India Insights Monthly update on Indian markets

Transcription

1 India Insights Monthly update on Indian markets March 2018 Summary CPI inflation for month of February came in at 4.44%, lower than market expectations driven by deceleration in food prices on seasonal supply, while core inflation remained steady We expect the RBI to be on hold in 2018 as it balances inflation and growth concerns. A change in policy is possible if inflation is significantly above or below the RBI's projected trajectory In February, the RBI announced a revised framework for resolving stressed assets that aims at a comprehensive resolution of stressed assets and is expected to accelerate non performing loan (NPL) recognition and provisioning in the near term Indian bond markets have largely stabilised in the past month with 10-year government bond yields currently at around 7.66%, however risk appetite of state-owned banks, one of the large participants in the market, continues to be muted Indian banking system gets a $2 billion wake-up call The flurry of negative headlines involving banks along with the central bank s newly announced revised framework for resolving stressed assets have sent banking shares tumbling The Indian banking system has been in the spotlight in recent weeks after a $2 billion fraud at India s second-biggest state-run lender came to light in February, triggering a large-scale probe and regulatory changes in the financial sector According to the beleaguered bank, two jewellery groups colluded with rogue bank employees to secure credit from overseas branches of Indian banks using fraudulently issued guarantees This case, which has been deemed the largest banking fraud in India, is not an isolated instance as a number of smaller loan frauds at other banks have also been uncovered in recent weeks. The flurry of negative headlines involving banks along with the central bank s newly announced revised framework for resolving stressed assets have sent banking shares tumbling (see page 4 for more details) Concerns that credit growth in India is unlikely to pick up quickly have re-emerged as investors expect tighter regulations in the banking sector in the wake of the fraud A few weeks after the alleged deception was uncovered, the Reserve Bank of India barred all India lenders from issuing letters of undertaking, which was the form of credit guarantee widely used to perpetrate the fraud The RBI has also asked banks to comply within strict deadlines aimed at closing certain technical loopholes, most notably to connect the SWIFT interbank messaging system with their core banking software by April 30, 2018 This commentary provides a high level overview of the recent economic environment, and is for information purposes only. It is a marketing communication and does not constitute investment advice or a recommendation to any reader of this content to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. The performance figures displayed in the document relate to the past and past performance should not be seen as an indication of future returns. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target. Non contractual document.

2 Indian banking system gets a $2 billion wake-up call News of the fraud has also raised questions about corporate governance standards in India Corporate governance standards and transparency are expected to improve over time as regulatory requirements tighten Along with worries about banking system, credit growth and its impact on the economy, news of the fraud has also raised questions about corporate governance standards in India The Confederation of Indian Industry (CII), an association representing Indian corporates, has recommended that the government lower its holding in public sector banks and tackle financial frauds through better monitoring and supervision of banks and by fostering higher corporate governance standards in the industry There are others who have taken a more positive view of recent events, concluding that the public scandal resulting from the fraud will encourage the state-owned banks, RBI and the government to move more quickly towards resolving the issues plaguing the banking sector The government had previously formed a Banks Board Bureau to improve governance standards and underwriting processes at state-run lenders. However, in a recent statement the bureau said it hasn t heard back from the finance ministry on recommendations made a year ago ESG in India India embarked on its ESG journey only in The Securities and Exchange Board of India (SEBI) now requires mandatory ESG reporting from the top 500 listed companies by market cap on Bombay Stock Exchange and National Stock Exchange of India ESG information is reported through a Business Responsibility Report (BRR) which is submitted with the annual report. Currently 31 out of the Nifty 50 companies (62%) disclose sustainability reports and BRR BRR is based on nine principles of National Voluntary Guidelines (NVG): 1) ethics, transparency and accountability; 2) responsible products and services; 3) employee well being; 4) stakeholder engagement; 5) human rights; 6) environment; 7) public policy advocacy: 8) inclusive growth; 9) customer value In 2017 SEBI published a draft report on proposed corporate governance reforms, which if adopted could improve India s corporate governance framework in a meaningful manner Among other changes the proposal recommends that audit committees should monitor the flow of funds to unlisted subsidiaries of companies, including those established overseas, and that listed entities should put in place a proper regulatory framework while sharing unpublished price-sensitive information with promoters or any other significant shareholders It also proposed that listed companies be required to have at least six directors on the board with a minimum of 50 %representation of independent directors, including one woman director Corporate governance standards and transparency are expected to improve over time as regulatory requirements tighten. Additionally, greater level of shareholder activism can also encourage companies to not just adhere to regulations but also to the spirit of the rules Source: HSBC Global Asset Management as of March 2018 Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only and does not constitute any investment recommendation in the above mentioned asset classes, indices or currencies.

3 Equity market While interest from foreign investors has been fluctuating in the past year, domestic interest has been consistently strong Corporate earnings at cyclical low 8 7 Companies posted solid 3QFY18 results, reinforcing the view that corporate earnings is undergoing a recovery India corporate profit as % of GDP Indian equity markets have been under pressure since the highs seen in January Month-to-date (through 21 st March), the MSCI India Index was down 2.9%, while the MSCI AC World Index was down 0.10% Markets globally are concerned over faster than expected US Fed rate hike. Domestically, the introduction of the Long Term Capital Gains (LTCG) tax and the negative headlines surrounding a prominent public sector bank have affected investor sentiment (see page 1 for more details). While our portfolio was not a holder of this public sector bank position, negative sentiment hurt the overall banking sector and our holdings in private sector banks were also impacted Indian companies posted solid 3QFY18 results, reinforcing the view that corporate earnings, which is at a cyclical low, is undergoing a recovery. Corporate earnings in India have been on a downtrend with profits currently at only 3.1% of GDP, versus 4.2% five years ago, and 7.1% ten years ago (see below figure) The economic cycle, as evidenced by recent macro data releases, also appears to be picking up: data is showing GDP growth rebounding (above market expectations and acceleration over previous quarter), industrial production growth improving, and inflation trends moderating With the recovery process gathering steam, the recent heightened levels of market volatility can provide opportunity for our equity portfolio to enter into attractive positions at better valuations. We remain an overweight on consumer discretionary names that will benefit from moderating interest rates and improving urban incomes. We are also overweight industrials which we expect to slowly benefit from the pick-up in investment cycle. Overall, we remain positive on the outlook for the Indian markets Indian equities saw net inflows of USD830 million in February. Foreign investors pulled back from the market while domestic investors continued to pour funds in. While interest from foreign investors has been fluctuating in the past year, domestic interest has been consistently strong as households direct more of their savings into financial markets instead of physical assets FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E Source: CLSA, as of 31 January Note: Investment involves risks. Past performance is not indicative of future performance. Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only and does not constitute any investment recommendation in the above mentioned asset classes, indices or currencies.

4 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Sector Views Sector Consumer Discretionary Financials Materials Industrials Real Estate Utilities Telecom Information Technology Consumer Staples Health Care Energy Chart in focus Weighting Neutral Neutral Source: HSBC Global Asset Management as of end-february 2018 Sector focus Indian corporates: Improving health in balance sheets In February, the RBI announced a revised framework for resolving stressed assets. The revised framework aims at a comprehensive resolution of stressed assets and is expected to accelerate non performing loan (NPL) recognition and provisioning in the near term In the past, there has been substantial focus on resolution of stressed assets, with the RBI introducing different schemes for such resolution at different time periods. In view of the Insolvency and Bankruptcy Code (IBC) enacted in 2016, the RBI s instructions under the revised framework aims to harmonize and substitute previous resolution schemes The IBC was a game changer for insolvency resolution. Under the IBC, we are seeing an acceleration in bad loan resolution, with around 42% of gross NPLs of the banking system undergoing review Amid heightened market volatility, fraud news surrounding a prominent public sector bank and the RBI s revised framework announcement, the NIFTY Bank Index underperformed the broader index by 3.50% since the beginning of February through 21 March Resolution of NPLs could prompt a re-rating of corporate lenders. We remain positive on corporate lenders who have built valuable deposit franchises but who have been saddled with bad loans. Valuations for well capitalized corporate lenders are very compelling compared to fast growth retail lenders (banks and nonbanks) Free cash flow to sales 15% Registrants in millions 10% 5% 0% -5% -10% -15% Corporate leverage 80% BSE 500 (ex-financials) New tax filers (millions) 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% 80% 60% 40% 20% 0% -20% BSE500 BSE500 ex Financials BSE500 ex Financials & Energy Debt change YoY (RHS) Net Debt/Equity (LHS) Source: Capitaline, Company data, Morgan Stanley Research, as of 31 January 2018 Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only and does not constitute any investment recommendation in the above mentioned asset classes, indices or currencies.

5 Fixed income Core inflation (headline excluding food, fuel, petrol and diesel) remained sticky at 5.3% for a third month in a row Indian bond markets have largely stabilised in the past month with 10 yr government bond yields currently at around 7.66% (as on March 20). CPI inflation for month of February came in at 4.44%, lower than market expectations. Valuations also remain attractive with the difference between the 10 yr and the repo rate at high levels of However risk appetite of state-owned banks, one of the large participants in the market, continues to be muted given their large government securities holdings in excess of SLR (statutory liquidity ratio) Going forward, potential increase in foreign portfolio investor limits (from around 5% of outstanding Government stock currently to around 6%-8%), possible tweaking of borrowing calendar by Government of India with increase in borrowing through floating rate securities, and potential scope for open market operations towards latter half of the year can help balance the demand-supply equation for government securities in fiscal 2019 From a strategy standpoint, we maintain neutral duration given growth-inflation dynamics and expectation of interest rates to remain on pause in the near term On an incremental basis, depending on spreads and supply, we have added selectively to state government bonds to our portfolio. We continue to add liquid INR corporate credit names with a preference for the 3-5 year segment to maintain carry in a stable interest rate environment. This has resulted in a reduced holding of government bonds We could add to some Masala bonds depending on valuations / diversification and increase USD bond holdings on a defensive basis, given the levels in US Treasuries / spreads, while still retaining an underweight stance Core inflation remains sticky for a third month in a row % y-o-y Currency Given solid external fundamentals, we expect the INR to trade more in line with the equity market performance in the short term as well as reflect any move in the USD 0 6/ /2014 6/ /2015 6/ /2016 6/ /2017 Source: HSBC Global Asset Management, Bloomberg data as of February 2018 The rupee fell against US dollar in February, amidst concerns about the wider fiscal deficit and the re-imposition of long term capital gains tax on equities. Post a bounce-back in first two weeks of February, sentiments over the public sector bank fraud issue and demand for spot dollar by importers led to rupee trading weak. Rupee is currently trading at (as on 16-Mar) v/s in beginning of February Given solid external fundamentals, we expect the INR to trade more in line with the equity market performance in the short term as well as reflect any move in the USD Furthermore, given the recent rise in commodity prices, the central bank could use currency appreciation to temper imported inflation at the margin Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only and does not constitute any investment recommendation in the above mentioned asset classes, indices or currencies.

6 Data watch Indicator Latest data Consensus data Previous data Analysis PMI (Composite) - Manufacturing - Services 49.7 (Feb) 52.1 (Feb) 47.8 (Feb) NA 52.5 (Jan) 52.4 (Jan) 51.7 (Jan) The drop in the service PMI was led by a sharp fall in new business subindex. The manufacturing PMI stayed above 50 for the seventh consecutive month, despite a further retreat. Industrial Production (IP) (% 7.5 (Dec) 6.4% 7.1 (Dec) The pick-up in IP was broad-based, across consumer durables, capital goods and construction & infrastructure. Despite the monthly data volatility, the 3-month trailing averages continued to show a gradual recovery in production activity, as the drags from GST rollout and demonetisation have faded. We expect the growth recovery to gradually gather pace, on the back of a revival in consumption, industrial activity and public capex. Local passenger vehicle (PV) sales (units) 275,329 (Feb) (7.8% NA 285,477 (Jan) (7.6% The steady dispatches came despite price increases, with gains continuing to be driven by utility vehicles on new launches. A positive outlook for the sector is supported by a recovery in rural demand and a more stable market conditions after major disruptions (demonetisation/ BS4 transition/ GST) last year. However, the PV industry will face more stringent emission/safety norms till 2020 and beyond. Exports (USD) (% Imports (USD) (% 4.5 (Feb) NA 9.1 (Jan) Exports have been volatile and non-commodity exports in particularly have seen tepid growth momentum, despite a healthy global growth environment so far. This probably to some extent reflects lingering impact of GST-related disruptions. Rising US protectionism and the potential impact on global trade is a key risk (Feb) NA 26.1 (Jan) There was a broad-based moderation across oil, gold and non-oil, non-gold imports, though some pay-back after a strong January was expected. The overall trend is still consistent with firmer domestic demand. Trade Balance (USD) -12.0bn (Feb) -14.2bn -16.3bn (Jan) Slower import growth helped a narrower February trade deficit from January s 5-year high, but an overall widening trend remains intact, which has been and will likely continue to be led by higher global commodity prices (especially oil) and better domestic demand momentum. Inflation (% - CPI - WPI 4.44 (Feb) 2.48 (Feb) (Jan) 2.84 (Jan) The further moderation in headline CPI inflation was driven by deceleration in food prices on seasonal supply, while core inflation remained steady. Looking forward, the monthly trajectory (esp. food) will likely be volatile distorted by base effects, and there are still uncertainties from the minimum support price hikes, monsoon, global oil and commodity price trend, and the risk of increased populist spending given the busy political calendar. However, inflation is likely to average somewhat lower than the RBI s projections. Repo rate (%) Reverse repo rate (%) Marginal standing facility (MSF) rate (%) (7 Feb) (6 Dec) The MPC raised its inflation forecast for Q4 FY18 from % to 5.1%, and expects inflation to rise to % in H1 FY19 (reflecting the pressure from higher oil/commodity prices) before moderating to % in H2 FY19 (given the diminishing impact of the housing rental allowance hike and moderation in food inflation). It lowered GVA growth marginally to 6.6% (vs. 6.7%) and projected FY19 at 7.2%. We expect the RBI to be on hold in 2018 as it balances inflation and growth concerns. A change in RBI policy is possible if inflation significantly deviates from the RBI's projected trajectory. GDP at market prices (quarterly, % Gross valueadded (GVA) at basic prices (quarterly, % 7.2 (Oct- Dec) 6.7 (Oct- Dec) (Jul- Sep) 6.2 (Jul- Sep) The GDP/GVA data show growth is recovering with broad-based gains across industries (GVA) and demand normalisation as negative supply shocks from demonetisation and GST have faded away. The base effect was also behind the growth pickup. The GDP growth rebound was primarily led by a bounce in investment growth, while private consumption and net exports weakened. The massive revisions to the FY17 GDP suggesting that not only is a recovery underway, but it is being driven by a turnaround in the investment cycle makes us cautious about the credibility of the data. Current Account Balance (CAB) (quarterly, balance in USD and % of GDP) - USD13.5b -2.0 (Oct- Dec) NA -USD7.2b -1.1 (Jul- Sep) A wider goods trade deficit more than offset a larger services trade surplus and an improvement in the income account balance. The overall balance of payments still printed a solid surplus (1.4% of GDP), but the recent slowdown in net FDI inflows makes India more heavily reliant on volatile portfolio flows and the INR more sensitive to the global risk environment. We see a material deterioration in FY18 CAD (to close to 2.0% of GDP from 0.7% in FY17) and a slightly larger FY19 CAD, though the levels should still be sustainable. Indicates improved data on month-on-month/quarter-on-quarter/year-on-year basis Indicates worsened data on month-on-month/quarter-on-quarter/year-on-year basis Indicates no change in data on month-on-month/quarter-on-quarter/year-on-year basis Source: Bloomberg, HSBC Global Asset Management, as of March 2018 Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only and does not constitute any investment recommendation in the above mentioned asset classes, indices or currencies.

7 Important information The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. Past performance contained in this document is not a reliable indicator of future performance whilst any forecasts, projections and simulations contained herein should not be relied upon as an indication of future results. Where overseas investments are held the rate of currency exchange may cause the value of such investments to go down as well as up. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. Economies in Emerging Markets generally are heavily dependent upon international trade and, accordingly, have been and may continue to be affected adversely by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been and may continue to be affected adversely by economic conditions in the countries in which they trade. Mutual fund investments are subject to market risks, read all scheme related documents carefully. The contents of this document may not be reproduced or further distributed to any person or entity, whether in whole or in part, for any purpose. All non-authorised reproduction or use of this document will be the responsibility of the user and may lead to legal proceedings. The material contained in this document is for general information purposes only and does not constitute advice or a recommendation to buy or sell investments. Some of the statements contained in this document may be considered forward looking statements which provide current expectations or forecasts of future events. Such forward looking statements are not guarantees of future performance or events and involve risks and uncertainties. Actual results may differ materially from those described in such forward-looking statements as a result of various factors. We do not undertake any obligation to update the forward-looking statements contained herein, or to update the reasons why actual results could differ from those projected in the forwardlooking statements. This document has no contractual value and is not by any means intended as a solicitation, nor a recommendation for the purchase or sale of any financial instrument in any jurisdiction in which such an offer is not lawful. The views and opinions expressed herein are those of HSBC Global Asset Management and are subject to change at any time. These views may not necessarily indicate current portfolios' composition. Individual portfolios managed by HSBC Global Asset Management primarily reflect individual clients' objectives, risk preferences, time horizon, and market liquidity. We accept no responsibility for the accuracy and/or completeness of any third party information obtained from sources we believe to be reliable but which have not been independently verified. Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided as an "as is" basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively 'the MSCI Parties') expressly disclaims all warranties (including, without limitation, all warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. ( Copyright HSBC Global Asset Management (Hong Kong) Limited All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Global Asset Management (Hong Kong) Limited. Expiry date: 31/05/2018