Equity & Debt Strategy

Transcription

1 Equity & Debt Strategy Mid Aug Sept 2

2 Equity Market Update & Equity MF Strategy

3 Nifty was up 6% in July post good results by HDFC Bank and Reliance Both Large and Mid Cap index did well in July Both FII and MFs continue to be net buyers 1,2 1,1 1, 9,9 9,8 9,7 9,6 9,5 CPI falls to 1.54% Cess on Cigarettes hiked Strong Earning of HDFC Bank and Reliance 9,4 3-Jun- 6-Jul- 12-Jul- 18-Jul- 24-Jul- 3-Jul- 19, 18,6 18,2,8,4, cr 15, 1, 5, -5, -1, 11,48 1,23 9,425 9,5 8,255 3,965 3,764 Apr May Jun Jul -2,243-2,587-2,8-5,122-3,432 FII DII MF NIFTY Index Nsemcap index Monthly Inflows to Equity MF* continue to be strong In July, NSE Energy index was up 1.6% while FMCG led by ITC was down 3.8% Rs. cr 2,, 12, 8, 12,78 14,67 15,72 13,12 15.% 1.% 5.% 1.6% 8.2% 7.4% 6.2% 5.9% 4.4% 4, Mar Apr May Jun.% -5.% Energy Bank Realty Infra IT Auto Pharma FMCG -1.4% -3.8% Source: Bloomberg, AMFI, KIE As of 31 st July 2 YoY% unless specified * Equity + ELSS + 65% of Balanced Confidential 3

4 US macro disappointing, ECB policy key event to watch out for US inflation has fallen below the Fed Target of 2% making it difficult for the Fed to follow rate hike path Europe GDP growth strong at 2.1%, could lead to ECB tightening monetary policy % % Mar Apr May Jun. Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar Jun Sep Dec Mar Jun US Dollar index at lowest level since Trump election on Euro strength and disappointing US macros Source: Bloomberg Mar- 3-Apr- 31-May- 3-Jun- 31-Jul-1 China Manufacturing PMI still stable while Government is trying to control property prices and leverage Feb Apr Jun Aug Oct Dec Feb Apr Jun Source: Bloomberg YoY% unless specified Confidential 4

5 Government has accelerated expenditure, Infra and Agri to benefit Government has frontloaded its capex leading to substantially higher expenditure 2 Wheeler sales were less impacted by GST reflecting strong rural demand % Mar Apr May Mar Apr May Jun 2W Sales 8.6 Passenger Vehicle Sales Higher expenditure focussed on Agri, food procurement of Rabi crops substantially increased to support farmers Both FII and MF have been increasing their exposure in mid-small cap stocks Rs. cr 1, 8, 6, 4, 2, 85,925 42,351 25,133 15,2 Ministry of Consumer, Food and Public Ministry of Chemicals and Fertilizers Distribution Apr-May 2 Apr-May % 55.% 5.% 45.% 4.% 35.% % of Portfolio in non Top 3 stocks Mar- Jun- Sep- Dec- Mar- FII MF Source: Nomura, KIE, CS, DB YoY% unless specified Confidential 5

6 Rest of the economy still struggling Exports Growth has started to slow down due to INR strength Low inventory levels across sectors could be a new normal post GST which will hurt manufacturing this year Days of inventory - Pharma. Mar Apr May Jun 3-Apr- 31-May- 7-Jun- 14-Jun- 21-Jun- 28-Jun- 7-Jul- Manufacturing PMI hits 8 year low on GST disruption, new orders also contracted 82% of the stocks are trading above their 2 Day daily moving average Mar Apr May Jun Jul India PMI - Manufacturing PMI New Orders 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Source: KIE, CS, Morgan Stanley YoY% unless specified Confidential 6

7 Earnings and Valuation Liquidity and Hope of strong Earnings growth in FY-18 has led to slightly expensive valuations Nifty at 18.2x Bloomberg one year forward earnings estimate, Mid Caps at premium vs historic level MSCI India P/E Premium over MSCI EM is still close to long term average Large Cap 7.7% Current 12M Forward PE 5 Year Average Mid Cap 1.3% 12M Forward PE 46% 44% 42% 4% 38% 36% 34% Mar Apr May Jun Jul 41% 5 Year Average Nifty Q1218 EPS is expected to fall by 5%, Pharma has disappointed while Energy has done well 12 8 Outperformed Underperformed As Expected Not Released Banking and Automobile sector to lead Earnings growth in coming next 2 Fiscal Years % x Automobiles Banking Consumers Energy Pharma Techology Nifty 5 Nifty 5 (exenergy) Earnings Growth FY19E P/219E Source: Bloomberg, KIE Estimates Outperformed if PAT>1.5x Expected, Underperformed if PAT<.95 of expected YoY% unless specified, ^ CY-18 Confidential 7

8 Key Triggers GST Implementation and Monsoon Positive Triggers Global Economic data : World economy improving. Expectation of fiscal stimulus from Republican Government Lower Domestic Interest rates: Many Banks have cut their MCLR sharply which should help in reviving credit demand Resolution of NPA: Effective addressal by government of NPA issue in Indian Banks Risks US Policies: Revival of Trump/Reflation trade could lead to EM outflows again Earnings: Consensus expected earnings growth for domestic equities is high at around 2%, any downgrade would make the valuations more expensive GST implementation: Demand revival getting delayed post GST Geo-Political Risk: Political uncertainty in UK, Germany, Netherland Monetary Policy: Faster than expected monetary tightening in Europe and US Confidential 8

9 India Equities: Valuations & Strategy Maintain Neutral Stance At current levels of approx (11 th August, 2), Nifty is trading at a 1 year forward PE of 19.1X. Also the ratio of potential upside to downside is biased towards downside at current valuations. New Deployments: Risk-Reward Scenario based on earnings growth & valuations: 9711 Fwd PE(X) On a risk-reward basis we continue to maintain Neutral stance Recommended allocation within equity mutual funds is as under: 1% Large Cap allocation (Prefer Large Caps due to relatively Favorable Valuations) Equities continue to rally to life time highs on the back of foreign and domestic liquidity. Rural Consumption and Government spending has started to show signs of uptick, although most domestic indicators are struggling due to dual impact of Demonetization and now GST. Post RBI s 25bps rate cut in the August policy, we see further policy action dependent on the inflation trajectory. Mutual Funds: As domestic liquidity continues to drive markets, we advise new investments in Mutual Funds to be deployed 25% in lumpsum and subsequent in tranches via SIPs/STPs This allocation to Large caps can also be taken through Opportunistic Funds which currently have a bias towards Large cap For investors who want equity exposure but have low appetite for volatility, they can take equity exposure through Balanced Funds. Balanced funds have 2% to 3% allocated to Debt which provides cushion to the portfolio return during market volatility. Fwd EPS Estimate Estimate Target Nifty Level % Upside / Downside 1 Year Upside Q4-FY19 1, % Downside 58 Q1-FY19 8, % Source: EPS Estimates by KIE Confidential 9

10 Debt Market Update & Debt MF Strategy

11 Debt Market: Key Variables Indicators Policy Action RBI cuts Repo rate by 25 bps in August policy Further rate cuts will depend on inflation trajectory One member pushed for 5 bps cut Inflation CPI came at all time low of 1.54% in June 2 RBI expects CPI to be little over 4% by March 218 We expect CPI to remain below 2% in July 2 1 Year G-Sec Benchmark Yield 1 Yr yield likely to remain in range 6.35% 6.55% range likely in near future INR Appreciated to 63.7 Likely to remain in a range Liquidity Liquidity surplus still at Rs. 2.9 trn RBI will do one more Rs. 1, cr of OMO sale RBI is timing OMOs gradually G-Sec Supply The gross G-Sec supply to be Rs. 5.8 trn SDL issuance of Rs. ~4 trn+ expected; QFY18 issuance expected to be Rs. ~1.2 trn Key Risks US policies; Fed hikes; Global monetary tightening Impact of 7CPC HRA allowance implementation on CPI State and PSU implementation of 7CPC Farm loan waivers can impact fiscal deficit by 1% to 1.3% of GDP Confidential 11

12 % Yield Spread (bps) Amount in Rs. Bn % Yield Spread (bps) RBI cuts repo rate by 25 bps - Expects inflation to bounce back in H2 4, 3, 2, 1, Liquidity remains high as RBI going slow with OMO Sales 2, Benchmark yield didn t move much as 25bps was mostly factored in by the market Spread 1 Year G Sec Repo Rate 6.% 5.% 4.% 3.% 2.% 1.% Inflation at a all time low, core inflation also below 4% CPI Core Inflation 1.54% 3.72% Bonds rallied on inflation data and strong FII buying Y 2Y 3Y 4Y 5Y 8Y 1Y.% Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Change Current G-Sec Yield 1M earlier G-Sec Yield * Avg Spread over Repo in Falling rate regime 61 bps Average Spread over Repo in Rising rate regime 71 bps Source: Bloomberg As of 3 rd Aug 2 Confidential 12

13 USD Million FII flows continue to be robust on back of strong macros 5, 4, 3, 2, FIls continue to pour money in debt 2,894 1.% 9.% 8.% FII Debt Utilization has increased substantially and is almost 1% 99.3% 99.8% 1, -1, -2, -3, -4, Dec Jan Feb Mar Apr May Jun Jul 7.% 6.% Aug Sep Oct Nov Dec Government Jan Feb Mar Corporate Apr May Jun Jul INR has appreciated to 63.7 level Crude bounces back above 5 level Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug $/bbl Nov Dec Jan Feb Mar Apr May Jun Jul Brent Source: Bloomberg As of 31 st July 2 Confidential 13

14 India Fixed Income: Strategy Substantial part of the portfolio should to be played through a mix of high rated and credit accrual strategies. Exit from duration funds only for investors who have completed 3 years and can deploy with another 3 years view. Investment Focus: Passive Accrual-Oriented Debt funds High quality portfolios (~1% AAA / Sovereign) Portfolio is run on a passive accrual basis i.e buying a bond and holding it till maturity thereby earning from the accruing of interest Higher predictability of return, lower volatility & lower interest rate risk High Yield Credit-Oriented Funds Low volatility on account of maturity of portfolio between 3 5 years, attractive and stable accrual yields Experienced teams to carefully evaluate and tightly monitor high yielding debt instruments Short Term Bond Funds Actively managed to run a low avg. maturity of 2-3 years, attractive risk-reward Lower volatility and interest rate risk than Dynamic Bond Funds, better suited from a risk-adjusted basis in volatile markets Continue to recommend ultra short term relative to liquid funds (up to 3 Months) For short term parking of funds for a minimum of 6 months, Arbitrage funds preferred over ultra short term funds on back of better tax adjusted returns Source : AMCs, other Financial websites Confidential 14

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