THE YEAR OF SELECTION · 2019-01-10 · the markets, possibly separated by the general elections....

THE YEAR OF SELECTION

THE ANNUAL OUTLOOK 2019

ANNUAL OUTLOOK FOR 2019ANNUAL OUTLOOK FOR 2019

ANNUAL OUTLOOK FOR 2019ANNUAL OUTLOOK FOR 2019

CEO SPEAK

As we step into the New Year, it would be safe to say that ‘change’ truly sustains itself. Across the globe, innovation is changing the way we interact and transact. Demographic shifts are changing the face of society as we know it. We are fast moving towards a world that is increasingly connected and aware.

Back home, the evolution of the Mutual Fund Industry is a prime example of these phenomena. India fi nds itself in the midst of a purple patch of Mutual Fund infl ows. Awareness about fi nancial planning is on the rise, especially amongst the rising working population of the country. Regulatory measures are aiding investor confi dence. There has been a shift from investment in physical assets to fi nancialisation of savings. The rise of digital technology has made investing more accessible and convenient. As a result, industry infl ows have doubled*

in just the last 3 years and this momentum looks sustainable.

In this year’s Annual Outlook, we take a closer look at some of these changes through key themes that could impact the economy in 2019. The publication offers our detailed views on the Equity and Debt markets in the year ahead.

Economies and stock markets by their very nature are cyclical and go through various phases over multiple years. We believe, the year 2019 will see the emergence of yin and yang of the markets, possibly separated by the general elections. Macro factors are expected to infl uence market sentiment in the fi rst half of the calendar year while micro factors may take centre stage in the second. In the short term, the elections could contribute to market volatility. But we expect this impact to be neither large nor enduring. In the medium term, markets have been observed to be fairly immune to an election outcome as long as the economic and policy reform agenda stays on track.

At BNP Paribas Asset Management India, we strive to keep an eye on the changing landscape. Changes, that create opportunities for delivering long term, sustainable growth for our investors and partners.

We hope that this Annual Outlook is a testament to that commitment and makes for enriching reading.

Sharad SharmaMD and CEO,BNP Paribas Asset Management India Pvt. Ltd.

*Source: AMFI

ANNUAL OUTLOOK FOR 2019

TABLE OF CONTENTS

THE YEAR GONE BY

WHAT WE SAID IN 2018

CIO SPEAK

TALE OF TWO HALVES

A. First Half: Macro over Micro

B. Second Half: Micro over Macro

KEY THEMES FOR 2019

Theme 1: Framework reforms in place for sustainable growth

Theme 2: Economic recovery led by consumption

Theme 3: Revival of manufacturing/investment capex

Theme 4: Embracing and accelerating digital disruption

Theme 5: Earnings Growth: Delayed but recovery mode on

KEY RISKS

EQUITY MARKET OUTLOOK

DEBT MARKET OUTLOOK

FUND POSITIONING

PRODUCT LABELING

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- 1 -ANNUAL OUTLOOK FOR 2019

THE YEAR GONE BY

WHAT WE SAID IN 2018

Source: Bloomberg, various media sources, Morgan Stanley Research. Data as of Dec. 18, 2018. Cabinet Committee on Economic Affairs (CCEA). LTA - Long Term Average, MSP – Minimum Support Prices

April 2018

October 2018

May 2018

August 2018

Govt announces Bank Recap details

Union Budget F19 - Govt introduces Long Term Capital Gains Tax on Equities

RBI keeps policy rates unchanged

RBI removes min. maturity cap for FPI investment in bond market

CCEA approves increase in MSP for Kharif crops for 2018-19 season

Crude breaches USD80 / barrel, highest since Dec 2014

RBI announces a limited extension for Mr. Rana Kapoor’s tenure as MD and CEO YES Bank, until 31st Jan, 2019

Concerns of systemic liquidity risks in the NBFCs and (HFCs)

Govt announces merger of 3 PSU banks

RBI eases liquidity requirements and steps up OMO purchases

Congress wins 3 out of 5 state elections, with the regional parties winning rest

RBI's OMO purchases continued with INR 1.6 tn in FY19 till date

India's rank in ease of doing business improves significantly from 100 last year to 77

FX reserves decline by most since 2011

No confidence motion against NDA govt. held

GST cut on a range of products

RBI hikes rates by 25 bps to 6.25%

BJP falls short of majority in Karnataka; Cong-JD(S) stich alliance

IMD predicts monsoon at 97% LTA

PNB bank detects fraudulent transactions at its Mumbai branch worth USD 1.8 bn

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Kartikraj Lakshmanan, Senior Fund Manager of the newly launched BNP Paribas India Consumption Fund talks to Paisabazaar about his outlook on consumption stocks and why now could be a good time to consider investing in them. You can read our NFO note about this fund, here.

June 2018

Note: Above articles represent some of the market views put forth by the investment team at BNP Paribas Asset Management India Pvt. Ltd., over the course of CY 2018.

ANNUAL OUTLOOK FOR 2019 - 2 -

The year gone by was more or less in line with our expectations. The micro economy recovered from the initial teething issues related to GST implementation and demonetization led shocks with consumption picking up and acceleration in government spending. However, at the same time, India’s macroeconomic variables declined ‘marginally’ from the unsustainably lofty levels witnessed in 2017. In CY2018, equity markets were volatile as expected. But a sharp correction in mid and small capitalization companies surprised us. Interest rates also moved up along expected lines with the 10 Year Government bond yield reaching 8%, as envisaged1. On the other hand, a slower than expected earnings growth disappointed us. While top line growth was in line with our expectations, growth in profi ts was disappointing.

We believe that CY2019 will be a tale of two halves.

We expect the fi rst half of CY2019 to witness multiple events which will keep markets more focused on macro variables. However, we believe that in the second half of the year, micro factors will take the centre stage, making stock selection a key for outperformance, both in equity and fi xed income portfolios. In our view, the fi rst half of CY2019 will have four key events, among many, to watch out for.

The US Federal Reserve monetary policy stance: Focus will mainly be on the pace at which rates are being hiked (two rate hikes indicated as per the latest Fed meeting outcome) and the pace of balance sheet unwind.

The US-China led trade war: This could have a bearing on large (as well as related smaller) economies - hurting their competiveness, capital allocation, resources and economies of scale.

Crude prices: This year we are expecting to see some certainty emerge around crude prices. With OPEC+ production cuts and slower demand growth globally, crude prices might stabilise, which could help market participants and businesses make smarter decisions.

The upcoming General Elections in India: This will chart the way forward for India over the next fi ve years, as it will determine the political party and ideology at the helm of the country.

In the midst of uncertainty, the underlying economy will continue to be in a recovery mode. Over the last four years, the economy has witnessed the implementation of several ‘framework’ reforms which have disrupted the economy in the short term. However, we believe these initiatives are likely to fructify in the longer term, helping the economy deliver a stronger and more robust growth.

Anand ShahDeputy CEO and Head of Investments,BNP Paribas Asset Management India Pvt. Ltd.

CIO SPEAK

We believe that CY2019 will

be a tale of two halves:

‘macro over micro’ environment

in the fi rst half and ‘micro over

macro’ in the second.

1 The Year of U Turns: Annual Outlook 2018, Jan 2018 by BNP Paribas Asset Management (India)


Tighten the seat belt, to withstand volatility

when elections are scheduled and enjoy

the earnings recovery ride in the second half and beyond, through bottom-up selection.

India’s consumption story has recovered from the demonetisation led shock and we believe it will continue to drive micro level growth for the economy along with continued thrusts from the governments (both state and central) on infrastructure. In the second half of 2019, post the general elections, we believe the focus will be back on fundamentals. The second half is expected to reward superior stock selection wherein key variables like the state of the global economy, stable crude prices and the economic policies of the next government could infl uence stock prices. Our mandate would be to identify sectors and companies which can sustainably grow earnings at a superior rate over the next few years. Similarly, on the fi xed income side, we will have to make important decisions with respect to duration and credit which are likely to have the maximum risk/reward at that point of time.

Equity markets are poised to do fairly well amidst the volatility. Given that it’s going to be an election year, we cannot wish away the volatility; however, we believe that earnings recovery, albeit delayed, will take centre stage post elections. We continue to like consumer facing companies considering their superior growth, positive cash fl ows, minimal leverage and substantial moat. Banking, especially corporate banks, could provide profi table growth as asset quality improves while retail lending opportunity will provide future growth and fee income opportunities. Infrastructure, unlike the last few years, is also expected to see some traction and thus could provide select opportunities for stock picking. However, we believe exports recovery will continue to remain choppy amidst non-tariff barriers and slower global growth.

On the fi xed income front, benign infl ation, lower crude prices, a dovish US federal commentary and an expected change in RBI policy stance to neutral, bodes well for growth and the fi scal balance. This, we believe, supported by the liquidity easing measures (OMOs) and government maintaining its fi scal defi cit target, could keep the benchmark bond yield in the trading range of 7.10% to 7.40% for the fi rst half of CY2019. However, the direction of crude oil prices and outcome of the election will determine the range for the second half.

To summarise, we expect the fi rst half of CY2019 to be a ‘macro over micro’ environment and the second half to be a ‘micro over macro’ environment.

Indian investors we believe may continue to increase their savings allocations to fi nancial assets, as they move away from real estate and gold owing to benign infl ation, high real rates and a relatively stable currency.

We believe that it’s time to tighten the seat belt, to withstand the volatility in the fi rst half of the year when elections are scheduled and enjoy the earnings recovery ride in the second half of 2019 and beyond, through bottom-up selection.


TALE OF TWO HALVES

A. FIRST HALF TO BE DRIVEN BY NEWS FLOW (MACRO OVER MICRO)

While markets are, in the long term, likely to be driven by the underlying fundamental earnings in the economy (read corporate sector in this case) the fi rst half of CY2019 in our opinion is fraught with a multitude of large macro developments. We view the following as key events which are expected to keep the markets fairly volatile in the fi rst half of the year.

I. Global monetary and economic policiesThe key issue is whether we fi nally see monetary policy divergence between the US Fed (Federal Reserve) and other developed market central banks recede, as other central banks begin or continue to tighten policy while the Fed potentially closes in on the end of its tightening cycle (including on balance sheet runoff). Ceteris paribus, reduced monetary divergence should weigh on the USD. However, the strong reaction to the recent dovish comments by the Fed suggests that there is a two-way risk. Changes in central bank leadership (notably at the ECB) may also introduce uncertainty.

The market will be closely watching the scope and effectiveness of Chinese fi scal easing next year, with additional stimulus measures (corporate tax cut, VAT tax cut) likely to be introduced soon, but without a fi rm timetable. In developed markets, the overall direction for fi scal policy could be towards easing. However, prospects for fi scal expansion in the US are limited, calling into question the sustainability of the tax-cut driven growth surge. The Eurozone fi scal policy is also likely to ease slightly. But the Italian example shows that the impact of fi scal policy on growth and forex are less obvious in Europe than elsewhere.

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Policy Rate (in %) US Policy Rate (in %) EUPolicy Rate (in %) Japan

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Exhibit 1: Key Policy Rates In Developed Markets

Source: CEIC, Morgan Stanley Research. Data as of November 2018

The fi rst half of CY2019 is fraught with a

multitude of large macro developments which are

expected to keep the markets fairly volatile.


II. Escalation of trade tension

As more markets, led by the largest economies, are taking steps to support their domestic industry (via delayed opening up or increasing barriers for incremental investment from foreign companies), global trade fl ows can continue to remain volatile and uncertain even in 2019. While the recent 90 day2 truce between the world’s two largest economies (China and the United States) does provide an opportunity for them to broker a deal that is mutually benefi cial (with some give and take), a meaningful and broad trend reversal is unlikely in the near term – possible until the next round of elections in these economies. This will effectively result in:

a) The countries will increasingly try to cater to domestic demand from domestic sources, i.e.,

change in energy imports via promoting or incentivising the use of renewables

use of effi cient technologies (like LED in lighting, super critical plants in thermal power)

electrifi cation (lowering for both household use by substitution of kerosene, as well as Electric Vehicles in mobility),

use of alternate fuels (increasing mandatory blending of ethanol with oil) etc.

While few countries may carry out some of these changes over multi-year periods or in some cases even decades, they do change the mix at the margin (if not decisively) more towards lowering the trade defi cit.

b) Additionally, countries that are currently witnessing a growth similar to that of China’s in the previous two decades or India’s incrementally in this decade, are looking to benefi t from opening up their markets to overseas companies with an incentive to promote the creation of domestically located manufacturing and supply chains.

c) At some level, a lower trade fl ow will also imply that there will be loss in economies of scale for those industries that have large export oriented facilities or have a global supply chain. Consequently, this will lead to an increase in infl ation levels for countries where these cannot be manufactured or will have to be substituted via higher cost domestic sources. While some job creation will be there for the domestic industry, there is likely to be a faster move towards technology driven solutions (as the quest to keep the cost low will always be there).

d) This will also necessitate the diversifi cation of sourcing for various raw, intermediate as well as fi nished products and to that extent countries with better access to vast pools of land, labour, a strong functioning judiciary, legal and fi nancial systems, can benefi t.

As more markets, led by the largest

economies, are taking steps to support their

domestic industry, global trade fl ows can

continue to remain volatile and uncertain

even in 2019.

Countries will increasingly try to cater to domestic

demand from domestic sources.

Impact:

1. This may positively impact sectors like Chemicals, Pharmaceuticals, Automobile, Engineering where India is a competitive supplier and at the margin can benefi t from a changing supply chain.

2. Technology providers, who can address the growing needs of automation and digitization can also benefi t as the additional capacities that get created would like to stay competitive.

3. Localisation of capacities (import substitution) is likely to benefi t outsourced manufacturers and material suppliers.

2 Source: Media sources


III. Crude oilGeopolitics has dominated the global oil markets - from fear of disruption in supplies to the news fl ow on increasing oil production from OPEC (mainly Saudi Arabia), USA and Russia. All this has led to sharp volatility in crude oil prices in 2018.

Exhibit 3: Macro variable sensitivity to rise in oil prices

Brent (USD/bbl)

USD/bbl160

140

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100

80

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Sensitivity to 10% rise in oil prices

Current account defi cit (% of GDP) 0.3

CPI Infl ation, YoY% 0.3

WPI Infl ation, YoY% 0.8

GDP Growth, YoY%* -0.01

Source: RBI, BNPP, Morgan Stanley Research. Data as of Dec 2018

Note: *GDP growth sensitivity is based on USD10/bbl change from RBI

The weaker global growth outlook from IMF, along with IEA’s

global oil demand growth which is

pegged largely fl at, should keep a lid on

the oil prices.

Brent prices have swiftly moved from USD 85 per barrel to USD 55 per barrel, in a matter of few weeks. However, in a meeting in early December 2018, oil exporting nations agreed for a 1.2 mm bpd output cut (OPEC 0.8 mm bpd and non-OPEC 0.4 mm bpd) with Russia fi nally agreeing to a gradual reduction and Iran and Venezuela being given an exemption3. Following this, we expect Brent prices to stabilize around these levels over the next two or three months. Subsequently, crude oil prices may take their cue from the impact on supply post the end of the 180 day waiver on crude imports from Iran (in the fi rst week of May 2019). Over the slightly longer term, post the completion of a network of pipelines in the US Permian basin from H2 FY 2020, transportation constraints are expected to ease and new supply is likely to hit the market. The weaker global growth outlook from the International Monetary Fund along with IEA’s global oil demand growth which is pegged largely fl at yoy at 1.4million barrels per day (bpd), should keep a lid on the oil prices. If the oil prices move contrary to our expectations, it could pose a risk to India’s Current Account Defi cit, infl ation and growth outlook. .

Source: Bloomberg, December 2018

3 Source: Media sources

Exhibit 2: Crude Oil (in USD, bbl)


In the short run, elections may add

some volatility to the markets. However, in the medium term

markets aren’t severely impacted by an election outcome.

Exhibit 4: Clear Mandate And Reform Continuity Drive Market Performance

Election Cycle 6M pre election 3M pre election 3M post election 6M post election Mandate

Performance Sensex Abs perf Sensex Abs perf Sensex Abs perf Sensex Abs perf

1984 9% 2% 30% 69% Majority

1989 1% -3% -2% 13% Weak coalition

1991 9% 7% 44% 42% Majority

1996 20% 6% -5% -19% Weak coalition

1998 -9% 7% -8% -21% Weak coalition

1999 32% 9% 6% 6% Strong coalition

2004 10% -10% -2% 11% Strong coalition

2009 30% 26% 27% 38% Strong coalition

2014 18% 18% 8% 16% Majority

Avg. 13% 7% 11% 17%

Exhibit 5: Good full term performance is backed by earnings growth

Election Cycle Year 1 Year 2 Year 3 Year 4 Year 5 Full Term Abs perf Sensex EPS Growth Abs perf

1999 -9% -35% 7% 56% 33% 76% 118%

2004 24% 82% 23% 21% -54% 65% 122%

2009 59% 6% -27% 20% -10% 76% 55%

2014 6% -11% 21% 8% - 23%* 9%

IV. Elections results don’t matter as long as they deliver a clear mandate to the winning coalitionOur study of general elections since 1984 suggests that, in the short run, elections may add some volatility to the markets, however, in the medium term markets aren’t severely impacted by an election outcome. We also observe that the returns are fairly healthy in three/six months post elections (Exhibit 4), if there is majority or a strong coalition. We see the following reasons for the same:

Since 1991 all the governments in power, post elections have carried forward the economic reform agenda, albeit at a different pace

Since 1999, the coalition (strong) government which has completed a full term, has added very little uncertainty to the markets

Thrust on infrastructure (roads, power, ports, airports, telecom) has been a core agenda of all the past governments

In the long term, markets have delivered good returns, tracking earning more closely than anything else (Exhibit 5)

Source: RIMES, Morgan Stanley Research, data as of Dec 2018. EPS growth computation: Bloomberg, Internal * Note: For 2014 election cycle, the performance is not full term.Past performance is no guarantee of future results.

Source: RIMES, Morgan Stanley Research, data as of Dec 2018. Past performance is no guarantee of future results.

Impact:

1. We see the government in power continuing the reform agenda, as seen in the past, which should benefi t the economy.

2. Impetus to rural infrastructure and focus on improving farm income along with falling dependency ratio and rising per capita income in urban areas shall continue and could boost consumption.

3. As capital expenditure of State government is higher than Central government, we see states continuing to invest in water/urban infrastructure/housing for all/metro rail/farm/rural roads/etc.

4. Goods and Services Tax and Direct Benefi t Tax could continue to benefi t and improve compliance.

5. Earnings will continue to recover (Please refer Theme 5 - covered later in the report) and should support markets.


B. SECOND HALF TO BE DRIVEN BY FUNDAMENTALS (MICRO OVER MACRO)

The second half of the calendar year is likely to be driven by earnings delivery. In some sense, a move from the single digit earnings growth seen in the past few years, towards the long term average levels (two decade average of 13%), is likely to result in the multiples trading at a premium vs the average to refl ect the improved growth. In this context, we see a reasonable year for equities amidst the volatility. In such an environment, stock selection is likely to be crucial and can make a large difference to equity portfolios.

Exhibit 6: Nifty Earnings Growth (% yoy)

We believe the following fi ve themes, impacting micros (markets), are likely to play out in CY 2019 and beyond.

Theme 1: Framework reforms in place for sustainable growth

Theme 2: Economic recovery led by consumption

Theme 3: Revival of manufacturing/investment capex

Theme 4: Embracing and accelerating digital disruption

Theme 5: Earnings growth: Delayed but recovery mode on

Nifty EPS Growth

Long Term Average 13%

40%

35%

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25%

20%

15%

10%

5%

0%

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FY 2

004

FY 2

005

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021E

We see a reasonable year for equities

amidst the volatility. In such an environment, stock selection becomes

crucial.

Source: Bloomberg, Consensus Nifty Estimates. Data as of Dec 2018


KEY THEMES FOR 2019

The Governments in India (since 1991, whichever party or coalition) have carried out some landmark reforms that can bring about sustainable economic improvement in the long term. While all these improvements have happened over the last three decades, some very notable ‘Next-Gen’ reforms have been carried out in the recent past which have had varied degrees of impact on the economy in a more institutionalized manner. Some of these include:

Insolvency and bankruptcy code

While this reform is in its initial years, it has the potential to change the way the economy can restart in case the assets created in a particular cycle turn bad. The quick and timeline based resolution process that has been brought about is a very healthy one. It has already helped set various precedents at the judicial level and in turn can position for further faster resolutions in the future with assets being passed on to stronger hands – as these examples serve as use cases for the future. More importantly, unlike the previous resolution mechanisms, this has given the power to the system (lenders, operational creditors, employees, promoters, society at large) to effect a management and ownership change and for the assets to change hands quickly in a very clean and legal manner. This gives the assets (and in turn the capital deployed) a better chance to remain productive in a far more expedient and effi cient manner.

Goods and Services Tax (GST)

The Goods and Services Tax was a landmark indirect tax reform (unparalleled globally at this scale) that has resulted in the widening of the tax base.

With the states and central government now having a single tax, the simplifi cation in terms of compliance, time saved (on both compliance and transit) is likely to introduce a greater proportion of activity into the mainstream economy.

Source: Government websites, BNP Paribas Asset Management.

Exhibit 7: Framework Reforms

Goods and Services Tax

(GST)

Auctioning of Natural Resources

FRAMEWORK REFORMS

Insolvency and Bankruptcy Code

Direct Benefi t Transfer

Jan Dhan Accounts

THEME 1 : FRAMEWORK REFORMS IN PLACE FOR SUSTAINABLE GROWTH

Some very notable ‘Next-Gen’ reforms have been carried out in the recent past which have

had varied degrees of impact on the

economy in a more institutionalized

manner.


This will also result in better opportunities for job creation in the formal sector and bring all players to a level playing fi eld.

While overall collections have been slightly below initial expectations, the structure on its own has led to the state level collections (driven by the fourteenth fi nance commission: 42% of central taxes vs 32% previously) being much higher than the break-even level. This has resulted in contributing to state funded projects that are more tailored to the specifi c development needs of the state.

Even in cases where compensation to some states has been required, the cess collections have been reasonably healthy and have allowed the tax structure to be a lot more predictable (and not prone to very frequent changes).

Exhibit 8: Goods and Services Tax Collection

Returns Filed (mn)GST Collection (INR bn, LHS)

1100

1000

900

800

700

600

500

8.0

7.0

6.0

5.0

4.0

3.0

2.0

(mn)(INR bn)

Aug-

17

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17

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17

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Mar

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-18

Source: PIB, Morgan Stanley Research. Data as of Nov 2018

Jan Dhan Accounts

Started in 2014, Pradhan Mantri Jan Dhan Yojana (PMJDY) has been a great boon for fi nancial inclusion to ensure access to fi nancial services in an affordable manner (that can be opened with Zero balance). It has led to a large section of the population coming under the ambit of the formal fi nancial sector. This, in effect, has also led to it being the backbone of a string of reforms that the Government has subsequently implemented like Direct Benefi t Transfer for a host of Government schemes.

Exhibit 9: Jan Dhan Account – Benefi ciaries and Amount

Bank TypeNumber of Total Benefi ciaries

(in mn)Deposits in Accounts

(INR bn)

Public Sector Banks 269.9 685.4

Regional Rural Banks 55.2 145.5

Private Sector Banks 10.4 24.0

Grand Total 335.5 855.0

Source: PMJDY Website, Morgan Stanley Research. Data as of December 2018.

Widening of the tax base will result in

better opportunities for job creation in the formal sector

and bring all players to a level playing

fi eld.


No of schemesDBT Transfers (in INR bn, LHS)

2500

2000

1500

1000

500

0

500

450

400

350

300

250

200

150

100

50

02013-14 2014-15 2015-16 2016-17 2017-18 2018-19 (FYTD)

(INR bn)

Source: DBT Website, Morgan Stanley Research. Data as of Nov 2018

Direct benefi t transfer

This reform was initially introduced in 2013. However, it has now picked up pace in terms of implementation where transfer of subsidies is now being done for as large as 400 schemes across 46 ministries as of CY2017 end4. With every passing year, these numbers are increasing and have resulted in the leakage levels of intended subsidies going down and the true benefi ciaries receiving their relevant share of the subsidies.

This, coupled with the opening up of Jan Dhan accounts, has led to most of these benefi ciaries coming into the mainstream fi nancial system and at some level being able to access funds at a relatively lower cost.

Exhibit 10: Direct Benefi t Transfers – Amount and Schemes

Impact:

At a macro level, the impact of these structural reforms is likely to institutionalize the process of Government actions and schemes and is likely to drive a widening of the tax base, fi nancialisation of savings, formalization of the economy and improved effi ciency in distribution of benefi ts through various Government schemes. Considering the myriad benefi ts, it is a very healthy development from a long term perspective.

Auction of natural resources

Auction of natural resources (vs the earlier mechanism of allotting on a fi rst come fi rst served basis) has led to a level playing fi eld. While this has potentially resulted in infl ation levels moving up for some of these natural resources, it has also helped the Government (or the People, in spirit) get a fair share of the resources at market determined rates.

With a clear mechanism to distribute the royalty, duties and levies, there is a very direct impact to the district (where the natural resource is located), the state and the centre.

Opening up of Jan Dhan accounts

has led to most benefi ciaries

coming into the mainstream

fi nancial system.

4 Source: DBT Website


Post the series of structural changes (demonetisation in late 2016, GST in mid-2017), the economy is slowly returning to normal growth levels on the back of a stable policy environment and growth initiatives fueled by government capex. While liquidity tightness at the margin is likely to bring down the growth that was being fi nanced by NBFCs (in the absence of most PSU banks ex SBI), we see the stress levels in the system slowly reducing. With capacity utilization levels also inching up at the economy level (RBI OBICUS survey indicating seasonally adjusted level at 76.1%, Sep 2018), monsoons being normal across most parts of the country and the key headwind of oil prices having eased considerably, we see an improvement at the margin in the economic activity, primarily driven by consumption. The momentum on private sector capex, however, can take some time and is unlikely for a good 6-12 months after elections, when policy clarity starts emerging as well as the benefi ts of some large landmark infrastructure projects like Dedicated Freight Corridor (DFC) and DMIC (Delhi Mumbai Industrial Corridor) start having an impact.

Source: RBI, Media Reports, Morgan Stanley Research. Data collated for Andhra Pradesh, Telangana, Tamil Nadu, Maharashtra Uttar Pradesh, Punjab, Rajasthan, Karnataka, Madhya Pradesh, Chhatisgarh

Farm Loan Waiver (in INR, Bn)

1000

900

800

700

600

500

400

300

200

100

0

831882

410

60

2014 2016 2017 2018

(INR bn)

Exhibit 12: Healthy Retail Credit Growth

Source: RBI, Morgan Stanley Research. Data as of November 2018.

Industry LoansRetail Loans

40%

35%

30%

25%

20%

15%

10%

5%

0%

-5%

-10%

Apr-

08

Sep-

08

Feb-

09

Jul-

09

Dec-

09

May

-10

Oct-

10

Mar

-11

Aug-

11

Jan-

12

Jun-

12

Nov

-12

Apr-

13

Sep-

13

Feb-

14

jul-

14

Dec-

14

May

-15

Oct-

15

Mar

-16

Aug-

16

Jan-

17

Jun-

17

Nov

-17

Apr-

18

Sep-

18

(yoy)

THEME 2 : ECONOMIC RECOVERY LED BY CONSUMPTION

We see an improvement at

the margin in the economic activity, primarily driven by

consumption.

Exhibit 11: Farm Loan Waiver by State Governments


Exhibit 13: Investments Led by Public Capex

Source: CMIE, Morgan Stanley Research. Data as of Sep 2018

Impact:

The economic recovery being led by consumption is likely to be positive for consumer staples, consumer discretionary, retail lenders, consumer durables and construction materials players.5

Public Private Total

Projects Under Implementation, YoY(%)20%

15%

10%

5%

0%

-5%

-10%

Sep-

11

Sep-

12

Sep-

13

Sep-

14

Sep-

15

Sep-

16

Sep-

17

Sep-

18

(yoy)

5 The sector(s) mentioned in this document do not constitute any recommendation of the same and BNP Paribas Mutual Fund may or may not have any future position in these sector(s).


A broad and widely followed measure of fi xed asset investment in any economy is Gross Fixed Capital Formation (GFCF). Between FY2012 and FY2017, India’s GFCF to GDP ratio has consistently been falling from around 34% to 30%. This was mostly on the back of near zero growth in household investments which included housing and informal enterprises. On the other hand, both public and private corporate sector capex posted a growth of 9% and 14%6 CAGR, respectively, over this time period. On an absolute basis, the GFCF (4 quarter average, %yoy) has grown from 6% to 11% since Jan 2018. (Exhibit 14)

THEME 3 : REVIVAL OF MANUFACTURING/INVESTMENT CAPEX

GFCF, 4-quarter avg, yoy%

Sep-

13N

ov-1

3Ja

n-14

Mar

-14

May

-14

Jul-

14Se

p-14

Nov

-14

Jan-

15M

ar-1

5M

ay-1

5Ju

l-15

Sep-

15N

ov-1

5Ja

n-16

Mar

-16

May

-16

Jul-

16Se

p-16

Nov

-16

Jan-

17M

ar-1

7M

ay-1

7Ju

l-17

Sep-

17N

ov-1

7Ja

n-18

Mar

-18

May

-18

jul-

18Se

p-18

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%

(yoy)

Exhibit 14: Gross Fixed Capital Formation (4 quarter average, %yoy)

Source: CSO, Bloomberg. Data as of Sep 2018

An approximate 7% GDP growth compounded over fi ve years translates into an approximate 40% growth in aggregate demand. This has led to utilization levels bottoming out in certain sectors like steel, railways, power, airports and autos. Although, corporate India is not euphoric as there are several stressed assets on offer under the Insolvency and Bankruptcy Code (IBC) proceedings, we have already seen a restart in investments in sectors like steel, railways chemicals and oil and gas with the power sector not being far behind.

If we take a closer look at the sectors, we can see new investments coming through.

In steel, after a long lull, companies like JSW Steel and Tata Steel have announced brownfi eld expansion plans of 12 million MT over the past year7. This is around 10% of existing steel production in the country.

In the rail sector, the central government is focusing on projects like route electrifi cation, doubling of existing track length and conversion of existing mild steel coaches to stainless steel Linke Hofmann Busch (LHB) coaches. After a considerable period of time, the railways are now becoming serious about increasing the wagon fl eet and orders for sourcing 21,758 wagons (highest ever) valued at more than Rs.60 billion8 have been placed. On their part, state governments are setting up metro rail projects. Currently, four such projects are being executed and another eight are due to commence their next phase in the near future.

Utilization levels have bottomed out in certain sectors like

steel, railways, power, airports and autos.

6 Source: CSO, Credit Suisse Research. Data as of March 20177 Source: Company Data. Data as of Dec 20188 Source: Media sources


In the chemical sector, the supply disruption caused by stricter environmental regulations in China has meant that Indian manufacturers of chlor-alkali, dye intermediates, pigments/dyes, agro-chemical and pharma intermediates have started investing in new capacities. While equipment for these projects will be mostly imported, it will be benefi cial for construction companies and producers of captive power equipment.

Another industry to witness a fresh round of capex is the natural gas sector. The central government’s stated objective of promoting the use of natural gas as a household and transport fuel will mean a signifi cant capex for setting up pipelines from west to north and east India. GAIL has announced plans to set up 5,500 km9 of pipeline capacity over the next three years. Pipeline connectivity will also enable new urea capacities to start in east India. Orders worth Rs. 180 billion have already been given to set up three urea plants in UP, Bihar and Jharkhand.

While the progress of road construction projects has not been always smooth, the National Highway Authority (NHAI) of India has prepared a tender pipeline of Rs. 900 billion10 to be awarded from next year onwards. Progress on awarded projects is also expected to improve as the pace of receiving fi nancial closure on hybrid annuity projects has picked up of late.

With average plant load factors (PLFs) hovering around 60% for a long time, the thermal power sector has been a laggard in terms of new investments. However, with electricity consumption growth picking up pace due in part to the governments’ various initiatives like the Saubhagya scheme, we have seen peak PLFs inch up to around 70% 11. This means that fresh capex will be necessary in another two to three years. In addition, the recent draft tariff guidelines rolled out by the CERC12 for the 2019-2024 period has lowered the regulated Return on Equity on all power plants that are more than 25 years old. This may encourage the replacement of these units with new and effi cient ones.

Impact:

Pickup in manufacturing and investments capex is likely to be positive for

(a) equipment suppliers (particularly the technology owners and/or the Indian subsidiaries of global tech leaders); and

(b) the industry leaders in these specifi c user industries who have latent capacity to cater to the incremental demand.

9 Source: Company data10 Source: NHAI 11 Source: saubhagya.gov.in12 Central Electricity Regulatory Commission


Aadhaar has added a layer to the service stack

At a global level, broadly digital disruption by the government has not kept pace with the digital disruption in business. Of the systems that have broken the one billion user mark, many have originated from private-sector efforts - Facebook and Google being among the prominent examples. An exception to this rule is Aadhaar*. Aadhaar is both, the only non-US technical system globally to have broken the one billion user threshold and the only such system to have been developed by the public sector.

Having a biometrically-verifi able identity number and a bank account created the potential for adding another layer to the service stack: mobile payments. With an identity to create a bank account, and a bank account to receive funds, the hundreds of millions of people eligible for the receipt of government services in India suddenly had a way to access those services digitally, from beginning to end. The process of digital disruption - whether led by the government or not - creates numerous signifi cant changes to the business models of traditional businesses. Rather than seeking to slow that process to reduce those challenges, India has taken the opposite approach: to not only embrace but accelerate digital disruption, so that it’s full potential for economic and social inclusion can be realized. The reality is that India is moving into the future at an unprecedented rate. And the path it is taking to get there is digital.

THEME 4 : EMBRACING AND ACCELERATING DIGITAL DISRUPTION

Exhibit 15: India Technology Service Stack

Presence-lessLayer

AadhaarAuthentication

Aadhaar e-KYC,e-sign, Digital Locker

Supported by major reforms and policy interventions

Pradhan Mantri Jan Dhan Yojana

AadhaareKYC

Goods andServices Tax

Network

UnifiedPaymentsInterface

Bharat BillPaymentSystem

IMPS, AEPS,APB and UPI

OpenPersonal

Data SourcePaperless Layer

Cashless Layer

Consent Layer

Source: IDFC Securities Research, IndiaStack and BCGImmediate Payment Service (IMPS), Aadhaar Enabled Payment System (AEPS), Aadhaar Payment Bridge (APB)

Technology is a common thread in digital disruption: Indian banks have been early movers

Technology is the common thread that weaves together most digital disruption themes. In India, rising internet penetration, high mobile penetration, lower storage costs, cloud computing etc. are helping accelerate this trend. Indian banks have been early movers in the adoption of new technology due to: (1) competitive awareness, (2) potential to save costs and (3) government/regulatory push. We expect banks to continue to dominate in the digitization of fi nancial services in India, given their responsiveness and agility, though we wouldn’t rule out some disruption in niche segments by bigger technology players.

Technology is the common thread that

weaves together most digital

disruption themes.


Exhibit 16: Digital Retail Transactions (as % of GDP)

Source: RBI, Morgan Stanley Research. Data as of Sep 2018 Note: Digital transactions comprise of Credit Card, Debit Card, Mwallet, other Prepaid Payment Instruments (PPI) and Immediate Payment Service (IMPS)

More people with data

Data prices have fallen by 90-95% in India over last 2 years13. India has gone from being the most expensive data pricing relative to average income country to by far the cheapest in the world. In response to this fall in prices, mobile data per user has spiraled up by 10x in a year.

Cheap video-capable phones help companies reach out to a large customer base in India including rural parts of India. The share of rural consumption that can be targeted by video advertising may jump from just 27 per cent to over 95 per cent as per Credit Suisse. Not only does the reach widen, but smaller advertisers can reach more niche audiences too: One can run an advertising campaign targeting only a few thousand users now, instead of relying on mass media advertising that has very large ticket-sizes for advertising spots. The cost of advertising should fall as well - the surge in volumes on some of the internet platforms has brought down the cost per impression by three-fourths in the last two years. Thus, the branding reach broadens, sharpens and also becomes cheaper.

The shift towards a digital ecosystem is driving data advantage to internet-centric business models. We could see a disruption in traditional models as customer engagement shifts to digital, with the emergence of new business models.

Drivers for digital consumption in place

Companies that use data across external and internal sources will be able to deliver better customer value and potentially use levers such as differential pricing, customized product, sharper credit risk assessment and reduce cost of delivery.

Digital technologies continue to tear up the traditional rulebook for industries. Standards are being shaken and norms nullifi ed as digital disruption spreads. This is already having a profound impact on the way organizations are strategizing in India.

Digital Retail Transactions (as % of GDP)

12%

10%

8%

6%

4%

2%

0%

F200

4

F200

5

F200

6

F200

7

F200

8

F200

9

F201

0

F201

1

F201

2

F201

3

F201

4

F201

5

F201

6

F201

7

F201

8

F1Q1

9

F2Q1

9

Companies that use data

across external and internal sources will be

able to deliver better customer value.

13 Source: Company data, Credit Suisse estimates. Data as of March 2016 to March 2018.


Exhibit 17: Disruption trends in Indian context

Automotive Banking & Financial Services Industrial Manufacturing Retail Healthcare

Active

Investing in technologies for digital supply chains

Use of data analytics Automation and Robotics Customer insights and wallet shares

Hybrid cars Collaboration with ecosystem

Supply directly to consumer through e-commerce

Retail workforce management

Marketing, promotion & offers using data

Buzz

EV Big Data Industrial internet of things (IOT) Electronic health

record

Remote hospital like care delivery

Cold Autonomous Vehicles

Blockchain and internet of things (IOT) 3D Printing of spare parts Physical digital stores

Big data for Predicting risk and health problems

Source: Media sources, Company data, Data as of Dec 2018

Impact:

Companies across various user industries who can use big data and technology can benefi t from (a) headroom over competition to gain market share, (b) better demand prediction and (c) improving cost structure, among a host of other benefi ts.

We already see many companies (across a wide spectrum of industries) who have embraced and accelerated these trends in a much better manner and the competition is starting to play catch up.


We expect earnings growth to slowly come back into the mid teen levels in FY2019E and move above historic average levels by FY2020E and FY2021E. A lion’s share of the incremental profi ts are being driven by a sharp improvement in the fi nancial (large corporate focused banks) sector as most of their stress is largely recognized and a retail book led recovery is anticipated. In addition to this, earnings growth is also expected in consumer focused sectors like pharmaceuticals, paints, construction materials, retailing and possibly telecom. Our assessment based on evaluating the street estimates is as below.

Exhibit 18: Nifty 50 Earnings Estimate

Exhibit 19: Long Term Nifty EPS Growth

Source: Bloomberg Consensus Estimates, Kotak Institutional Equities. Data as of Dec 2018

Source: Bloomberg Consensus Estimates. Data as of Dec. 2018Past performance is no guarantee of future results.

No Of Companies 2019E 2020E 2021E 2YR CAGR

Automobiles & Components 6 8% 18% 11% 15%

Banks 7 19% 65% 21% 42%

Capital Goods 1 33% 1% 14% 7%

Commodity Chemicals 1 17% 24% 18% 21%

Construction Materials 2 33% 29% 22% 25%

Consumer Staples 2 16% 15% 13% 14%

Diversifi ed Financials 4 21% 25% 24% 24%

Electric Utilities 2 18% 14% 13% 14%

Fertilizers & Agricultural Chemicals 1 10% 15% 11% 13%

Gas Utilities 1 55% 3% 8% 6%

IT Services 5 18% 12% 9% 10%

Media 1 11% 17% 13% 15%

Metals & Mining 4 25% -2% 12% 5%

Oil, Gas & Consumable Fuels 6 -1% 7% 8% 8%

Pharmaceuticals 3 58% 26% 22% 24%

Retailing 1 28% 25% 20% 23%

Telecommunication Services 2 -74% -23% 179% 47%

Transportation 1 9% 11% 28% 19%

Nifty 50 15% 26% 15% 20%

NIFTY EPS (INR/Share, LHS) % YoY

INR/Share yoy

800

700

600

500

400

300

200

100

0

50%

40%

30%

20%

10%

0%

-10%

FY 2

003

FY 2

004

FY 2

005

FY 2

006

FY 2

007

FY 2

008

FY 2

009

FY 2

010

FY 2

011

FY 2

012

FY 2

013

FY 2

014

FY 2

015

FY 2

016

FY 2

017

FY 2

018

FY 2

019E

FY 2

020E

FY 2

021E

We expect earnings growth to slowly come back into the mid teen levels in FY2019E and move above historic

average levels by FY2020E and FY2021E.

THEME 5 : EARNINGS GROWTH: DELAYED BUT RECOVERY MODE ON


Credit quality issues in the banking system will now start receding as stressed assets are getting recognized and being provided for in varying proportion (due to the RBI circular, the movement from the IBC process, pickup in economic activity etc.). With this, we expect to see the credit costs in the large banks easing off from elevated levels and hence driving a large improvement in the earnings.

While earnings growth from the diversifi ed fi nancials sector could be slower at a sector level on the back of recent liquidity issues, the stronger names (incidentally the large weights in the indices) could use their liability franchise strength to drive earnings growth.

Select consumer names are also likely to witness strong earnings growth on the back of accelerated spending in the domestic economy, improved execution and some benefi ts of corporate actions.

Among the smaller sectors, improved earnings are also expected from construction materials (largely paints followed by cement) on the back of benign input costs and improved volume growth. If pricing were to improve in these sectors, there is likely to be improved earnings growth.

A sharp recovery in the pharmaceutical sector earnings growth is likely due to a depressed base level. Here, improved execution hinges upon the success of specialty products in the US markets and a recovery in the domestic business that has suffered from changes in supply chain.

The Information Technology sector is likely to see improved earnings growth from a combination of improved end market trends of growing appetite for digital projects, their ability to offer solutions at scale and the benefi ts of improved capital allocation.

Industrial companies are also poised to show earnings growth recovery led by an improved order book visibility and gradually easing working capital stress in the system.

KEY RISKS

Oil prices

With India likely to drive one fourth of the global energy demand in the next two decades, the steps taken by the country to diversify its energy mix is something that has to be observed closely. With crude oil currently making up the largest proportion of the country’s energy demand, after coal, and consequently being the largest item of import, any signifi cant rise in oil prices results in the trade defi cit widening and puts pressure on the Government’s fi scal balance, infl ation levels, interest rates and the currency.

Liquidity issues for NBFCs turning into solvency issue at the margin for some

In the recent past, post the IL&FS issue, the fi nancial sector in the country has seen some pressure building up for businesses that do not have a strong liability franchises. With some of these entities having grown to a considerable size (to an extent that now NBFCs account for 28% of the total banking system credit in FY2018 vs 14% in 200714 ), any large ALM mismatch, if not managed well, can snowball into a credit quality issue and impact both confi dence as well as incremental lending in the market.

Any marked shift in policy by the Government (whichever party/coalition comes into power) post elections

Historically, irrespective of the government that has come in power post elections, the path of economic reforms in India has not seen a reversal. While the pace could come under question, the direction has not changed and the pressure on economics and fi scal prudence, has not been there. However, considering that the world is going through some changes on the trade policy front, a possible move towards very populist measures post elections can put pressure on the macros and, in turn, on the market.

Sharp slowdown in global macros

With a good proportion of the large Indian companies earnings now being dictated by the global macros (Information Technology, Energy, Pharmaceuticals, Metals), any meaningful slowdown in the global demand environment can adversely impact volume growth for some of these businesses and in turn slow down the growth in profi ts for these companies.

14 Source: RBI, Company data


EQUITY MARKET OUTLOOK

While we expect macro events, globally and domestically, dominating the equity markets in the fi rst half of the year, we see the second half of the year being largely driven by earnings delivery. In this context, we see a reasonable year for equities amidst the volatility. While we agree that the Indian market broader index valuations (for Nifty) at around 16.5x FY20E earnings does seem at a marginal premium to the long term average, the return to normalcy of earnings growth (to above longer term average levels), from the subdued levels that were seen in the last few years, we see this premium likely to hold up in the coming 12-24 months. Stock selection is likely to be crucial and can make a large difference to equity portfolios.

Given our outlook for the year and the themes discussed in this publication, we are positive on sectors like Private sector banks (given they are seeing continued momentum in retail business and the receding credit quality issues with the corporate loans), insurance companies (continued benefi ts of fi nancialisation of savings), consumer staples, paints, media, retail (that have tailwinds from improved consumption drivers). We also like select chemicals, gas utilities and industrial players (that are likely to derive benefi ts from the developments in China around pollution and trade wars; as well as the improving utilisations in the Indian industry).

Our stance on technology is neutral and driven by a more bottom up view on the various companies. While we see the likely global growth slowdown resulting in order pipeline and growth levels moderating from previous year levels, the companies have improved their competency levels in the new emerging technologies and are better placed. This, coupled with improved capital allocation and reasonable valuations offers balanced risk reward. We are also neutral on the diversifi ed fi nancials given they are going through a period of growth slowdown (vs the elevated growth levels seen in the last few years) owing to the recent liquidity issues and the likely change in funding sources.

Our underweight stance on Auto sector is due to likely pressures from increased cost of regulatory changes that are having an impact of demand as well as profi tability. On other major sectors, we remain underweight on public sector banks given their continued market share losses, and balance sheet constraints. On pharma, while there is likely to be large earnings growth, it is coming on a very subdued base and the valuations are yet not at a level where the risk reward is favourable – except a few names. Given the global growth slowdown, we remain underweight metals names as they are likely to face the twin pressure of subdued prices and the elevated leverage levels.

Disclaimer: The sector(s) mentioned above do not constitute any recommendation of the same and BNP Paribas Mutual Fund may or may not have any future position in these sector(s). Sector positioning is basis the current market dynamics and is subject to change at BNPP AMC’s discretion.

Exhibit 20: Sector Positioning

Overweight Neutral Underweight

Private sector banks Insurance Chemicals Media, Retail Cement Industrials Gas Utilities Paints Consumer Staples

Home Builders Technology Diversifi ed Financials

Auto Public Sector banks Telecom Metals Pharma Real estate Utilities


Infl ation

Average Retail infl ation is likely to stay sub 4% in CY2019 if food infl ation continues to offset pressure. First half of CY2019 would see a marginal pick up due to upside risk arising due to minimum support prices (MSP) impact and farm loan waivers. Hence, the headline number is most likely to meet RBIs estimate of 3.80-4.20% for Q2 & Q3 CY2019 as moderation in oil prices and rupee appreciation are positive factors.

The monetary policy committee (MPC) has indicated a real rate expectation of around 125-175 bps, thus with 1 year forward CPI guidance at around 4.00-4.25%, we are sitting comfortable at real rates in excess of 200 bps.

Rates

We expect the RBI to remain at a long pause for better part of the fi rst half CY2019. Though the new Governor has hinted a dovish bias on interest rates, we need to be cognizant of global headwinds emanating from US politics, Eurozone parliamentary election shaping the Eurozone, rate path of US Federal reserve as well as possible tightening stance from ECB. The MPC would err in the side of caution and hold rates. The demand supply dynamics looks fairly balanced for better part of Q1 CY2019 and thus till RBI keeps the tap open for liquidity via the OMO purchases, we are constructive on the sovereign curve. However, with increased supply of SDL s because of political populism through farm loan waivers, we expect it to crowd out the investments in the corporate bond space keeping the spreads elevated. We expect the 10 year G-sec to trade in the range of 7.10%-7.40% for the fi rst half of CY2019. We expect RBI to actively provide liquidity to the banking system via increased OMOs in Q1 CY2019, add to it improved capital fl ows via remittances and portfolio fl ows. Thus with a long pause at rates, we expect the yield curve to steepen going forward.

DEBT MARKET OUTLOOK

Growth

The GDP in H1FY19 came in at 7.4%. Going forward, while lower rabi (winter crop) sowing coupled with the soft crop prices may affect rural demand, we believe the pre-election government spending (farm loan waivers, higher MSPs) would offset the decline in output/realisations. Also, lower crude price and stronger currency (implying lower import prices) increases the disposable income in the hands of the consumer. This would aid in higher consumption supporting the GDP. In addition, low interest rate cycles are not attractive enough for the savers, thereby, encouraging consumption led GDP growth. The uptick in capacity utilization would encourage new investments, especially the missing private sector investments in the form of addition of new capacities further supporting GDP outlook. Based on the these factors, we believe that the RBI’s GDP forecast of 7.5% for H2FY2019 could be met.

Exhibit 21: Private Consumption Growth

Source: CMIE, Morgan Stanley Research. Data as of Sep 2018

Private Consumption 4-quarter avg, YoY%

12%

10%

8%

6%

4%

2%

0%

Sep-

13

Dec-

13

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

Dec-

17

Mar

-18

Jun-

18

Sep-

18

YoY%


Exhibit 22: Consumer Price Infl ation Vs Repo Rate

Source: RBI, Morgan Stanley Research, Data as of Nov 2018

Mar

-12

Aug-

12

Jan-

13

Jun-

13

Nov

-13

Apr-

14

Sep-

14

Feb-

15

Jul-

15

Dec-

15

May

-16

Oct-

16

Mar

-17

Aug-

17

Jan-

18

Jun-

18

Nov

-18

14%

12%

10%

8%

6%

4%

2%

0%

9.0%

8.5%

8.0%

7.5%

7.0%

6.5%

6.0%

5.5%

5.0%

CPI Repo Rate (RHS)

Exhibit 23: India 10 Year G-Sec

10Y Yield

9.5

9.0

8.5

8.0

7.5

7.0

6.5

6.0

5.5

Dec-

12

MAr

-13

Jun-

13

Sep-

13

Dec-

13

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

Dec-

17

Mar

-18

Jun-

18

Sep-

18

Dec-

18

Source: Bloomberg. Data as of Dec 2018

Exhibit 24: OMO Operations (in INR, bn)

Source: RBI, Morgan Stanley Research. Data as of Dec 2018

(INR Bn)

500

400

300

200

100

0

-100

-200

-300

Mar

-16

Jun-

16

Sep-

16

Dec-

16

MAr

-17

Jun-

17

Sep-

17

Dec-

17

Mar

-18

Jun-

18

Sep-

18

Dec-

18

RBI has announced OMO purchases worth INR 1360 bn since Sep-18

We expect the RBI to remain at a long pause for better part of fi rst

half of CY2019.

We expect the 10 year G-sec

to trade in the range of 7.10%-7.40% for the fi rst

half of CY2019.


FUND POSITIONING

CONTRIBUTORS

Equity Funds Scheme Positioning

BNP Paribas Large Cap Fund The fund aims to invest predominantly in the large cap space with focus on quality companies exhibiting sound management and fundamentals across sectors with sustainable earnings growth.

(An Open-Ended Equity Scheme predominantly investing in large cap stocks)

BNP Paribas Multi Cap Fund The fund follows a multi-cap approach, with a blend of growth and value stocks. For value, the fund scouts for opportunity among high operating cash fl ow companies and for growth it looks for companies with sustainable and superior earnings growth.

(An Open-Ended Equity Scheme investing across large, mid cap and small cap stocks)

BNP Paribas Midcap Fund The fund intends to invest primarily in the midcap space with focus on high growth companies with superior earnings potential across all sectors.

(An Open-ended Equity Scheme predominantly investing in mid cap stocks)

Chockalingam NarayananHead - Research (Equities)

Karthikraj LakshmananSenior Fund Manager (Equities)

Brijesh Ved*Head of Equities - PMS & Offshore Advisory

Vikram PamnaniFund Manager (Fixed Income)

*Brijesh Ved’s contribution is limited to authoring of research articles in this publication.

Mayank PrakashFund Manager (Fixed Income)

Amol JadhavProduct & Investment Specialist

Abhijeet DeySenior Fund Manager (Equities)


Equity Funds Scheme Positioning

BNP Paribas Focused 25 Equity Fund The fund follows a concentrated strategy of high conviction companies having superior and sustainable earnings growth. The fund intends to invest across capitalization with a blend of value and growth stocks.

(An Open-Ended Equity Scheme investing in maximum 25 stocks across market capitalization i.e. multi cap)

BNP Paribas India Consumption Fund The fund follows a multi cap approach with consumption as a core theme. These are businesses which interact directly with their consumers, i.e., following primarily a B2C (business-to-consumer) model. The fund intends to focus on companies having strong competitive advantage, with high earnings visibility over the long run.

(An Open-Ended Equity following consumption theme)

BNP Paribas Long Term Equity Fund The fund is a diversifi ed equity scheme with fl exibility to own companies across market capitalizations. Three year lock-in makes the fund less vulnerable to volatility in cash fl ows and increases the fund manager’s ability to capture suitable long term investment opportunities.

(An Open-Ended Equity linked savings scheme with a statutory lock in of 3 years and tax benefi t)

Hybrid Funds Scheme Positioning

BNP Paribas Arbitrage Fund The fund follows an arbitrage strategy with an aim to take advantage of mispricing opportunities arising from cash and futures along with a tactical “market neutral strategy” on a small portion of the portfolio. This enhancement is with an aim to aid the fund in alpha generation i.e. the ability of our actively managed long portfolio to outperform Nifty (which we sell for hedging the long portfolio). While there is an imperfect hedge (but values are matched) at play, there is no directional view taken on markets. The fund also invests in short-term fi xed income instruments.

(An Open-Ended Equity Scheme investing in arbitrage opportunities)

BNP Paribas Substantial Equity Hybrid Fund The fund aims to focus on long term wealth creation through a combination of Equity and Debt. The equity portion of the portfolio intends to be well diversifi ed with fundamentally strong companies across market cap and sectors. The debt portion is actively managed to help generate stable income reducing the overall volatility of the fund.

(An Open-Ended Hybrid Scheme investing predominantly in equity and equity related instruments)

Debt Funds Scheme Positioning

BNP Paribas Corporate Bond Fund The fund intends to play out the curve with a drawdown strategy. We intend to maintain average maturity of the fund around 3 - 3.25 years with higher weightage to investments in the 3 – 3.5 year space. We believe that the rates in this segment are attractive to play out a buy-and-hold rundown strategy. The fund maintains an opportunistic stance towards taking tactical duration calls.

(An Open-Ended Debt Scheme predominantly investing in AA+ and above rated corporate bonds )

BNP Paribas Short Term Income Fund The Fund intends to maintain the low average maturity since the yield curve is expected to steepen. The Fund would like to maintain lower duration and remain in liquid AAAs and equivalent. We also remain open to taking tactical duration calls.

(An Open ended Short Term Debt Scheme investing in instruments such that Macaulay duration^ of portfolio between 1 year and 3 years)

^Concept of Macaulay duration: The Macaulay Duration is a measure of a bond’s sensitivity to interest rate changes. It is expressed in annual terms. It is the weighted average term to maturity of the cash fl ows from a bond. The weight of each cash fl ow is determined by dividing the present value of the cash fl ow by the price. Factors like a bond’s price, maturity, coupon, yield to maturity among others impact the calculation of Macaulay duration.

Fund positioning contained herein is for general information purposes only and does not indicate assurance of future scheme performance. Further, the portfolio of the scheme(s) is subject to changes within the provisions and limitations of Scheme Information Document. For further details on asset allocation, investment strategy and risk factors of the scheme(s), please refer to SID available on our website (www.bnpparibasmf.in). The market outlook provided herein should not form basis for any investment decision in the scheme(s) of BNP Paribas Mutual Fund and Fund positioning and market outlook should be considered and read as independent of each other.


PRODUCT LABELING

Equity Funds Riskometer

BNP Paribas Large Cap Fund (An Open ended Equity Scheme predominantly investing in large cap stocks)This product is suitable for investors who are seeking*: Wealth Creation in long term. Investments in diversifi ed and actively managed portfolio of equity and equity

related securities with bias to large cap companies.Investors understand that their principal

will be at Moderately High risk.

BNP Paribas Multi Cap Fund (An Open ended Equity Scheme investing across large cap, mid cap, small cap stocks)This product is suitable for investors who are seeking*: Wealth Creation in long term. Investments in actively managed portfolio of equity and equity related

securities across market capitalization.Investors understand that their principal

will be at Moderately High risk.

BNP Paribas Mid Cap Fund(An Open ended Equity Scheme predominantly investing in mid cap stocks)This product is suitable for investors who are seeking*: Wealth Creation in long term. Investments in companies in mid capitalization segment. Investors understand that their principal

will be at High risk.

BNP Paribas Focused 25 Equity Fund (An Open ended Equity Scheme investing in maximum 25 stocks across market capitalization (i.e. multi cap stocks))This product is suitable for investors who are seeking*: Wealth Creation in long term. Investment primarily in equity and equity-related securities of upto 25 companies

and the rest in debt securities & money market instruments.

Investors understand that their principal will be at Moderately High risk.

BNP Paribas India Consumption Fund(An open ended equity scheme following consumption theme)This product is suitable for investors who are seeking*: Wealth creation in long term. Investment primarily in equity and equity-related securities and the rest in

debt securities & money market instruments to generate capital appreciation and provide long-term growth opportunities by investing in companies expected to benefi t by providing products and services to the growing consumption needs of Indian consumers.

Investors understand that their principal will be at High risk.

BNP Paribas Long Term Equity Fund (An open ended equity linked saving scheme with a statutory lock in of 3 years and tax benefi t)This product is suitable for investors who are seeking*: Wealth Creation in long term. Investments in diversifi ed and actively managed portfolio of equity and equity

related securities across market capitalisation along with income tax rebate.


BNP Paribas Arbitrage Fund (An Open ended Scheme investing in arbitrage opportunities)This product is suitable for investors who are seeking*: Wealth creation in long term. Investment in a diversifi ed portfolio of equity and equity related instruments,

including use of equity derivatives strategies and arbitrage opportunities with exposure in debt & money market instruments.



Hybrid Funds Riskometer

BNP Paribas Substantial Equity Hybrid Fund (An Open ended Hybrid Scheme investing predominantly in equity and equity related instruments)This product is suitable for investors who are seeking*: Wealth creation in long term. Investment primarily in equity & equity-related securities and the rest in

debt securities & money market instruments to generate income and capital appreciation.


Debt Funds Riskometer

BNP Paribas Corporate Bond Fund (An Open ended Debt Scheme predominantly investing in AA+ and above rated corporate bonds.)This product is suitable for investors who are seeking*: Capital appreciation and regular income in long term. Investment primarily in AA+ and above rated corporate bonds and the rest in

debt and money market instruments.

Investors understand that their principal will be at Moderate risk.

BNP Paribas Short Term Income Fund(An Open ended Short Term Debt Scheme investing in instruments such that Macaulay duration^ of portfolio between 1 year and 3 years)This product is suitable for investors who are seeking*: Regular income in short term. Investments in debt & money market instruments.

Investors understand that their principal will be at Moderate risk.

^Concept of Macaulay duration: The Macaulay Duration is a measure of a bond’s sensitivity to interest rate changes. It is expressed in annual terms. It is the weighted average term to maturity of the cash fl ows from a bond. The weight of each cash fl ow is determined by dividing the present value of the cash fl ow by the price. Factors like a bond’s price, maturity, coupon, yield to maturity among others impact the calculation of Macaulay duration.

* Investors should consult their fi nancial advisers if in doubt about whether the product is suitable for them.

The material contained herein has been obtained from publicly available information, internally developed data and other sources believed to be reliable, but BNP Paribas Asset Management India Private Limited (BNPPAMIPL) makes no representation that it is accurate or complete. BNPPAMIPL has no obligation to tell the recipient when opinions or information given herein change. It has been prepared without regard to the individual fi nancial circumstances and objectives of persons who receive it. This information is meant for general reading purpose only and is not meant to serve as a professional guide for the readers. Except for the historical information contained herein, statements in this publication, which contain words or phrases such as ‘will’, ‘would’, etc., and similar expressions or variations of such expressions may constitute ‘forward-looking statements’. These forward-looking statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those suggested by the forward-looking statements. BNPPAMIPL undertakes no obligation to update forward-looking statements to refl ect events or circumstances after the date thereof. The words like believe/belief are independent perception of the Fund Manager and do not construe as opinion or advise. This information is not intended to be an offer to sell or a solicitation for the purchase or sale of any fi nancial product or instrument. The information should not be construed as an investment advice and investors are requested to consult their investment advisor and arrive at an informed investment decision before making any investments. The Trustee, Asset Management Company, Mutual Fund, their directors, offi cers or their employees shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages arising out of the information contained in this document.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Invest online atwww.bnpparibasmf.in

Call us on1800 102 2595 (Toll-Free)

OR

BNP Paribas Asset Management India Private Limited

Corporate Identity Number(CIN) : U65991MH2003PTC142972Regd. Off. : BNP Paribas House, 1 North Avenue,

Maker Maxity, Bandra Kurla Complex, Bandra (East),Mumbai – 400 051, India

Email : [email protected] | Fax : 91 022 33704294

THE YEAR OF SELECTION · 2019-01-10 · the markets, possibly separated by the general elections....

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Transcript of THE YEAR OF SELECTION · 2019-01-10 · the markets, possibly separated by the general elections....