India Insights Monthly update on Indian markets

Transcription

1 India Insights Monthly update on Indian markets September 2016 Summary GDP growth dropped to 7.1% in the April-June period from 7.9% in the previous quarter mainly due to much weaker growth in net indirect taxes After months of disappointing data releases, inflation for August came in at 5.1%, which is lower than market consensus of 5.2%, and down from 6.1% in the previous month, thanks to lower food prices The monsoon rains are seen retreating after delivering near-normal rainfall across the country and setting the stage for a bumper harvest after two years of scanty rain that left the rural economy in poor shape Prime minster Narendra Modi has directed his team to strictly abide by the April 1, 2017 deadline for GST roll out which in turn has spurred a flurry of activity on the implementation front Yields have continued to fall despite RBI s decision to keep interest rates unchanged. The 10 year government bond yields dropped to 6.85%, mainly driven by the RBI s move to inject liquidity into the system via OMO purchases In the spotlight Masala bonds spice up global access to rupee New measures for the India bond market development were set out by the RBI in late August this year, including a proposal to allow banks to issue Masala bonds as means of raising additional Tier I and II capital. Earlier in September 2015, the RBI had issued detailed guidelines for the issuance of Masala bonds, which allowed Indian companies to raise capital through these rupee denominated bonds. Some of the rules around Masala bonds have now been revised under RBI s new package of measures for further development of the fixed income and currency markets The issuance of the first offshore Masala bonds on London Stock exchange by an Indian company, The Housing Development Finance Corporation Limited (HDFC) took place in July Since then private and public sector companies have lined up plans to issue Masala bonds. On 1 September, The Province of British Columbia subscribed to INR 5 billion of these rupee denominated bonds from HDFC, making it the first foreign government to issue a bond in the Indian offshore market. This is the stepping stone for foreign countries to build stronger trade and investment ties with India and could make the rupee more widely available in the global markets Before Masala bonds, corporates had to rely on avenues such as external commercial borrowings. These bonds began trading in November 2014, when the International Finance Corporation (IFC) issued INR 10 billion bond with the intention to fund infrastructure projects in India. It was named Masala bonds, the Indian term for spices, to include a touch of the local flavour, similar to the Chinese Dim Sum bonds, and the Japanese Samurai bonds The rise in the demand and supply for Masala bonds can be attributed to the recent relaxation in regulations. The Finance Ministry has reduced the withholding tax on the interest income of the Masala bonds from 20% to 5% which has helped boost investor demand. In addition, to help banks gain access to capital, the RBI proposed to permit banks issuance of Masala bonds for their capital requirement and for financing infrastructure and affordable housing Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purpose only. This publication is intended for Professional Clients and Institutional Investors only and should not be distributed to or relied upon by Retail Clients. The information contained in this publication is not intended as investment advice or recommendation. Non contractual document.

2 Masala bonds spice up global access to rupee (contd.) There are multiple benefits of Masala bonds to both the issuers and investors. First, it helps Indian companies diversify their bond portfolios, as they issued only corporate bonds previously. Second, it helps cut down costs for the issuers as the bonds that are issued in India carry an interest rate of 7.5%-9.0% whereas Masala bonds outside India are issued below 7.0% interest rate. Lastly, it also helps widen the investor base as this bond is issued in the offshore market Meanwhile, offshore investors are likely to earn better returns by investing in Masala bonds owing to its good pick up over USD bonds and attractive spread dynamics. For example, Masala bonds offer yields of around 5-6% as compared with USD bonds of around 2% In the last several years INR has been trading in a relatively narrow range, after stabilising under Raghuram Rajan s governorship. As Urijit Patel takes over as the new governor it is likely that he would continue with Rajan s policies, thus ensuring the stability of the currency. Investors would benefit from Masala bonds when INR appreciates at the time of maturity, however, they would bear all the currency risk when the bonds value falls as the currency depreciates. The key point to note about Masala bonds is that the currency risk lies entirely with the investors which provides incentive for issuers to issue these bonds and find new ways to sell them. Bankers are now packaging these INR denominated bonds into derivatives with a leveraged return of 12-13%, targeting mainly non resident Indians residing in financial hubs such as Hong Kong and Singapore As India continues to be the fastest growing major economy in the world, with its GDP growth at 7.1% in the quarter ended June, ahead of China s 6.7%, we are seeing increasing effort from both the government and the RBI to open up India s bond markets in order to facilitate better access for foreign investors Under the comprehensive set of new guidelines, foreign portfolio investors can gain direct access to bond trading platforms for government and corporate paper, which could potentially attract more inflows and widen the investor base We believe the outlook for India remains positive as growth is relatively stable with consumption gradually picking up. The GST bill passed by the Modi government shows strong commitment to the reform agenda. The increasing foreign direct investment inflows would continue to support the currency and keep current account deficit relatively narrow and healthy, and could provide room for further rate cuts down the road Source: HSBC Global Asset Management as of September 2016 Equity market In August, Indian equities continued to show positive traction driven by domestic factors leading to gains in market indices with MSCI India index gaining 0.9% (in USD terms) and domestic market indices BSE Sensex and NSE CNX Nifty rallying 1.4% and 1.7% respectively. Amongst the various sectors, materials turned out to be the best performer for the second month in a row closely followed by consumer discretionary while telecom was the worst performer followed by information technology during the month of August Key amongst the positive factors boosting investor sentiment was the passing of the GST bill early in the month. Encouragingly, prime minster Narendra Modi has directed his team to strictly abide by the April 1, 2017 deadline which in turn has spurred a flurry of activity on the implementation front The monsoon rains are seen retreating after delivering near-normal rainfall across the country and setting the stage for a bumper harvest after two years of scanty rain that left the rural economy in poor shape The April-June quarterly earnings season was devoid of any major surprises or a notable pick-up in the earnings trajectory. Hopes are now pinned on the July-September quarter to show meaningful earnings recovery driven by a normal monsoon and pick-up in domestic consumption Equity market valuations are currently trending above historical averages and the premium of the mid-cap to large-cap valuations have moved up significantly, with the former outperforming in August as well In other market developments, the first initial public offering in India's insurance sector opened on 19 September with ICICI Bank aiming to raise INR 60 billion by selling a stake in subsidiary ICICI Prudential Life Insurance Company. This is the biggest IPO in the domestic market in nearly six years. The sector has seen quite a bit of action this year, in August, HDFC Life and Max Life announced the two will merge in a three step scheme to create a mega life insurance company Source: HSBC Global Asset Management as of September 2016 Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purpose only. Non contractual document

3 Sector views Sector Weighting Industrials Overweight Consumer Discretionary Overweight Information Technology Overweight Financials Overweight Utilities Neutral Energy Consumer Staples Healthcare Telecom Materials Source: HSBC Global Asset Management as of end-august 2016 Sector focus In early September India s richest man, Mukesh Ambani, laid out a road-map for his firm Reliance Jio, which is the latest entrant into India s $50-billion telecom sector. The ambitious plan includes free calls and the world s most inexpensive rates for data The entry of this deep-pocketed competitor is likely to shake up the sector and lead to aggressive moves from the more established telecom players, as well as some level of consolidation in the industry down the road. There are already reports of tariff cuts from the incumbents with free calls being bundled together with data for some select high-value plans as well as data tariff cuts. Some of incumbent players have also taken up the cudgels against the newcomer, accusing the company of unfair practices Shares in telecom companies dropped in recent weeks amidst worries about intensifying competition in the sector and a likely tariff war which in turn will hurt profitability Chart in focus Healthcare sector valuations have normalised making the sector more attractive Source: Credit Suisse as of September 2016 For reference only and does not constitute any investment recommendation. The views and opinions expressed herein 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. Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purpose only. Non contractual document

4 Fixed income After months of disappointing inflation numbers, inflation for August came in at 5.1%, which is lower than market consensus of 5.2%, and down from 6.1% in the previous month, thanks to the lower food prices as a result of higher reservoir levels and relatively good crop sowing. As inflation stabilizes, there maybe room for the RBI and MPC (Monetary Policy Committee) to consider cutting rates further this year The monetary policy meeting last month marked the last time in RBI s history that the governor decides on interest rates as the future rate decisions will be made by the MPC, a formal team of 6 member to be announced by October, with setting inflation targets as the primary objective of the revised monetary policy framework. This 6 member committee is comprised of three members from RBI and three independent members to be selected by the Government Yields have continued to fall despite RBI s decision to keep interest rates unchanged in the last monetary policy meeting. In the last two weeks, the 10 year government bond yields dropped 20-25bps, to 6.85%, mainly driven by the RBI s move to inject liquidity into the system via OMO purchases. We expect yields to potentially go down further as there is a higher chance for RBI to cut rates given the lower inflation levels Our investment strategy remains broadly unchanged, as we continue to be overweight in government bonds. The Fed s decision to delay rate hikes, along with the continuance of BoE, BoJ and ECB s easing measures, have contributed to strong investor demand for yields, especially at the long end of the curve, causing bond yield curves to flatten globally. The yield curve in India remains relatively steep, given that shorter-term yields have already compressed. As such, we have started to marginally take profit from 5Y part of the curve and move towards 15Y bonds. We also continue to be overweight in INR corporate bonds, while we are underweight in USD bonds Yields to be driven down further on the back of possible rate cut by RBI & MPC Jan-15 May-15 Sep-15 Jan-16 May-16 Sep Year Government bond yield Source: Bloomberg, data as of 16 September 2016 Currency The Foreign Currency Non-Resident Deposit Bonds (FCNRB) withdrawals in Sep-Oct could temporarily affect liquidity in the near term and potentially weaken the rupee. However, this effect is temporary and once completed, should not result in significant movements to the currency After depreciating to a two-week low of 67.02, as of 15 September, the rupee firmed up slightly against USD due to reduced expectations for Fed rate hike. Going forward we expect INR to continue to trade within a range. The key event this month is the FOMC meeting with regards to the Fed s decision on rate hike, which could impact the market and currencies across the board Over the long term, INR continues to look attractive, as India s current account deficit is expected to remain relatively narrow and increasing foreign direct investments inflows would continue to support the currency and limit its volatility INR expected to trade in a range against USD Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 USDINR exchange rate Source: Bloomberg, data as of 16 September 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. In Europe, non contractual document only intended for

5 Data watch Indicator Latest data Consensus data Previous data Analysis PMI (Composite) 54.6 (Aug) NA 52.4 (Jul) Both the manufacturing (up to 52.6 in August from 51.8 in June) and services PMIs (up to 54.7 from 51.9) improved materially, suggesting better business outlook and demand conditions. Industrial Production (IP) (% -2.4 (Jul) (Jun) The disappointing IP data was driven by a sharp decline in manufacturing output (-3.4%. Contraction in capital-goods IP (-29.6%) remained a major drag on overall production, largely due to the volatile cable and rubber insulated products segment. Consumer goods output slowed but held up relatively well, esp. consumer durables IP reflecting robust urban consumer demand. Notwithstanding the high data volatility, we still expect the underlying momentum to pick up in the near term, on improvement in rural demand and boost to urban incomes from pay commission hikes. Local passenger vehicle sales (units) 258,722 (Aug) (+16.7% NA 259,685 (Jul) (+16.8% Strong sales growth was driven by strong uptake of SUVs (+47%). The shifting consumer preference for SUVs continues, given the segment s wider selection of available models and a number of new launches. Also, low oil prices have likely increased their attractiveness. Demand for midsized cars also picked up. Normal monsoon, the festive season and discounts, 7 th Pay Commission pay rises should support auto sales in the near term, The Supreme Court s lifting of an eight-month-old ban on the registration of over 2000cc diesel vehicles in the national capital region (NCR) Delhi is also likely a positive for auto sales. Exports (USD) (% Imports (USD) (% -0.3 (Aug) NA -6.8 (Jul) The significant improvement in yoy export growth, particularly with non-oil export growth turning positive (+1.8%) largely reflected the base effect and less negative price effects. Data still suggested weak global demand (Aug) NA (Jul) Slowing gold and oil imports continued to drag on imports. The decline in non-oil, non-gold imports, an indicator of domestic demand, was relatively modest, at 0.4% yoy in August vs. -9.1% in July. Trade Balance (USD) -7.7bn (Aug) NA -7.8bn (Jul) The wider trade deficit in the recent months should not worsen the benign CAD trends materially, although we expect the trade deficit to widen in FY17 on improving domestic demand and still subdued exports. Inflation (% -CPI -WPI 5.1 (Aug) 3.7 (Aug) (Jul) 3.6 (Jul) CPI inflation moderated significantly, driven by a sharp correction in food prices and the base effect. Core inflation edged lower slightly, indicating a stable underlying trend. Moderation in food prices and favourable base effects are likely to keep headline CPI inflation low toward the yearend before it reverts back to its underlying trend of 5-5.5% by March The inflation trajectory likely to keep the space open for another rate cut in FY17. However, we believe the harp disinflation is behind us. Food prices are highly volatile, and potential increase in house rent allowances and GST implementation could temporarily push headline inflation higher. Policy repo rates (%) 6.50 (9 Aug) (7 Jun) The RBI cited upside risks to its near-term CPI inflation target of 5% for March 2017 as the key reason for the decision to stand pat. However, the RBI reiterated that the monetary policy stance remains accommodative and the forward guidance indicates that some space to cut rates could open up once the inflation risks subside. The RBI continued to emphasise adequate liquidity provision and policy transmission. GDP at market prices (quarterly, % Gross value-added (GVA) at basic prices (quarterly, % 7.1 (Apr- Jun) 7.3 (Apr- Jun) (Jan- Mar) 7.4 (Jan- Mar) The significant slowdown in real GDP growth was mainly due to much weaker growth in net indirect taxes. GVA suggested only a marginal deceleration. Lower growth in private consumption and a decline in fixed investment offset a jump in government consumption and a positive contribution from net exports. We continue to expect a normal monsoon and government employee pay hikes to support private consumption, which together with easier liquidity conditions that facilitate monetary policy transmission, continued FDI inflows and positive reform momentum to support growth in coming quarters. However, the slow pace of recovery in private corporate capex and weak exports will likely remain headwinds. Current Account Balance (CAB) (quarterly, balance in USD and % of GDP) -USD0.3bn -0.1 (Jan- Mar) +USD1.8bn USD7.1bn -1.3 (Oct- Dec) The smallest quarterly deficit in nine years was mainly driven by a smaller goods trade deficit partly due to seasonal factors. With strong net FDI inflows (thanks to liberalisation of FDI norms, improved growth and reform prospects and attractive yields, etc.), the basic balance (CAD + net FDI) surplus rose sharply, indicating reduced external vulnerability. We expect a modestly larger but still contained CAD in FY17. 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 Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purpose only. Non contractual document Source: Bloomberg, HSBC Global Asset Management, as of September 2016

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