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1 A subsidiary of TVS Wealth Pvt Ltd IMMPL Annual Outlook 2019
2 2018 A CHALLENGING YEAR, BETTER STARTING POINT IN 2019 The year gone by The year 2018 was a challenging year for investors. Almost all asset classes faced significant ups and downs during the year. Global economic growth slowed down in the last quarter, led by China. Availability of cheaper money reduced as global liquidity tightened. Political risks rose with US-China trade tensions emerging. Crude prices oscillated between a low of USD 53/bbl and high of USD 85/bbl. Locally, at the start of the year Indian equities and currency were overvalued and interest rates started increasing. Additionally IL&FS, a AAA-rated, Non Banking Financial Corporation (NBFC), it defaulted triggering concerns around other NBFCs and in turn tightening liquidity at the local level as well. What to expect this year Local fundamentals have improved since the start of last year. Equity valuations have moderated to more reasonable levels. Corporate profit (earnings) are likely to grow at a higher pace in The RBI could move towards cutting rates. The INR is unlikely to breach its 2018 lows this year and seems to be more fairly valued now. Crude prices could stabilize around USD 60 65/bbl in However, global volatility is likely to continue, just like Global growth may decline in Global interest rates are expected to continue tightening. US-China trade tensions are likely to continue simmering. Local volatility is also likely to increase as we head into election in May, So, what does this mean for investors? It is important to stick to one s asset allocation, basis individual risk profile, to counter volatility. We are neutral on equities and bonds, hence suggest clients to be at the middle of their equity/debt band, as per risk profile. Key takeaways Local fundamentals slightly better. But, global volatility likely to continue. Stick to one s asset allocation. We are neutral on equities/bonds. Performance of key indices Index Price %change %change (Dec 31, 1 year 3 years* 2018) Nifty Index 10, % 11.0% Nifty Midcap 17, % 10.1% Nifty 6, % 4.5% Smallcap MSCI World % 6.0% (USD) MSCI EM % 8.0% (USD) 10-yr Govt 7.37% 5bps -13bps Securities 10-yr US Treasury 2.69% 28bps 14bps USD/INR % 1.7% Spot Brent Crude % -6.9% Price (USD/bbl) Gold 1, % 6.5% (USD/oz) Source: Investing.com Change in bond yields is in absolute basis points *3-year return is annualized, change in bond yields is also annualised SIP/STP could be the best way to tackle expected equity volatility. We suggest to limit exposure to mid/small-cap equities for now. We prefer good credit quality (AAA/AA-rated) short-duration funds on the debt side.
3 Global equities were under pressure in 2018 (% price change in 2018) India US 3.2% -6.2% The RBI raised rates twice, by 25bps each, to 6.5% in 2018, as inflation crossed RBI s target range of 4% at the start of the year. However in its latest monetary policy, the RBI sounded a little more accommodative as inflation fell below the 4% mark. World -10.4% What to expect in 2019 Euro -10.3% Emerging -16.6% Market China -24.6% 30% 25% 20% 15% 10% -5% 0% 5% 10% Source: Investing.com, data as of December 31, 2018 Global Macroeconomic Outlook Global GDP growth remained at 3.7% in 2018, same as 2017, despite slowdown in China s economic growth. However, growth slowed in Q as US economy grew at 3.4% vs 4.2% in Q (highest in four years). The US Fed raised rates four times in 2018 and started reducing its balance sheet, thus ending the period of cheap money. What to expect in 2019 India s GDP growth could slow, though still remain strong, as both consumption and investment are likely to moderate. High-frequency indicators like auto sales, new project launches indicate the same. CPI inflation could range between 4 4.5% as food inflation picks up from very low levels and core inflation moderates as crude prices stabilize and impact of house rent allowance wanes out. The RBI could cut rates at least once as inflation remains moderate and growth slows. Politics could be in focus as we head into general elections in May Key charts Global GDP growth likely to slow in 2019 US economic growth could slow further as impact of corporate tax cuts and fiscal spending in the US fade away. Chinese economy could continue to slow as the government continues to deleverage. The US Fed could now hike interest rates once in Central banks outside the US could also start tightening E 2019E Equities outside US could outperform American equities as they catch up with US equity performance in Indian Macroeconomic Outlook GDP growth %change y/y Source: Aditya Birla Sun Life to AMC 2019, data basis Bloomberg consensus estimate Indian GDP growth reached a 10-quarter high of 8.2% in Q (quarter ended June, 2018) before declining to 7.1% growth in Q (quarter ended September, 2018). India s Consumer Price Index (CPI) inflation declined from 5.0% at the start of the year to 2.3% (in November, 2018), much below RBI s target of 4% with food inflation declining and core inflation remaining about 5%.
4 India s inflation declined below RBI s target of 4% in 2018 What to expect in 2019 Equity valuations have moderated to a more reasonable level. Growth in corporate earnings is likely to be a key driver for Indian equity returns. We expect earnings to pick in 2019, led by reduction in provisioning costs for banks. Emerging market equities could rebound after a sharp correction last year. This could support foreign inflows into Indian equities as well. However, global volatility (slowing growth, Source: Tradingeconomics India s GDP growth slowed in Q rising interest rates, and US-China trade tensions) and political risk as we head into elections are key concerns in our view. Implication for investor portfolios We are neutral on equities and bonds, hence suggest clients to be at the middle of their equity/debt band, as per risk profile. While mid- and small-cap valuations also look reasonable, given expectations of volatility, it is best to limit mid/small-cap exposure. Existing investors in mid/small-cap can now remain invested. Staggered way of investing, using STP/SIPs, could be the best way to tackle expected equity volatility. Source: Tradingeconomics Indian Equity Outlook At the start of 2018, Indian equities were near all-time highs. Earnings (corporate profit) growth had continued to be below market expectations and the INR was overvalued. As the year progressed US-China trade tensions weighed on EM equities. Additionally, for the INR, crude oil prices also rose. Since crude is a large part of our import bill, it led to a sharp fall in the INR. This weighed on Indian equities as well. Additionally, IL&FS default triggered concerns about system-wide issues. This led to sharp correction in Indian equities. Indian mid- and small-cap saw significantly higher correction, compared to the large-caps. We took a cautious stance towards Indian equities at the start of the year and preferred large-caps over mid- or small-caps. Key drivers for Indian equities Driver View Rationale Macroeconomic Environment Valuations Earnings EM Equities Moderate inflation supportive, GDP growth slowing but still strong. Global volatility and local elections key risks. Valuations reasonable, but still above historic avg. Expectations of earnings pick up in Expectations of bounce Positive, Neutral, Negative back in EM equities could support flows into Indian equities as well. Source: International Money Matters Investment Committee
5 Key charts Mid- and small-cap corrected more sharply % % 5.9% 3.2% - 3.4% -40% -30% -20% -10% 0% 10% Sensex Nifty Index Nifty 500 Midcap Smallcap Source: Investing.com, data as of December 31, 2018 Equity valuations look more reasonable Indian Bonds Outlook Indian bond yields saw a wild swing this year. Fall in the INR and rise in crude oil price led to expectations of rise in inflation, hence the RBI raised repo rates by 50bps in Additionally, liquidity tightened as investors refrained from lending to NBFCs post the IL&FS default. Subsequently bond yields rose by 105bps to a high of 8.18% (in September, 2018) from lows of 7.13% in April, However, significant Open Market Operations (OMOs) by the RBI (almost INR 1.5tn worth of OMOs were purchased between September, 2018 and December, 2018) and easing of norms by allowing banks to lend more to NBFCs led to improvement in liquidity. As a result, bond yields declined by 81bps to 7.37% by end of 2018, from the highs of September, What to expect in 2019 The RBI could cut rates in 2019, if inflation continues to remain below the 4% RBI target. Corporate bond yields (AAA/AA) will be more attractive than government bond yields, as they haven t declined in accordance with the fall in government bond yields. However, the government could marginally Jan08 Jan10 Nifty trailing Source: Capitaline Jan12 Jan14 Jan16 Jan18 Corporate earnings likely to pick up in % 25% 20% 15% 10% 5% 0% -5% -10% 7.8% FY % FY11 7.1% FY12 2.9% FY % FY14-5.1% FY15-0.6% FY16 6.2% FY17 Jan20 Historic avg. 8.0% FY % FY19E 23.7% FY20E overshoot their fiscal deficit target if GST revenues disappoint. Additionally, rising global bond yields could also cap gains in Indian bonds. Implication for investor portfolios We remain neutral on Indian bonds portfolios should be near the median of the bond range, basis investor s individual risk profile. We prefer short-duration, good-quality (AAA/AA) bonds. We believe uncertainty around fiscal deficit and rising global bond yields could limit scope for sharp gains for long-duration portfolios. Hence, we suggest clients invested in medium/long-durations funds, to look at reallocating to short-duration funds once three years are completed. Nifty EPS growth Average
6 Key drivers for Indian bonds Driver View Rationale Microeconomic Environment Bond Yield Monetary Policy Moderate local inflation supportive, but global yields rising. Bond yield vs. repo rate and inflation is attractive. If inflation continues to remain moderate, scope for rate cut by the RBI could increase. Liquidity Bond Supply Demand OMOs by the RBI and increasing lending by banks to NBFCs have eased liquidity concerns. Government could overshoot its fiscal deficit target, requiring it to borrow more. Positive, Neutral, Negative Source: International Money Matters Investment Committee Key charts Difference between AAA corporate bond yields and Gsec higher than historic average Bond yields have declined significantly already Source: Investing.com Source: IDFC AMC,days as of December 31, 2018 Liquid funds outperformed in % 2.0% 4.0% 6.0% 8.0% Source: CRISIL, days as of December 31, % Indian Rupee The Indian rupee (INR) depreciated by more than 14% to touch an all-time low of 74.34, before recovering to close 2018 at With the Fed raising rates in the US, and US-China trade tensions rising, led to a stronger USD as money moved to the US. Subsequently Emerging Market (EM) currencies, including the INR, declined. Further rise in crude oil prices led to increase in India s import bill, given it is our largest import. This added further pressure on the INR. In the long term, the INR depreciates against the USD by about 3 4% every year, given the inflation differential of 3 4% between India and the US. After sharp depreciation in 2013, the INR appreciated till the end of This made the INR overvalued against the USD. Hence, a bit of fall was expected.
7 What to expect in 2019 The INR is likely to be range bound between in 2019, given the INR is fairly valued now. Key Charts Indian rupee fell in line with other emerging market currencies in 2018 The USD isn t expected to get more stronger, as the US Fed s interest rate rising path is well known to investors for sometime now. Foreign inflows can be expected, as EM market valuations look attractive after a sharp decline in Crude Oil Prices Crude oil prices saw a wild swing in 2018, rising by 29% to a high of USD 86.29/bbl in October 2018 and then declining by 37% to USD 53.8/bbl by end of Decline in Venezuela s production, US sanction on Iran, and OPEC supply cut led to lower supply initially putting pressure on prices. However, as US-China trade tensions increased, demand outlook for crude reduced. Additionally, US shale gas and OPEC production increased, and the US relaxed restriction on import of oil from Iran, causing oil prices to decline sharply % -20.6% -17.0% -16.6% -9.5% -7.5% -6.4% -5.7% -4.9% -4.5% -2.7% Turkey Russia Brazil India Indonesia China Euro Korea Malaysia -50.0% -40.0% -30.0% -20.0% -10.0% 0.0% 10.0% South Africa Source: Investing.com, data as of December 31, 2018 Crude price important variable for the INR UK What to expect in 2019 Crude oil prices are likely to stabilize around the USD 60-65/bbl level. Crude oil supply is likely to decline, as American exemptions on importing crude oil from Iran despite sanctions end. Further rise in US shale gas production unlikely. OPEC cut in supply to be implemented in USD 18/INR Crude Oil Price January, actual compliance to be closely watched. Rise in crude oil production led to sharp decline in prices in 2018 Source: Investing.com, data as of December 31, 2018 Gold Gold prices are generally inversely related to the USD. USD strength in the first half of 2018 as the US Fed raised rates weighed on gold prices. However, gold is considered a safe haven, thus when risks escalate gold prices rises. Hence, as geopolitical risks escalated due to US-China trade tensions, demand for gold increased and gold prices rallied. On the other hand, INR gold gained 8.1% in 2018 even as global gold prices declined by 1.5% in This was largely due to 8.2% depreciation of theinr against the USD. Source: Aditya Birla Sun Life AMC
8 What to expect in 2019 Gold could offer diversification benefits amid expected volatility. Geopolitical risks due to US-China trade tensions could add to gold s safe haven demand. Further strengthening of the USD unlikely, which could be positive for gold. We suggest 5 10% exposure in gold for diversification. Key charts of 2018 Key chart Gold inversely related to the US Dollar Gold (XAU/USD) Jan12 Jan13 Gold Price Source: Investing.com Jan14 Jan15 Jan16 Jan17 Jan18 Jan19 Jan20 Dollar Index US Dollar Index (DXY) Indian equities in 2018 Source: ICICI Prudential AMC, data as of December 31, 2018 India Government Bond yield in 2018 Source: ICICI Prudential AMC, data as of December 31, 2018
9 How Did We Do in 2018 Scheme Type CY2018# CY2017* CY2016* Cumulative 3-year Performance^ IMM Large Cap Funds IMM Large Cap PMS Industry Average Nifty 100 TRI IMM Multi Cap/ Large & Mid Cap Funds IMM Multicap PMS Industry Average Nifty 500 TRI IMM Mid Cap Funds Industry Average Nifty Midcap 100 TRI IMM Small Cap PMS Nifty Smallcap IMM Aggressive Hybrid Funds IMM Dynamic Asset Allocation Funds 3.22 CRISIL Hybrid Aggressive Index IMM Short Term Fund IMM Credit Risk Fund IMM Medium Duration Fund 6.42 Crisil Short Term Bond Fund Source: International Money Matters All data as of December 31, All returns in percentage gains in INR, all returns shows for direct plans only # Please note due to SEBI-suggested recategorization funds could have moved from one category to another in * The category is as per IMMPL categorization, ^3-year performance is annualized. Please note past performance is not an indicator of future performance.
10 As seen in 2018, we believe index funds might be able to outperform large-cap funds and large-cap PMSes going forward. Hence, adding some large-cap index funds makes sense. WHAT TO EXPECT IN We believe multi-cap, mid-cap, and small-cap PMSes could continue to outperform their respective indices in the coming years. Short-duration funds could continue outperforming medium-duration funds in *Please keep investment suitability in mind while investing in PMS. What We Are Watching Events Date US Fed s 1st monetary policy meeting of 2019 January 30, 2019 RBI s 1st monetary policy meeting of 2019 February 7, 2019 US China trade tension: deadline for China s to implement structural changes March 1, 2019 Britain s exit date from European Union March 29, 2019 Indian General Elections May, 2019
11 Disclaimer All information contained in this document has been obtained by IMMPL from sources believed by it to be accurate and reliable. Although reasonable care has been taken to ensure that the information herein is true, such information is provided "as is" without any warranty of any kind, and IMMPL and its respective directors, officers, or employees in particular, makes no representation or warranty, express or implied, as to the accuracy, suitability, reliability, timelines or completeness of any such information. All information contained herein must be construed solely as statements of opinion, and IMMPL and its respective directors, officers, or employees shall not be liable for any losses or injury, liability or damage of any kind incurred from and arising out of any use of this document or its contents in any manner, whatsoever. Expressions of opinion are those of IMMPL only and are subject to change without notice. It does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. Investors should seek professional advice from heir financial advisors regarding the appropriateness of investing in any securities or investment strategies that may have been discussed or recommended in this report and should understand that the views regarding future prospects may or may not be realised. Visit
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