Market Outlook - SBI Funds Outlook_Nov... · 2017. 12. 21. · • Equity delivered positive...

Market Outlook

November 2017

EQUITY MARKET

Global equity market snapshot: October 2017

Source: Bloomberg, SBIMF Research

• Equity delivered positive returns across most markets in October.

• NIFTY up by 6% during the month. On YTD basis, NIFTY delivered 26% return- thus being amongst top 3 markets and in linewith overall emerging market performance.

• On a YTD basis, MSCI EM index has delivered 30% and has outperformed developed market indices

Performance October 2017 (local currency returns) Performance YTD (local currency returns)

-7

-20

01 2 2 2 2 3 3 3 3 3

4 45 6

8

(8)(6)(4)(2)02468

10

PAKI

STA

NRU

SSIA

MSC

I EM

- EU

ROPE

BRA

ZIL

CHIN

AU

KIN

DO

NES

IAS&

P 50

0PH

ILIP

PIN

ESH

AN

G S

ENG

SRI L

AN

KAG

ERM

AN

YFR

AN

CEM

SCI E

MD

OW

JON

ESTA

IWA

NKO

REA

NIF

TYJA

PAN

-17

-3

5 69 11 13 13 15 15 15 17 18

22 23 25 26 28 30

(20)

(10)

0

10

20

30

40

PAKI

STA

NRU

SSIA UK

SRI L

AN

KACH

INA

MSC

I EM

- EU

ROPE

FRA

NCE

IND

ON

ESIA

S&P

500

JAPA

NG

ERM

AN

YTA

IWA

ND

OW

JON

ESPH

ILIP

PIN

ESBR

AZI

LKO

REA

NIF

TYH

AN

G S

ENG

MSC

I EM

Indian stock market snapshot: October 2017

Performance in October 2017


• Nifty and Sensex are up by ~6% each in October. Mid-cap and small-cap delivered positive returns of 7% and 9% respectivelyduring the month.

• Sector-wise: All the sectors delivered positive returns. PSU, Oil & Gas and Real Estate were the sector out-performers duringthe month.

• YTD, Nifty and Sensex are up by 26% and 25% respectively. Sector-wise performance has been positive across all sectors ona YTD basis (barring Pharma). Real estate continued to out-perform significantly (up 82%).

Performance YTD

4 5 5 5 6 6 6 6 67 7

99

11 12

13

0

2

4

6

8

10

12

14

IT

BAN

KEX

FMCG

AU

TO

NIF

TY

PHA

RMA

BSE

100

SEN

SEX

BSE

500

CAP

GO

OD

S

MID

CA

P

MET

ALS

SMA

LL C

AP

REA

L ES

TATE

OIL

& G

AS

PSU

-3

2

22 25 25 26 26 28 31 35 36 36 3846 46

82

(10)

0

10

20

30

40

50

60

70

80

90

PHA

RMA IT

PSU

SEN

SEX

AU

TO

FMCG

NIF

TY

BSE

100

BSE

500

CAP

GO

OD

S

OIL

& G

AS

BAN

KEX

MID

CA

P

MET

ALS

SMA

LL C

AP

REA

L ES

TATE

Source: CMIE, SBIMF Research,

GDP growth has weakened till Q1 FY18

India’s GDP growth has been weakening for 5 quarters in succession

8.7

5.6 5.6

9.1

6.1

5.7

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Real GVA at basic prices Real GDP (% y-o-y)

% y-o-y

Source: CMIE economic outlook, SBIMF Research

Q2 FY18 shows some signs of improvement

Early onset of festive season likely led to an improvement in 2Q FY18 consumption demand

Green: Growth is higher than previous quarter

Pink: Growth is lower than previous quarter

% y-o-y Consumption

IIP: Consumer

Durables

IIP: Consumer

Non-Durables

Domestic Sale of 2

wheelers

Domestic Sale of

Passenger Cars

Currency in Circulation

Bank Personal Loans

Central Govt: Revex (ex Int Payment)

Domestic Passengers Handled at airport

Foreign passengers handled

Import of Consumption Goods

Real Rural Wages

Sep-12 0.0 10.5 -3.8 -7.2 13.0 13.0 18.7 -9.6 0.4 -6.9 9.0Dec-12 1.6 3.1 6.0 -2.0 12.0 13.8 -8.4 -8.6 6.0 0.7 7.5Mar-13 1.8 -2.0 -0.6 -20.5 11.6 14.7 -1.5 -0.7 10.2 12.8 5.3Jun-13 0.5 6.0 -0.8 -10.4 8.9 12.3 26.3 0.8 11.7 6.8 4.9Sep-13 5.8 5.0 8.2 2.2 9.5 14.4 5.0 13.5 11.9 4.5 3.0Dec-13 8.7 1.8 9.0 -5.5 11.1 15.2 11.4 6.5 6.2 4.9 18.7Mar-14 7.4 2.2 13.1 -3.2 9.2 12.5 -8.6 1.0 4.5 -0.5 24.8Jun-14 5.6 2.6 13.2 2.2 11.6 15.3 2.6 7.5 6.9 11.0 22.8Sep-14 7.8 3.5 19.0 6.0 10.6 13.5 6.4 13.9 10.4 23.8 18.4Dec-14 0.6 2.3 1.2 7.0 9.6 12.9 18.8 14.4 9.7 20.5 4.3Mar-15 2.2 6.8 -0.2 4.3 11.3 15.5 1.4 20.1 8.9 17.1 -0.6Jun-15 2.7 3.2 0.6 8.7 10.2 17.1 1.4 19.5 8.0 6.8 0.4Sep-15 0.8 -1.3 -1.3 10.6 11.6 18.0 1.2 20.4 8.3 3.7 1.7Dec-15 5.9 8.3 4.4 15.1 13.0 18.5 -1.7 21.4 6.9 9.4 -1.0Mar-16 3.9 0.3 8.6 -1.7 14.9 19.4 11.5 24.3 7.4 6.4 -0.5Jun-16 7.9 7.6 14.3 -1.4 15.7 18.5 27.9 20.4 7.7 -3.1 -1.0Sep-16 5.9 12.8 20.6 11.5 15.2 19.7 5.8 24.5 10.7 0.5 -0.6Dec-16 0.9 2.7 -4.6 -2.3 -39.9 13.5 18.7 23.2 7.6 6.2 3.1Mar-17 -2.4 9.2 -2.3 8.0 -19.7 16.4 -11.6 18.5 7.8 23.2 3.7Jun-17 -0.8 7.8 7.8 3.9 -11.6 14.1 26.8 17.4 9.1 35.4 5.0Sep-17 0.6 7.8 12.3 9.0 -8.1 16.8 0.8 14.7 9.5 20.7 4.5

Source: CMIE economic outlook, SBIMF Research

Net exports improved

Investment too, paints a relatively optimistic picture for Jun-Sep quarter

Green: Growth is higher than previous quarter

Pink: Growth is lower than previous quarter

% y-o-y Investment

IIP: Capital Goods

Consumption of Industrial fuel in energy equivalent terms

Bank Industrial Credit

Central Govt Capex

Domestic sales: Commercial vehicles

Cargo handled at Rail, Ports and Airways

Imports of Engineering goods

Sep-12 -5.0 12.9 17.0 9.9 1.7 2.7 -8.3Dec-12 -3.2 6.8 15.2 6.8 -4.8 1.2 -3.3Mar-13 -2.3 9.5 15.1 -5.4 -8.7 2.0 -9.2Jun-13 -3.0 -3.9 13.9 35.8 -8.1 2.7 -14.9Sep-13 -5.7 -4.2 17.4 7.4 -21.8 6.9 -9.3Dec-13 -1.5 -4.2 13.4 44.6 -24.5 1.6 -19.9Mar-14 -4.4 -0.1 12.8 -34.4 -25.2 2.7 -17.8Jun-14 -1.9 4.8 10.2 -8.7 -16.2 4.3 -3.0Sep-14 2.1 3.2 5.9 15.6 -3.8 3.9 1.4Dec-14 -5.1 2.2 7.1 -32.4 4.6 6.8 17.9Mar-15 0.2 8.3 5.6 92.2 4.9 2.7 10.5Jun-15 -3.5 11.1 4.8 17.7 4.7 2.7 6.1Sep-15 0.1 17.7 4.9 41.1 9.5 2.3 -2.0Dec-15 10.0 17.5 4.9 43.3 11.0 0.4 -10.3Mar-16 5.3 26.5 2.7 16.5 20.0 2.1 -2.4Jun-16 13.0 19.0 0.6 -16.4 13.0 2.0 -8.4Sep-16 0.1 16.0 0.9 23.5 -0.2 -0.2 -4.2Dec-16 -2.0 8.1 -4.3 -23.1 -1.1 4.8 12.8Mar-17 2.6 -6.6 -1.9 68.2 5.7 4.1 -2.1Jun-17 -4.4 -3.2 -1.1 39.5 -9.1 4.3 9.4Sep-17 1.6 -7.8 -0.4 -9.2 21.0 4.5 10.6

% y-o-y Net exports

Exports of Goods

Imports of Goods

Exports of Services

Imports of Services

Sep-12 -8.5 -0.7 2.6 -1.6Dec-12 0.6 6.2 9.9 -8.2Mar-13 4.5 0.8 9.4 -10.7Jun-13 -1.6 4.0 13.8 0.2Sep-13 12.9 -8.6 9.1 2.4Dec-13 7.3 -15.1 1.3 -1.4Mar-14 -0.5 -12.0 7.7 7.1Jun-14 10.2 -5.7 6.7 13.1Sep-14 1.4 10.3 2.6 0.3Dec-14 0.6 8.4 3.1 -2.4Mar-15 -14.7 -13.4 2.4 6.3Jun-15 -15.9 -11.8 -7.1 -9.1Sep-15 -18.1 -15.3 4.6 15.0Dec-15 -19.0 -19.1 1.2 2.8Mar-16 -7.7 -13.3 -10.9 -6.9Jun-16 -1.6 -14.9 5.4 11.0Sep-16 -1.0 -11.6 -0.9 4.6Dec-16 6.1 7.8 2.2 22.2Mar-17 18.5 26.9 8.0 9.0Jun-17 9.5 32.6 0.1 -5.1Sep-17 13.6 18.5 1.0 0.9

Exports of Goods and Services depicts healthier growth relative to their imports

Overall, GDP (demand side) is likely to grow at 6.5% in Q2 FY 18 vs. 5.7% in Q1 FY18


Overall Growth is likely to fall in FY18, but improve in FY19

• India has seen a host of pertinent structural reforms in last couple of years such as wide-scale implementation of directbenefit transfer, GST, crack-down on black money, RERA, Insolvency and Bankruptcy Code and so forth.

• They were much needed reforms to bring in productive efficiency and ensure more efficient utilization of resources. But inthe interim, it has undeniably disrupted the operating template of the Indian businesses and led to a deeper growth shockthan anyone would have anticipated.

• At the same time, policy makers are still grappling to resolve the twin balance sheet issues of high corporate leverage andnon-performing assets.

• We expect India’s growth to weaken to 6.7% in FY18 owing to recent signs of weakness in consumer sentiments, lingeringchallenges in private investment, and limited fiscal space to stimulate the economy . However, hopefully by next year, initialwrinkles in reforms such as IBC, GST and RERA should iron out over the next year and place India on a higher productivepotential. Accordingly, we expect FY19 growth to revive to 7.4% as the system gains some bit of normalcy.

5.5

6.4

7.58.0

7.1

6.1

7.2 7.4

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

FY13 FY14 FY15 FY16 FY17 1H FY18e 2H FY18e FY19e

Real GDP

% growthFY18: 6.7%

Earnings: Improved in 2Q FY18

Source: Antique, SBIFM Research

Earnings for FY18 downgraded while markets continue to expect 20% EPS growth for FY19

• 39 out of 50 NIFTY companies have reported results till 9th

November

• The earnings outcome for Q2 FY18 thus far suggests somereversal in the profit growth (~10.4% growth for 39 NIFTYcompanies that have reported results) along with highertop-line growth (11.3% y-o-y) and improved operating profit(11.7% EBITDA growth). That said, few companies (TataSteel, HDFC Bank, IOCL, and Reliance) accounted formost of the earnings growth and broad based recovery isyet to be seen.

• The results suggests that GST-related hiccups (de-stocking) have waned in Staples, but have persisted forDurables and Electricals. Higher NPA issues and sectorspecific challenges in IT and Pharmaceuticals are takinglonger to mend. Impact of hardening commodity costs isevident, with corporates hinting at ensuing price increasesto offset the input cost inflation in 2HFY18.

• On positive note, Consumer and Auto companies arerelatively positive on rural demand. In BFSI, private banksreported strong loan growth and largely stable margins,whereas NBFCs delivered strong results on most fronts.

• Corporate profits as percentage of GDP has hit anextremely low point and logically should mean revert.Earnings revival is absolutely critical for such richvaluations to sustain.

95128

175207

239283

247284

330 351385

427391 402

427475

580

-20%

-10%

0%

10%

20%

30%

40%

0

100

200

300

400

500

600

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

e

FY19

e

Nifty EPS YoY, RHS

3.0

4.75.4

6.27.3 7.8

5.56.5 6.2

4.9 4.6 4.33.8

3.1 2.9

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

Average of 5.4%

Corporate profit as percentage of GDP

Valuations

Valuations across the capitalization curve are rich when compared to history

But looks reasonable when looked at other parameters

82 83

103

55

9588

7164 66

8169

80 78

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

EMkt Cap / GDP (%)

Source: Bloomberg, MOSL, SBIMF Research,

7.0

9.0

11.0

13.0

15.0

17.0

19.0

21.0

23.0

25.0

May

-06

Nov

-06

May

-07

Nov

-07

May

-08

Nov

-08

May

-09

Nov

-09

May

-10

Nov

-10

May

-11

Nov

-11

May

-12

Nov

-12

May

-13

Nov

-13

May

-14

Nov

-14

May

-15

Nov

-15

May

-16

Nov

-16

May

-17

Sensex 1Y fwd PE

Mean: 16

+1 SD

-1 SD

10

12

14

16

18

20

22

24

26

28

Jul-1

3O

ct-1

3Ja

n-14

Apr

-14

Jul-1

4O

ct-1

4Ja

n-15

Apr

-15

Jul-1

5O

ct-1

5Ja

n-16

Apr

-16

Jul-1

6O

ct-1

6Ja

n-17

Apr

-17

Jul-1

7O

ct-1

7

S&P Mid Cap 1Y fwd PE

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Aug

-05

Jan-

06Ju

n-06

Nov

-06

Apr

-07

Sep-

07Fe

b-08

Jul-0

8D

ec-0

8M

ay-0

9O

ct-0

9M

ar-1

0A

ug-1

0Ja

n-11

Jun-

11N

ov-1

1A

pr-1

2Se

p-12

Feb-

13Ju

l-13

Dec

-13

May

-14

Oct

-14

Mar

-15

Aug

-15

Jan-

16Ju

n-16

Nov

-16

Apr

-17

Sep-

17

Sensex 1Y fwd P/B

1314151617181920212223

May

/15

Jul/

15Se

p/15

Nov

/15

Jan/

16M

ar/1

6M

ay/1

6Ju

l/16

Sep/

16N

ov/1

6Ja

n/17

Mar

/17

May

/17

Jul/

17Se

p/17

S&P Small Cap 1Y fwd PE

Source: Morgan Stanley, SBIMF Research,

Indian Equity Valuations relative to emerging markets

India’s valuations relative to other EMs in line with historical 5 year average…

…and the relative RoE remains healthy

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Dec

-15

Dec

-16

MSCI India's P/E prem. wrt MSCI EM

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Oct

-95

Oct

-96

Oct

-97

Oct

-98

Oct

-99

Oct

-00

Oct

-01

Oct

-02

Oct

-03

Oct

-04

Oct

-05

Oct

-06

Oct

-07

Oct

-08

Oct

-09

Oct

-10

Oct

-11

Oct

-12

Oct

-13

Oct

-14

Oct

-15

Oct

-16

MSCI India ROE Relative to EM

Liquidity: Mutual fund inflow cushioned FII outflow in October

Source: MOSL, CMIE, NSDL, SBIMF Research; NB:* Equity AUM includes all equity schemes and 65% of balance fund schemes

FIIs pulled out US$ 0.2 billion in October Domestic Mutual Funds, continue to witness robust inflow in the equity segment*

Insurance companies were also a net buyer in the India equity market

0.1

2.3

-0.1

2.9

1.41.71.2

-0.1-1.0

0.9

-2.6

-0.9

0.8

-1.1

0.0

-1.7-1.2

4.1

0.60.40.8

1.71.51.4

-0.7

-2.6

-1.2

0.0

1.6

5.1

-0.3

1.5

0.60.4

-2.0-1.7

-0.2

Oct

-14

Jan-

15

Apr

-15

Jul-1

5

Oct

-15

Jan-

16

Apr

-16

Jul-1

6

Oct

-16

Jan-

17

Apr

-17

Jul-1

7

Oct

-17

US% billion

-0.3

-1.5

-0.3

-1.4

-0.4-0.6

0.4

0.7

0.3

-0.7

0.9

0.1

-0.7

0.30.3

0.8

0.7

-1.0

-0.3

0.0

-0.3

-0.9-1.1

-0.3-0.2

0.7

0.0-0.1-0.2

-1.3

-0.3

-0.8

-0.4

-1.1

-0.3

0.5

0.0

Oct

-14

Jan-

15

Apr

-15

Jul-1

5

Oct

-15

Jan-

16

Apr

-16

Jul-1

6

Oct

-16

Jan-

17

Apr

-17

Jul-1

7

Oct

-17

US$ billion

0

10

20

30

40

50

60

70

2

3

4

5

6

7

8

Jan-

16Fe

b-16

Mar

-16

Apr

-16

May

-16

Jun-

16Ju

l-16

Aug

-16

Sep-

16O

ct-1

6N

ov-1

6D

ec-1

6Ja

n-17

Feb-

17M

ar-1

7A

pr-1

7M

ay-1

7Ju

n-17

Jul-1

7A

ug-1

7Se

p-17

Oct

-17

Domestic MF- Equity AUM (Rs. trillion)*

Equity AUM (% growth)-RHS

Equity Market outlook

• Improved earnings and economic data, relaxation in GST provisions and PSBrecapitalization move helped NIFTY to deliver 5.6% returns during the month, makingIndia the best-performing market among the emerging economies. YTD, NIFTY hasdelivered 33% returns in USD terms and 26% in rupee terms, relatively higher than30% dollar returns delivered by MSCI Emerging market Index.

• FIIs pulled out US$ 0.25 billion in October while domestic mutual fund invested US$0.4 billion. This trend of ‘financialization of savings’ has kept the Indian domestic fundflow upbeat. We expect the primary issuance to increase substantially to capitalize onthe large domestic flows.

• Accordingly, valuations continued to remain elevated at ~21 times 1 year forwardearnings.

• While policy reforms and robust liquidity have supported the market, as we get closerto some of the key state elections and 2019 general elections, one can expectpolitical underpinnings to play a role from the headline perspectives.

• The earnings outcome for Q2 FY18 thus far suggests some reversal in the profitgrowth. That said, few companies (Tata Steel, HDFC Bank, IOCL, and Reliance)accounted for most of the earnings growth and broad based recovery is yet to beseen. We believe that the near term growth challenges will overshadow the benefitsarising from the long term structural reforms, and keep corporate earnings in check.Further, as these reforms create higher transparency in the economy, monopolyprofits are likely to get destroyed and India Inc as a whole should settle down forrelatively lower return ratios.

• Hopefully, initial wrinkles in reforms such as IBC, GST and RERA should iron outover the next year and place India on a higher productive potential. Higher growth onthe back of the productivity gains resulting from structural reforms should be longerlasting. While the long-term India story remains intact, markets under-estimated thecyclical challenges. Given the abundant liquidity and on-going near-term disruptions,we remain focused on bottom-up approach in picking stocks.

Valuations are at 21 times on 1 year forward earnings


7

9

11

13

15

17

19

21

23

25

May

-06

Nov

-06

May

-07

Nov

-07

May

-08

Nov

-08

May

-09

Nov

-09

May

-10

Nov

-10

May

-11

Nov

-11

May

-12

Nov

-12

May

-13

Nov

-13

May

-14

Nov

-14

May

-15

Nov

-15

May

-16

Nov

-16

May

-17

Sensex 1Y fwd PE

Mean: 16

+1 SD

-1 SD

FIXED INCOME MARKET

Global rates snapshot for October 2017

• Global economy has been depicting synchronized improvement in growth leading the bond yields to go up.

• Given the growth momentum, central banks are likey to remain on the path of gradual normalization of monetary policy.

• US bond yields have inched up 5bps during the month.


10 Year G-sec Yield (% mth end) 2015 end 2016 end Jul-17 Aug-17 Sep-17 Oct-17 3m Change (in

bps)% change in 2017 YTD

(in bps)

Developed market

US 2.27 2.44 2.29 2.12 2.33 2.38 9 -6

Germany 0.63 0.21 0.54 0.36 0.46 0.36 -18 16

Italy 1.35 1.82 1.80 1.75 1.82 1.56 -24 -25

Japan 0.27 0.05 0.08 0.01 0.07 0.07 -1 3

Spain 1.77 1.38 1.50 1.56 1.60 1.46 -4 8

Switzerland -0.06 -0.19 0.05 -0.14 -0.02 -0.08 -13 11

UK 1.96 1.24 1.23 1.03 1.37 1.33 10 9

Emerging Market Bond yields- October 2017


Bond yields majorly inched up in the Emerging markets. Philippines depicted the fall in bond yields while bond yields increased or remained same for other key EMs during the month

10 Year G-sec Yield (% mth end) 2015 end 2016 end Jul-17 Aug-17 Sep-17 Oct-17 3m Change

(in bps)% change in 2017 YTD

(in bps)

Emerging Market

Brazil 16.5 11.4 10.0 10.0 9.7 9.9 -11 -152

China 2.8 3.0 3.6 3.7 3.62 3.88 26 85

India 7.8 6.5 6.5 6.5 6.66 6.86 39 35

Indonesia 8.7 7.9 6.9 6.7 6.45 6.77 -16 -115

Korea 2.1 2.1 2.2 2.3 2.38 2.56 33 48

Malaysia 4.2 4.2 4.0 3.9 3.91 3.92 -7 -27

Philippines 3.9 4.6 4.6 4.7 4.66 4.61 -4 -2

Russia 9.6 8.4 7.8 7.7 7.58 7.60 -21 -76

South Africa 9.8 8.9 8.6 8.6 8.55 9.09 47 18

Taiwan 1.0 1.2 1.1 1.0 1.01 1.04 -5 -17

Thailand 2.5 2.6 2.4 2.3 2.29 2.32 -11 -33

India Rates Snapshot for October 2017

• Indian bond yields rose in October as the market broadly builds the case of a long-pause on the rate front and remainfocused on rising crude prices and likely deterioration in demand-supply dynamics.

• Money market, too inched up during the month as higher currency leakage starts to pull down the surplus liquidity.

• Crude oil prices rose by 2.8% over the month.

• Rupee appreciated marginally (0.8%) during the month after 2.1% depreciation seen in September .

Source: Bloomberg, PPAC, CCIL, SBIMF Research; NB: **Crude oil price is average $/barrel for the month, rest of the data are % month end; *Corporate bond rate is for AAA rated bonds ,*** Refers to PSU Banks CD rate; # INR and Oil price changes are % change

Aug-17 Sep-17 Oct-17 m-o-m change (in bps) Change YTD (in bps)

1 Yr T-Bill 6.25 6.23 6.23 0 -10

3M T-Bill 6.09 6.08 6.10 2 -10

10 year GSec 6.53 6.66 6.86 20 35

3M CD*** 6.23 6.15 6.20 5 -8

12M CD*** 6.48 6.56 6.58 2 -5

3 Yr Corp Bond* 7.13 7.11 7.15 4 -14

5 Yr Corp Bond* 7.23 7.25 7.32 7 -5

10 Yr Corp Bond* 7.46 7.54 7.69 15 11

1 Yr IRS 6.16 6.09 6.17 8 -2

5 Yr IRS 6.21 6.27 6.38 11 12

INR/USD 63.9 65.3 64.7 0.8# 4.9#

Crude Oil Indian Basket** 50.6 54.5 56.1 2.8# 6.4#

CPI inflation has bottomed out; but to stay contained

Source: CSO, SBIMF Research

• CPI inflation for September was more sanguine than market expectation helped by sharper than anticipated decline in veggiesinflation. Core looks higher at 4.6% but more so because of one-off effects of 7PC implementation.

• Food and beverages inflation stayed contained at 1.8% y-o-y vs. 2.0% in August. Besides fruits & vegetables, cereals, sugar,meat products and spices inflation also stayed contained. After contracting for 10 months in succession (i.e. since Nov 2016),pulses prices showed a marginal up move in September (0.2% m-o-m). This may be the likely effect of government’s measuresto curb pulses imports starting August. That said, annual pulses inflation is still negative at -23% y-o-y.

• CPI Transport and Communication which reflect the impact of petrol and diesel also inched higher on the sequential basis.

• We expect CPI inflation to average at 4% in 2H FY18 and 3.3%-3.4% for the whole year - thus undershooting the central bank’scomfort level of 4% inflation.

CPI Inflation remained flat at 3.3% as of September Majority of CPI inflation is led by rise in food prices

0

2

4

6

8

10

12

14

Apr

-12

Aug

-12

Dec

-12

Apr

-13

Aug

-13

Dec

-13

Apr

-14

Aug

-14

Dec

-14

Apr

-15

Aug

-15

Dec

-15

Apr

-16

Aug

-16

Dec

-16

Apr

-17

Aug

-17

CPI % y-o-y

CPI target range 4% + 2%-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

Apr

-14

Jul-1

4

Oct

-14

Jan-

15

Apr

-15

Jul-1

5

Oct

-15

Jan-

16

Apr

-16

Jul-1

6

Oct

-16

Jan-

17

Apr

-17

Jul-1

7

Core CPI (CPI ex food ex fuel )CPI FoodCPI: Transport and communication

% y-o-y

Banking system Liquidity has reduced in October

Source: RBI, SBIMF Research

Banking system liquidity surplus averaged at Rs. 1.4 trillion in October vs. 2.2 trillion in September as..

…September and October saw a surge in currency leakage, and…

-4000

-2000

0

2000

4000

6000

8000

10000

Banking System Liquidity (Rs. Billion)

+1% of NDTL

-1% of NDTL

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2005 2006 2007 2008 2010 2011 2012 2013 2014 2015 2016 2017

Currency leakage in Sep- Oct (Rs. Crore)

-100,000

-50,000

-

50,000

100,000

Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17

Central Govt. Cash Balance with RBI (Rs. crore)

…Central government starts to spend less relative to its receipts


Current account deficit widened

-8.0

-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

-

-35.0

-30.0

-25.0

-20.0

-15.0

-10.0

-5.0

-

Mar

-11

Jun-

11Se

p-11

Dec

-11

Mar

-12

Jun-

12Se

p-12

Dec

-12

Mar

-13

Jun-

13Se

p-13

Dec

-13

Mar

-14

Jun-

14Se

p-14

Dec

-14

Mar

-15

Jun-

15Se

p-15

Dec

-15

Mar

-16

Jun-

16Se

p-16

Dec

-16

Mar

-17

Jun-

17

Current A/c Balance (US$ billion) (as % of GDP)

Trade deficit improved in Q2 FY18 Leading current a/c deficit to widen to 2.4% of GDP (vs. 0.6% in Q4 FY17)

• Indian merchandise exports have growth at a cumulative rate of 12% y-o-y between April to August. This is relatively betterthan negative export growth seen in last two years (2015: -17% 2016: -1.4%).

• However, exports growth have lagged behind some of the other emerging market peers such as Korea, South Africa,Indonesia, Brazil and Vietnam).

• Challenges can be seen in some of the key export oriented sectors of India (such as textiles, pharmaceuticals and IT). In theinterim, GST has also led to a sudden spurt in the working capital needs of Indian exporters. That said, government hastaken the cognizance of the GST related issues and this should iron out over next months or so.

• At the same time, imports growth have accelerated to 27% YTD due to surge in gold import, rising commodity prices andspurt in imports of select commodities such as electronics, chemicals and so forth. Sharper growth in imports relative toexports has led India’s current a/c deficit to widen to 2.4% of GDP (in Q1 FY18) vs. 0.6% in Q4 FY17.

-40-30-20-10

0102030405060

Mar

-14

Jun-

14

Sep-

14

Dec

-14

Mar

-15

Jun-

15

Sep-

15

Dec

-15

Mar

-16

Jun-

16

Sep-

16

Dec

-16

Mar

-17

Jun-

17

Sep-

17

Merchandise Exports (% y-o-y) Merchandise Imports (% y-o-y)

But overall external account stays healthy

CAD Financing is not a concern; robust FII and FDI inflows to help

Source: CMIE, RBI, SBIFM Research

FX reserves at US$ 398.8 bn as of 27th October and is sufficient to finance 11.3 months of import

48

7888

3228

2215

45

1222 20 22

33 36 36 40

0102030405060708090

100

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

E

CAD FDI

USD bn

6

7

8

9

10

11

12

13

260280300320340360380400420

Apr

-10

Jul-1

0O

ct-1

0Ja

n-11

Apr

-11

Jul-1

1O

ct-1

1Ja

n-12

Apr

-12

Jul-1

2O

ct-1

2Ja

n-13

Apr

-13

Jul-1

3O

ct-1

3Ja

n-14

Apr

-14

Jul-1

4O

ct-1

4Ja

n-15

Apr

-15

Jul-1

5O

ct-1

5Ja

n-16

Apr

-16

Jul-1

6O

ct-1

6Ja

n-17

Apr

-17

Jul-1

7

FX reserves (USD bn)- LHS Import cover (in months RHS)

Most emerging market (EM) currencies depreciated in October (Rupee depreciated 2.1% in September, and appreciated 0.8% in October)

Currency: Most EM currencies appreciated in 2017


Dollar Index (DXY) appreciating since September… …leading rupee to hover around ~65 levels

64.7

58

60

62

64

66

68

70

Feb-

14A

pr-1

4Ju

n-14

Aug

-14

Oct

-14

Dec

-14

Feb-

15A

pr-1

5Ju

n-15

Aug

-15

Oct

-15

Dec

-15

Feb-

16A

pr-1

6Ju

n-16

Aug

-16

Oct

-16

Dec

-16

Feb-

17A

pr-1

7Ju

n-17

Aug

-17

Oct

-17

INR/USD (mth end)

-6.0 -4.7 -4.0 -3.4 -3.3 -1.4 -1.4 -1.3 -0.7 -0.3

0.3 0.3 0.3 0.5 0.8 2.2

Turk

ey L

ira

Mex

ican

Pes

o

Afr

ican

Ran

d

Colo

mbi

an P

eso

Braz

il Re

al

Hun

gari

an F

orin

t

Russ

ian

Roub

le

Phili

ppin

e Pe

so

Indo

nesi

an R

upia

h

Mal

aysi

an R

ingi

tt

Chin

ese

renm

inbi

Thai

Bah

t

Polis

h Zl

oty

Taiw

anes

e D

olla

r

Indi

an R

upee

Kore

an W

on

% change YTD (Oct end) % change m-o-m

101.0

94.8

90

92

94

96

98

100

102

104

Jun/

16

Jul/

16

Aug

/16

Sep/

16

Oct

/16

Nov

/16

Dec

/16

Jan/

17

Feb/

17

Mar

/17

Apr

/17

May

/17

Jun/

17

Jul/

17

Aug

/17

Sep/

17

Oct

/17

Nov

/17

DXY Index

Source: Bloomberg, SBIMF Research,

Commodity: Both Energy prices and metals prices are rising

Barring natural gas and uranium, energy prices have increased

Precious metal prices are rising Barring iron ore and tin, industrial Metal prices are rising on YTD basis

Wheat prices have fallen while Sugar prices are rising

-40.0 -20.0 0.0 20.0 40.0

Natural Gas

Uranium

Gas Oil

Heating Oil

WTI

Coal

Brent

Gasoline

% m-o-m

% change YTD

-30.0 -20.0 -10.0 0.0 10.0

Wheat

Corn

Coffee

Cotton

Soybeans

Sugar

% m-o-m

% change YTD

-20.0 0.0 20.0 40.0 60.0

Gold

Platinum

Silver

Palladium

% m-o-m

% change YTD

-40.0 -20.0 0.0 20.0 40.0

Iron Ore

Tin

Lead

Aluminium

Zinc

Copper

Nickel

% m-o-m

% change YTD

The Monetary Policy Committee (MPC) of RBI maintained status quo,keeping for the repo rate and the “neutral” stance unchanged. 5 out of 6members voted for in favour of the decision, while one member (Dr. R.Dholakia) voted for a 25bps rate cut. Separately however, the RBI cutthe SLR by 50bps to 19.5% beginning the fortnight of October 14th.

Separately the SLR was cut to 19.5% from 20% to help banks meetliquidity coverage ratio requirements under Basel 3. RBI also reiteratedthe need to recapitalise public sector to fund growth, going forward. AnRBI committee has also suggested an externally benchmarked rate,replacing the MCLR to improve monetary policy transmission. Further,the central bank indicated towards the need to increase the liquidity inSDL market, starting with commencement of weekly auction of SDLs vs.the current practice of fortnightly auctions.

The central bank is dealing with two divergent developments. On onehand, growth has weakened and this raises the prospects of output gapwidening which itself will have benign impact on inflation. However onthe flipside is the build-up of generalized price pressures in July andAugust CPI data and the added risk of fiscal slippage, both for statesand the central government. Given that inflation is the primary objectivefor the MPC, it is only logical that the MPC should hold out on rates tilldata makes it clear that inflation likely to remain close to its target.

The current macro-developments has set a somewhat higher hurdle forfurther rate cuts in the near future. So unless significant downsideinflation surprises continue, market participants will likely be hesitant toprice in another 25bp cut just yet.

Policy Rate Outlook

Source: RBI, CSO, SBIFM Research

4.00

5.00

6.00

7.00

8.00

9.00

10.00

Nov

-05

Jul-0

6

Mar

-07

Nov

-07

Jul-0

8

Mar

-09

Nov

-09

Jul-1

0

Mar

-11

Nov

-11

Jul-1

2

Mar

-13

Nov

-13

Jul-1

4

Mar

-15

Nov

-15

Jul-1

6

Mar

-17

Repo Rate (mth end, %)

Indian bond yield (10 year G-sec) has inched up further in October to6.86% and stands at 6.93% as of 10th November as FIIs exhaustedtheir buying limit, RBI left the repo rate unchanged in its latest meet,fiscal concerns have come to the fore and crude prices inched higher.

RBI during its last monetary policy meeting in October left the repo rateunchanged even as it revised down its growth expectations for FY17,owing to building upside pressures in inflation. Unless significantdownside inflation and growth surprises continue, market participantswill likely be hesitant to price in rate cuts beyond another 25bp cut justyet.

Further, the rising risk of fiscal slippages (both from Centre and State)is making the market concerned on the deterioration of demand-supplydynamics. We expect fiscal related pressures to gradually dominatemarket moves, with a material possibility of additional marketborrowings over the 2H of FY17.

Crude prices have also inched up during October and Brent stands atUS$ 64 per barrel. Higher commodity prices, particularly crude, isnegative from Indian macro perspective, which imports 80% of its oilneeds and relies heavily on oil related tax revenues.

Anticipating these challenges, we had tactically reduced the duration inour fixed income portfolios and would be likely building them again atthe opportune time. We remain constructive from a longer termperspective as we believe that India’s inflation can average around 4%over next couple of years, barring intermittent surprises.

.

Debt Market Outlook

Source: Bloomberg, SBIFM Research

4.00

5.00

6.00

7.00

8.00

9.00

10.00

Aug

-09

Feb-

10

Aug

-10

Feb-

11

Aug

-11

Feb-

12

Aug

-12

Feb-

13

Aug

-13

Feb-

14

Aug

-14

Feb-

15

Aug

-15

Feb-

16

Aug

-16

Feb-

17

Aug

-17

10 year GSec yield (mth end, %) Repo Rate (mth end, %)

Thank you

Disclaimer

This presentation is for information purposes only and is not an offer to sell or a solicitation to buy anymutual fund units/securities. These views alone are not sufficient and should not be used for thedevelopment or implementation of an investment strategy. It should not be construed as investmentadvice to any party. All opinions and estimates included here constitute our view as of this date and aresubject to change without notice. Neither SBI Funds Management Private Limited, nor any personconnected with it, accepts any liability arising from the use of this information. The recipient of thismaterial should rely on their investigations and take their own professional advice.

Mutual Funds investments are subject to market risks, read all scheme related documentscarefully.

Asset Management Company: SBI Funds Management Private Limited (A joint venture with SBI andAMUNDI). Trustee Company: SBI Mutual Fund Trustee Company Private Limited.

Contact Details

SBI Funds Management Private Limited

(A joint venture between SBI and AMUNDI)

Corporate Office:9th Floor, Crescenzo, C-38 & 39, G Block,Bandra Kurla Complex,Bandra (East), Mumbai - 400 051Tel: +91 22 6179 3000Fax: +91 22 6742 5687/88/89/90/91Website: www.sbimf.com

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Market Outlook - SBI Funds Outlook_Nov... · 2017. 12. 21. · • Equity delivered positive...

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