urban demand.
We believe the first part of earning season was encouraging, but a clearer picture would emerge as more companies report their quarterly
earnings. Moreover, management commentary indicates improvement in consumption demand, however, sustainability of the same in the
backdrop of above-normal monsoon rainfall, hike in MSP for Rabi crops, 135 bps reduction in interest rate by RBI in CY19 and recent
measures by the government would be key levers for further improvement going ahead.
Q2FY20 Q1FY20 Q2FY19 Q2FY20 Q1FY20 Q2FY19 Q2FY20 Q1FY20 Q2FY19
Air Transport Service 31.0 44.7 16.9 (98.0) (22894.9) (236.1) 63.4 4219.8 (218.2)
Auto & Auto Anc (12.6) (7.8) 3.9 (8.1) (28.1) (20.9) 4.4 (93.1) (50.9)
BFSI 18.3 19.5 16.3 17.6 38.2 33.6 34.3 115.2 10.5
Capital Goods (15.7) (2.1) 57.1 (63.0) (48.0) 196.7 (52.1) (49.3) 200.8
Cement & Pdts 4.2 12.7 20.9 40.8 45.9 (5.7) 74.2 57.4 (19.5)
Chem & Fert 1.8 (1.6) 25.5 11.4 13.9 3.6 25.6 6.6 3.3
FMCG & Retail 7.7 10.0 13.1 13.0 17.6 13.3 30.0 15.9 12.8
Healthcare 9.5 14.1 28.1 24.8 58.4 33.6 10.5 116.5 43.8
Infrastructure 15.2 9.7 16.0 13.4 20.2 18.9 13.3 21.2 22.6
IT 9.2 12.5 18.9 8.1 10.3 18.4 4.6 5.9 13.7
Media & Ent 7.4 13.3 24.9 (30.5) 33.7 37.2 6.9 62.6 (38.2)
Metal & Mining (15.4) (3.5) 15.2 (33.2) (21.0) 19.4 18.3 (34.8) 14.0
Miscellaneous (4.6) 4.5 26.1 (186.4) 3.4 62.0 (195.8) (9.7) 46.8
Oil & Gas (5.8) 11.1 50.7 (6.8) (10.2) 20.4 (3.0) (15.5) 7.5
Realty (17.0) (32.1) 95.1 (28.1) (49.1) 80.7 (35.4) (50.9) 105.0
Telecomm (3.0) 1.7 3.7 17.7 20.5 (2.5) 60.6 39.0 (6.0)
Grand Total 2.4 10.2 24.6 7.9 17.9 20.5 12.7 17.4 3.8Source: Capitaline
YoY Changes in %Net sales EBITDA Reported PAT
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Continued reform agenda, recovery in FPI inflow, steady buying by DIIs and improvement in earnings, post tax rate cut helped markets to move
to all time high levels on intra day basis.
While some positive development also seems to be taking place in global markets, any unforeseen global event may bring jittery in the
domestic markets. Currently, valuations look reasonable as we move towards FY21. The S&P BSE Sensex trading at 17.1x FY21E Bloomberg
consensus EPS of Rs.2350. (S&P BSE Sensex price as on 31.10.2019). 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 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 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 for equity markets.
Barring unforeseen global events, valuations look reasonable as we move towards
FY21… demand revival could lead larger up move.
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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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S&P BSE Sensex & Trailing P/E
S&P BSE Sensex (LHS) P/E (RHS)Source: Capitaline
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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
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However, global economy continues to remain in slow growth trajectory…
…with Multilateral agencies continue to cut global growth forecast
The IMF has cut its CY19 global growth forecast for the fifth consecutive time since July 2018 citing that trade barriers and geopolitical tensions
are eroding the potential for economic expansion.
IMF has highlighted that the GDP releases so far in CY19, together with generally softening inflation, point to weaker-than anticipated global
activity.
As per IMF, a notable feature of the sluggish growth in CY19 is the sharp broad-based slowdown geographically, in manufacturing and global
trade.
On the global trade data, IMF highlighted that in H1CY19, the volume of world trade increased by only 1% YoY, the slowest pace of growth
for any six-month period since CY12.
The IMF in its October 2019 Outlook has forecasted global economy to grow by 3% YoY in CY19 vs earlier forecast of 3.2% YoY (forecasted
in July 2019) and 3.6% YoY growth seen in CY18. For CY20, IMF has cut growth forecast to 3.4% YoY vs its July forecast of 3.5% YoY.
However, on the positive side, IMF said that significant monetary easing seen almost simultaneously across advanced and emerging economies,
including the United States, has helped offset the negative impact of the US-China trade war. But it also warned that the outlook remains
“precarious,” with a further rise in tensions between the world’s two largest economies and the U.K. leaving the European Union without a trade
deal among the potential risks.
We believe, going forward, US-China trade negotiations along with any political uncertainty in the major economies like Euro area
(Brexit) and Middle East are likely to be the key determinants for global growth. Apart from these, policies of global central banks’ and
US Fed and ECB’s stance on monetary policy are also likely to direct the global growth.
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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 Oct 2019 World Economic Outlook
Global Activity Indicators – show sharp decline since the start of CY19
Source: IMF Oct 2019 World Economic Outlook
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Global markets saw some positivity emerging during the month of October 2019 on the back of some positive news flow on US and
China trade negotiations and also EU’s decision to extend Brexit deadline allaying concerns of a no-deal Brexit.
On the US-China trade front, US and Chinese officials reportedly said they are "close to finalizing" some parts of a 'phase one' trade
deal after high-level telephone discussions between the representatives of both the countries.
On the positive side, US President Donald Trump said that he expected to sign a significant part of the trade deal with China
ahead of schedule meet between the two countries in November. This was again taken as a positive move by the two nations.
Chinese state-run news agency has also pointed to progress being made on trade, which was also a positive sign.
In the start of October 2019, Trump had agreed to cancel the scheduled, October 15, increase in tariffs on USD 250 bn of Chinese
goods as part of a tentative agreement on agricultural purchases, increased access to China's financial services markets, improved
protections for intellectual property rights and a currency pact.
On the other hand, the move by the EU to grant extension for Brexit until 31 January 2020, has reduced the risk of a damaging no-
deal split of UK and EU.
This has also given UK’s Prime Minister Boris Johnson some more time to try again by a legislative route to win a simple majority to
pass a favourable Brexit deal with EU. For now, the risks related to a no-deal Brexit have diminished which has positively impacted
the global equity markets.
Thus, the two major concerns for the global economy “US and China trade deal” and a “no-deal Brexit” have seen some
positivity emerging. Early indications in the form of three month extension for Brexit and expected signing of Phase 1 deal
on US China trade agreement augurs well for the global economy.
Apart from these, US Fed has cut its policy rate for the third time in CY19 by 25 bps to 1.5-1.75% range in its October
policy meet and has also changed the language of its earlier policy statement of "will act as appropriate" to sustain the
economic expansion to “Committee will continue to monitor the implications of incoming information…” for any further
action. This has also boosted the sentiments further by giving the indication of a stronger than anticipated US economy.
Meanwhile some positivity has emerged on US-China trade negotiations
and Brexit …
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In commodities, industrial commodity prices continue to remain steady…
…Brent crude oil prices have also come off post the spike seen in mid-Sept
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. Post that, prices for most of the industrial metals have remained steady.
However, production curbs by major producer nations on one side and concerns of global growth on other have resulted in prices for
industrial metals sustaining at lower levels.
Brent crude oil prices, saw a sharp rise in Sept’19 following the attacks on Saudi Arabian oil processing facilities – “Saudi Aramco”.
However, after reaching a high of ~USD 65/bbl in mid-September, Brent crude oil prices have come off sharply towards the end of
September, primarily impacted by concerns of global growth and earlier than expected restoration of production capacity by Saudi Aramco.
While, Brent Crude oil prices saw some upmove during the month of Oct’19 from ~USD 58/bbl to ~USD 62/bbl levels on the back of positive
news flow on US China trade deal, third consecutive weeks of higher domestic crude oil production in Oct’19 by the US weigh down on the
crude oil prices.
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 expectation of slowing global growth may direct the industrial metal prices,
going ahead.
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Brent crude oil prices have come off recently after a sharp jump in Sept'19
Source: Bloomberg
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9
Ma
y-1
9
Ma
y-1
9
Jun
-19
Jun
-19
Jul-
19
Jul-
19
Au
g-1
9
Au
g-1
9
Sep
-19
Sep
-19
Oct
-19
Oct
-19
Ind
exe
d t
o 1
00
Industrial metal prices have remained steady in last few months
LME Aluminium LME Copper LME Steel LMEX Index
Source: Bloomberg
______________________________________________________________________
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 1.8% depreciation in CYTD Oct’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
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
9Se
p-1
9
Global Food Price Index
Source: Bloomberg
______________________________________________________________________
17
Large Cap and Midcap valuations have converged
0.0
10.0
20.0
30.0
40.0
50.0Fe
b-0
8
Jul-
08
Dec
-08
Ap
r-09
Sep
-09
Feb
-10
Jun
-10
No
v-10
Ap
r-11
Au
g-11
Jan-
12
Jun
-12
Oct
-12
Mar
-13
Au
g-13
Dec
-13
May
-14
Oct
-14
Feb
-15
Jul-
15
Dec
-15
Ap
r-16
Sep
-16
Feb
-17
Jun
-17
No
v-17
Ap
r-18
Au
g-18
Jan-
19
Jun
-19
Oct
-19
Valuation differential between Large Cap and Midcap Indices converged
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
Feb
-08
Jul-
08
De
c-08
Ap
r-0
9
Sep
-09
Feb
-10
Jun
-10
No
v-1
0
Ap
r-1
1
Au
g-1
1
Jan
-12
Jun
-12
Oct
-12
Ma
r-13
Au
g-1
3
De
c-13
Ma
y-1
4
Oct
-14
Feb
-15
Jul-
15
De
c-15
Ap
r-1
6
Sep
-16
Feb
-17
Jun
-17
No
v-1
7
Ap
r-1
8
Au
g-1
8
Jan
-19
Jun
-19
Oct
-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
Oct
-05
Oct
-06
Oct
-07
Oct
-08
Oct
-09
Oct
-10
Oct
-11
Oct
-12
Oct
-13
Oct
-14
Oct
-15
Oct
-16
Oct
-17
Oct
-18
Oct
-19
Nifty 50: 1-year rolling return (%) for last 15 years
1 YearSource: ICRA Online
-10
0
10
20
30
40
50
60
70
Oct
-05
Oct
-06
Oct
-07
Oct
-08
Oct
-09
Oct
-10
Oct
-11
Oct
-12
Oct
-13
Oct
-14
Oct
-15
Oct
-16
Oct
-17
Oct
-18
Oct
-19
Nifty 50: 3-year rolling return (%) for last 15 years
3 YearsSource: ICRA Online
-10
0
10
20
30
40
50
Oct
-05
Oct
-06
Oct
-07
Oct
-08
Oct
-09
Oct
-10
Oct
-11
Oct
-12
Oct
-13
Oct
-14
Oct
-15
Oct
-16
Oct
-17
Oct
-18
Oct
-19
Nifty 50: 5-year rolling return (%) for last 15 years
5 YearsSource: ICRA Online
______________________________________________________________________
19
S&P BSE Sectoral Indices monthly performance for October 2019
13.0%
7.5%
5.9%
4.3% 4.1% 3.9%3.1% 2.8% 2.7% 2.4%
0.7%
-1.8%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Auto Oil&Gas Healthcare Realty FMCG
Sector
Cons
Durable
Bankex Infra. Power Metal Cap Goods IT
(Month on Month change in %)
S&P BSE Sectoral Indices monthly performance
Source: BloombergSource: BloombergSource: Bloomberg
______________________________________________________________________
20
Status of key macro variables … Many macro economic data like declining GDP and exports and lower Manufacturing PMI are showing weakness
However, certain macro indicators like lower CAD, positive PV sales growth in Oct’19, steady credit growth data and lower interest rates are positive
While tepid GST collection, recent depreciation of rupee and weak IIP reading are concerning
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
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
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
-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
Sep
-19
Exports showing weakness in the last few months(Change YoY %)
Source: Ministry of Commerce & Industry
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
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
IIP growth declining on YoY basis in Aug'19 (YoY %)
Source: MoSPI
67
68
69
70
71
72
73
Jan-
19
Jan-
19
Jan-
19
Feb
-19
Mar
-19
Mar
-19
Apr
-19
Apr
-19
May
-19
May
-19
May
-19
Jun-
19
Jun-
19
Jul-
19
Jul-
19
Aug
-19
Aug
-19
Sep
-19
Sep
-19
Oct
-19
Oct
-19
INR
/USD
Rupee has depreciated against USD in the last few months
Source: Bloomberg
0
2
4
6
8
10
12
14
16
Ma
y-1
7
Jul-
17
Se
p-1
7
No
v-1
7
Jan
-18
Ma
r-1
8
Ma
y-1
8
Jul-
18
Se
p-1
8
No
v-1
8
Jan
-19
Ma
r-1
9
Ma
y-1
9
Jul-
19
Se
p-1
9
Ch
an
ge
Yo
Y %
Steady credit growth seen in last few months (YoY %)
Source: RBI
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
51.451.4
50.6
47
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
Oct
-19
Manufacturing PMI seen coming off in last few months
Source: Bloomberg
956 956941 933
838 843
898
860
922
1035
940956 965
940 944
1007976
947
1025
972
1066
1139
1003 9991021
982
919
954
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
9
Oct-1
9GST revenue collection showing weakness in last few months (Rs. Bn)
Source: Ministry of Finance
276398
280418
274000
275000
276000
277000
278000
279000
280000
281000
Oct 2018- Oct 2019-
Passenger Vehicles sales saw positive uptick in Oct'19 for the first time in seven months
Source: Data for Top 11 PV manufacturers, Media Reports
______________________________________________________________________
21
Market Round Up – October 2019
Indices 31 Oct 2019 30 Sept 2019 Chg %
S&P BSE Sensex 40,129 38,667 3.8
S&P BSE Mid Cap 14,865 14,104 5.4
S&P BSE Small Cap 13,558 13,171 2.9
S&P BSE 100 11,999 11,581 3.6
S&P BSE 500 15,387 14,810 3.9
Net Flow (Rs. Bn) FPI DII
CY19* 685 580
CY18 (340) 1204
CY17 513 1188
CY16 151 475
Source: BSE, NSDL (CY19 FPI data and DII data as on 30 October 2019)
Indian equity markets ended on a positive note and closer to their all-
time high levels during the month of October 2019 with S&P BSE
Sensex index and Nifty 50 index ending with the gains of 3.8% MoM and
3.5% MoM, respectively.
The S&P BSE Midcap index and S&P BSE Smallcap index also ended
higher by 5.4% MoM and 2.9% MoM, respectively.
On the sectoral indices front, S&P BSE Auto index and S&P BSE Oil &
Gas index were top two outperformers with a gain of 13.0% MoM and
7.5% MoM, respectively. The S&P BSE IT index and S&P BSE Capital
Goods index were top two underperformers, where former fell by 1.8%
MoM, while later grew by 0.7% MoM.
During the month of Oct’19, Foreign Portfolio Investors (FPIs) were net
buyers to the tune of ~Rs.124 bn and Domestic Institutional Investors
(DIIs) were net buyers to the tune of ~Rs.54 bn (as of 30 October 2019).
22000
25000
28000
31000
34000
37000
40000
43000
Oct
-15
Mar
-16
Aug-
16
Jan-
17
May
-17
Oct
-17
Mar
-18
Aug-
18
Dec
-18
May
-19
Oct
-19
S&P
BSE
Sens
ex L
evel
s
BSE Sensex Price Earning (PE) 1 year forward
19x
21x
17x
23x
Source: Bloomberg
______________________________________________________________________
22
Market Outlook Indian markets touched new all-time high levels on intra-day basis, owing to reform agenda bringing positivity to domestic markets and steady inflow from both FPIs and DIIs.
Government has taken a series of reforms in recent past in order to revive growth momentum. With recent announcement of hike in dearness allowance, the positive
sentiment in the economy is likely to continue going ahead.
Outcome of recent state election may boost the morale of the government at the center, which came out as single largest party in both states, to continue with its reform
agenda.
Benefits of Govt’s relentless focus on reforms reflected in World Bank’s ease of doing business ranking for India, which improved 14 places to 63rd in recent ranking.
While Kharif sowing saw sharp improvement, higher MSP for Rabi crop may bring rural growth and help in reviving rural demand.
Recent 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.
Q2FY20 earnings for companies in CNX 200 index, which reported their numbers so far, were higher than market expectation owing to lower tax provision.
Continued reform agenda, recovery in FPI inflow, steady buying by DIIs and improvement in earnings post tax rate cut helped markets to move to all time high levels on
intraday basis. While some positive development also seems to be taking place in global markets, any unforeseen global event may bring jittery in the domestic markets.
Currently, valuations look reasonable as we move towards FY21. The S&P BSE Sensex is trading at 17.1x FY21E Bloomberg consensus EPS of Rs.2350. (S&P BSE Sensex
price as on 31.10.2019). The Valuations of the Midcap indices have once again converged with large caps.
On the global markets, major global economies continue to remain in slow growth trajectory with multilateral agencies continuing to cut global growth forecast.
Meanwhile some positivity has emerged in global markets on the back of some positive news flow on US and China trade negotiations and also EU’s decision to extend Brexit
deadline allaying concerns of a no-deal Brexit.
On the commodity front, prices of many industrial metals remained steady in last few months. Brent crude oil prices have also come off post the spike seen in mid-September.
However, key macro-economic indicators are showing a mixed trend with negative bias, where declining GDP and exports 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.
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 announced by the government, we believe economy should start to revive from hereon and hence we maintain our
investment strategy of 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 cap 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 traded in a range in October 2019…
Domestic G-sec yields traded in a range during October 2019, wherein yield on the old 10 year benchmark G-sec 7.26% 2029 bond closed the month at 6.66% on
31 October 2019 as against 6.70% on 30 September 2019. Yield on the new 10 year benchmark G-sec 6.45% 2029 bond closed at 6.45% on 31 October 2019.
While the month was marked by positive events, concerns on government’s fiscal deficit amidst economic slowdown, prevented the yields from declining.
The month was marked by important domestic as well as global events:-
In the fourth Bi-monthly Monetary Policy, the RBI reduced the Repo rate by 25 bps to 5.15% from 5.40% and continued with its accommodative stance.
While the headline retail inflation inched up in September 2019, Core CPI inflation continued with the declining trend. Wholesale inflation also declined to
lowest levels in nearly three years.
European Central Bank (ECB) kept the monetary policy unchanged; however, the ECB reiterated that it is expected to keep the interest rates at present or
low levels until the inflation converges to near its target of 2%.
The US Federal Reserve reduced the Federal Funds rate by 25 bps; but indicated that it may pause on the interest rate cuts going forward.
Continued caution on government’s fiscal situation prevented the benchmark bond yield from declining, despite supportive domestic macro economic
variables and loose domestic and global monetary polices. Any further reforms announcement by the government to revive economic growth and how it
manages the fiscal situation would be the key determinants for domestic bond yield movement going forward.
______________________________________________________________________
25
RBI cuts key policy interest rates by 25 bps… …also maintained an accommodative policy stance
In the fourth Bi-monthly Monetary Policy, the RBI reduced the policy Repo rate
under the liquidity adjustment facility (LAF) by 25 basis points (bps) to 5.15%
from 5.40% with immediate effect.
Consequently, the Reverse Repo rate was reduced to 4.90%, and the Marginal
Standing Facility (MSF) rate and the Bank Rate to 5.40%.
The MPC also decided to continue with an accommodative stance as long as it
is necessary to revive growth, while ensuring that inflation remains within the
target.
The cumulative rate cut by the RBI since February 2019 now stands at 135 bps.
The RBI revised the inflation projections upwards for Q2FY20 to 3.4%, from the
earlier projections of 3.1%. Inflation projections for H2FY20 and Q1FY21 were
retained at 3.5%-3.7% and 3.6% respectively, with risks evenly balanced.
The real GDP growth projections for FY20 were revised downwards by the RBI.
GDP growth forecast was revised down from 6.9% in the August 2019 policy to
6.1%, with 5.3% in Q2FY20 and in the range of 6.6%-7.2% for H2FY20 – with
risks evenly balanced; GDP growth for Q1FY21 was also revised downwards to
7.2% from 7.4% projected in the August 2019 monetary policy.
The tone of the monetary policy was dovish with statements like:-
“…the continuing slowdown warrants intensified efforts to restore the
growth momentum…”
“...there is policy space to address the growth concerns by
reinvigorating domestic demand within the flexible inflation targeting
mandate…”
Given that the demand conditions in the economy have remained subdued, as
reflected in the declining Core Retail inflation and three year low Wholesale
inflation, the RBI may undertake another interest rate cut as early as December
2019.
Source:- RBI
Source:- RBI
______________________________________________________________________
26
CPI Inflation rises to 14 months high… …Core CPI inflation and WPI inflation continued with declining trend
Domestic inflation based on Consumer Price Index (CPI) rose higher than expectations in September 2019 following sharp rise in food prices and
came in at 3.99% YoY a tad lower than the RBI’s medium term inflation target of 4%.
CPI inflation for August 2019 was revised upwards to 3.28% YoY from 3.21% YoY released earlier.
Core CPI inflation on the other hand continued with its downward trend in September 2019 as well, and came in at 4.04% YoY as against 4.27% YoY
in August 2019.
CPI food inflation stood at 5.11% YoY in September 2019 against 2.99% YoY in August 2019.
The Food segment, which comprises over 47% of the CPI index, witnessed a broad based rise in inflation, with vegetable prices witnessing a sharp
rise amongst other internals of the food segment.
Inflation based on Wholesale Price Index (WPI) on the other declined to its lowest level in almost three years and came in at 0.33% YoY in
September 2019 compared with 1.08% YoY in August 2019.
Inflation in Manufactured Products segment, which has a weightage of about 64% stood at 0.1% YoY in September 2019 as against 0.3% YoY in
August 2019.
While headline CPI inflation has been rising and is now almost at the RBI’s medium term inflation target of 4%, the declining Core CPI and WPI
inflation are reflecting week demand in the economy.
Source:-Ministry of Statistics and Program Implementation
Source:-Ministry of Statistics and Program Implementation
______________________________________________________________________
27
Fiscal deficit touched ~93% of budgeted target for FY20...
India’s fiscal deficit for the period April-September 2019 stood at Rs.6.51 trillion
or ~93% of the budgeted estimates of Rs.7.04 trillion for FY20.
However, fiscal deficit for the same period last year was higher at 95.3% of the
budgeted estimates for FY19.
Tax revenues stood at 36.8% of the budgeted estimates till September in FY20
compared with 39.4% in FY19.
Non-tax revenues on the other hand stood at 66.7% of the budgeted target in
FY20 till September 2019 as against 44.5% in FY19.
The government is likely to breach the fiscal deficit of 3.3% of GDP for FY20,
given that it has announced measures like cut in corporate tax rates, due to
which the government will have to forgo Rs.1.45 trillion of tax revenues.
Higher fiscal deficit could mean higher market borrowings by the government
which could possibly be announced towards the later part of the fiscal year. The
extent of the rise in the fiscal deficit and market borrowings will depend on how
the government’s Non-tax revenues pan out, which will be a key variable to watch
out for.
Source:- cga.nic.in
Source:- Pib.nic Source:-cga.nic.in
______________________________________________________________________
28
Some other macro-economic variables remained steady… India’s trade deficit narrowed to USD 10.86 bn in September 2019 compared to
USD 14.95 bn during the same period last year and USD 13.45 bn in August
2019. Domestic exports contracted by 6.57% YoY in September 2019; whereas
Imports declined to 13.85% YoY.
India’s Foreign Exchange Reserves rose to a lifetime high of USD 442.58 bn as
on week ending 25 Oct 2019 compared to USD 440.73 bn as of week ending 18
Oct 2019. Foreign currency assets rose by USD 1.64 bn to USD 410.45 bn.
The Rupee depreciated marginally by ~0.08% MoM against the USD in October
2019 compared to appreciation of 0.75% MoM in September 2019. Between the
period Apr-Oct 2019 the Rupee depreciated by a much lower 3.17%, as against a
depreciation of 13.76% during the same period last year.
Source:- Bloomberg
Source:- Bloomberg
Foreign Portfolio Investors (FPIs) turned net buyers to the tune of Rs.~37 bn in
October 2019 as against net selling of Rs.~10 bn in September 2019. A stable
Rupee, prospects of interest rate cuts by the RBI and relatively attractive yields
led to strong buying interest in Indian bonds by FPIs.
______________________________________________________________________
29
Liquidity surplus rose in October 2019…
Domestic system liquidity continued to remain in the surplus zone during
October 2019. Liquidity as measured by the RBI’s Liquidity Adjustment
Facility (LAF) stood at a daily average surplus of ~Rs.1.98 trillion in
October 2019, compared to a daily average surplus of ~Rs. 1.12 trillion
during September 2019.
Banks’ credit growth continued to remain sluggish, and grew at
8.84% YoY as on 11 Oct 2019 as against 14.4% YoY during the same
period last year.
Deposit growth on the other hand stood at 9.8% YoY as on 11 Oct 2019
compared with 8.9% YoY during the same period last year.
RBI’s easy liquidity stance coupled with muted credit growth, led the
liquidity surplus to remain at higher levels.
Source - RBI
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Short Term rates continued to decline tracking surplus liquidity and Repo rate cut by the RBI…
Yields at the shorter end of the yield curve declined, as liquidity surplus rose and the RBI undertook another Repo rate cut in its October 2019
monetary policy.
In the month of October 2019 the yields on Certificate of Deposits (CDs) declined, wherein the 3 months CD yield declined by about 48 bps
MoM, whereas that on 6 months and 1 year CD yields declined by 25 and 51 bps respectively.
Yields on the AAA rated corporate bonds also declined on a MoM basis, wherein the 2 years and the 3 years AAA rate corporate bond yields
declining by about 24 bps and 5 bps respectively.
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Date3 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
Oct-19 125 101 188 317
Bond spreads – An Update
Spread between AAA corporate bonds and G-secs of similar tenure as on 26 August 2019. Source:- Bloomberg and Reliance MF
Credit spreads continued to remain higher than the pre-September 2018
period.
Additionally, in October 2019 spreads widened as compared to the
previous month.
Credit events continued to unfold in the month of October 2019 as well,
which led to continued caution in the corporate bond market.
Additionally, the G-sec yields declined more as compared to corporate
bond yields on a MoM basis, leading to widening of credit spreads.
The AAA rated corporate bond yield curve steepened, in October 2019
compared to September 2019, wherein the shorter end yields declined
more as compared to the longer end yields. Source:- Bloomberg
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Source:- RBI and IDFC Mutual Fund
G-sec yields declined across most segments of the yield curve on a MoM basis in October 2019.
The G-sec yield curve steepened further, as the shorter end yields declined tracking rise in liquidity surplus and the longer end
declined marginally tracking easier monetary policies, both domestically as well as globally.
Spread between the 1 and 10 years G-secs widened to 135 bps in October 2019 from 105 bps in September 2019.
Spread between 1 and 5 years G-secs also widened to 94 bps from 72 bps.
G-sec yield curve continued to steepen in October 2019… …Yields declined across the yield curve
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While the domestic liquidity surplus, may move in a range and may even decline as we move closer to the last quarter of the financial year, overall the
liquidity conditions are likely to remain in the surplus zone, given the RBI’s positive liquidity stance. Additionally, credit growth may take a while to pick
up, given the current weak demand conditions in the economy. Thus, surplus liquidity is here to stay for the time being, as long as it takes for economic
growth revival.
Retail food inflation may inch up yet again for the month of October 2019, given that unseasonal rains have led to higher prices of vegetables and other
food items. However, seasonal decline in food prices, better Kharif crop production and expectations of good Rabi crop production, may help in bringing
down food inflation in the near term. Additionally, lower Core CPI inflation due to weak demand in the economy is also likely to prevent the headline
inflation from spiking meaningfully. While headline inflation may rise over the RBI’s medium term target of 4%, the RBI is likely to look through the same,
as its priority is supporting growth at this juncture.
The major global central bankers have adopted loose interest rate and monetary policies so far. However, recent indication from the US Federal
Reserve on pause in interest rate cuts in the near term and improvement in some of the macro-economic data points in the US, need to be watched out,
for any signs of revival in economic activities. That being said, interest rates are likely to remain low for the time being in order to support economic
growth. Domestically, the RBI has highlighted that supporting growth is the need of the hour at this point. Also, in the October 2019 monetary policy, the
RBI has stated that there is policy space to address the growth concerns, which could mean further interest rate cut by the RBI and a continued
accommodative stance.
While the government has so far refrained from announcing a revision in the fiscal deficit estimates and borrowing numbers for FY20, the possibility
cannot be ruled out. Given that government has announced measures to support economic growth which are likely to put a strain the revenues of the
government, the government might revise the fiscal deficit possibly in the last quarter of the fiscal year. While the bond yields are currently pricing in a
higher fiscal deficit number for FY20, actual revised estimates would give further direction to the bond yields. To that effect, the longer end of the yield
curve is likely to remain volatile in a range.
Though yields declined across the G-sec yield curve, the curve continued to steepen in October 2019, wherein term spreads widened on a MoM basis.
The steepening of the yield curve may continue, as surplus liquidity conditions and accommodative monetary policy of the RBI may lead to further
decline in the shorter end of the yield curve; and the longer end of the yield curve likely remains volatile due to domestic and global uncertainties.
Thus, we recommend that 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 funds can be
considered for a horizon of 3 months and above.
Fixed Income Outlook
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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, above normal monsoons and better 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 cap funds can begin with a longer horizon (12-15 months). The equity investment strategy continues to remain at 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
funds can be considered for a horizon of 3 months and above.
Investment Strategy
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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
