India. The surprising fixed income opportunity. February 2016

Transcription

1 India The surprising fixed income opportunity February 2016 Presentation only intended for professional investors as defined by MIFID..

2 Content Why invest in India fixed income? Attractive market characteristics Supportive macroeconomic environment Portfolio strategy and fund details 2

3 Why invest in India fixed income? Attractive market characteristics

4 Indian Bond Market Large, liquid domestic market The market has rapidly grown in the past few years A market still dominated by government issuance Corporate market is still underdeveloped, but likely to grow strongly in the coming years Bonds outstanding Ownership pattern of Indian government securities USDbn 1, % GDP 60% 50% 13% 4% % % % % % Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Govt Corp % GDP 1% 1% 7% 4% 3% 2% 21% 0% 43% Commercial Banks Non-Bank PDs Insurance Companies Mutual Funds Co-operative Banks Financial Institutions Corporates FIIs Provident Funds RBI Others Source: RBI and HSBC Research, LHS: data as of September 2015, RHS: data as of June

5 South Africa Indonesia India Mexico Philippines Malaysia Hungary China Thailand US UK Spain Germany Indian Bond Market Attractive absolute and relative yields Indian government bond yields are attractive relative to emerging market peers, but especially so against developed markets Yield curve is flat, which means we don t give up yield irrespective of our duration view Selected 10 year government bond yields Yield (%) 10 Indian government yield curve Yield to Maturity (%) Y 2Y 3Y 5Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 15Y 30Y Years to Maturity Source: Bloomberg, data as of 28 January Past performance is not indicative of future performance. The commentary and analysis presented in this document reflect the opinion of HSBC Global Asset Management on the markets, according to the information available to date. They do not constitute any kind of commitment from HSBC Global Asset Management. Consequently, HSBC Global Asset Management will not be held responsible for any investment or disinvestment decision taken on the basis of the commentary and/or analysis in this document. 5

6 INR Appreciation potential over the long term Performance of Indian rupee % under/over valued versus USD on PPP Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-1 CHF GBP JPY EUR HKD KRW SGD CNY TWD PHP VND MYR THB INR IDR -120% -100% -80% -60% -40% -20% 0% 20% 40% 60% INR/USD exchange rate Indian rupee is among the most undervalued major currency on PPP in the world Source: IMF World Economic Database number as of October Spot rate as of 28 January Investment involves risks. Past performance is not indicative of future performance 6

7 Indian Bond Market Recent changes to FPI Investments Policy In the policy meeting on 29 September 2015, RBI announced significant changes to the FPI investments policy: Total FPI government securities limit has been adjusted to 5% of total outstanding bonds, implying an additional INR1.2trn in quota The limit was previously set in absolute dollar terms; the quota has also now been redenominated into INR The quota will be reviewed every 6 months and released every quarter, adding much more transparency to the system RBI introduced Masala bonds which are bonds issued by Indian companies offshore, denominated in INR and settled in USD Not subject to FPI license They do not face India s onshore capital gains tax Subject to 5% withholding tax 7

8 Why invest in India fixed income? Supportive macroeconomic environment

9 Fiscal deficit Heading in the right direction Central government fiscal deficit % of GDP Govt s fiscal consolidation path FY 00 FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 Fiscal deficit (as per new consolidation path) Old fiscal consolidation path Note: Any forecasts, projections or targets contained in this presentation is for information purpose 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 Source: Budget documents, CEIC, HSBC, as of May

10 Fiscal deficit Bond supply favourable in the medium term FY 12 FY 13 FY 14 FY 15 FY 16 (budgeted) Fiscal Deficit (% to GDP) Fiscal Deficit (INRbn) 5,160 4,902 5,245 5,311 5,556 Gross Borrowings (INRbn) 5,085 5,571 5,486 5,857 6,000 Net Borrowings (INRbn) 4,364 4,670 4,536 4,469 4,564 % financed by market borrowings Favourable technical backdrop in Jan-Mar FY 16 FY 15 (INRbn) Gross issuance Net issuance Gross issuance Net issuance October November December Q3 1,640 1,566 1, January February March Q H2 2,340 2,266 2,400 1,763 Note: Any forecasts, projections or targets contained in this presentation is for information purpose 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 Source: RBI, Bloomberg and HSBC Research, as of October

11 Decline in oil prices Potential savings of USD70bn How is the reduction in oil burden distributed? 12-month trailing peak net oil imports as of Dec-12 USD108bn 12-month trailing net oil imports as of Nov-15 USD61bn If oil prices stay at USD40/bbl til Dec-16, net oil imports would fall to ~USD38bn Current reduction in oil burden USD47bn Further reduction in oil burden ~USD23bn Government budget USD27bn Lower oil subsidy USD14bn Household sector USD8bn Higher tax revenue USD14bn Corporate sector USD12bn State Govt. lower oil sales tax USD1bn Source: CEIC, Morgan Stanley Research as of December 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 11

12 Inflation Down from historical highs RBI s inflation target is achievable % y-o-y 25.0 Core inflation trends lower % y-o-y RBI target: 4% +/- 2% Jan-02 Sep-03 May-05 Jan-07 Sep-08 May-10 Jan-12 Sep-13 May Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 CPI WPI Core WPI Core CPI Source: CEIC, Bloomberg, HSBC, December

13 Interest rate view RBI has front loaded rate cuts, with a larger-than-expected 50 bps cut on 29 September Room to cut further dependent on inflation going below 6% Reduction in fiscal deficit implies steady to lower supply of government bonds Statutory demand from insurers, pensioners and retirement funds to drive demand for yield Slow credit growth leads to demand from banking system Expect 10Y government bonds to trade between % with softening bias to yields (current yields at 7.8%) Improvement in banking liquidity to support demand for government securities Note: Any forecasts, projections or targets contained in this presentation is for information purpose 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. The commentary and analysis presented in this document reflect the opinion of HSBC Global Asset Management on the markets, according to the information available to date. They do not constitute any kind of commitment from HSBC Global Asset Management. Consequently, HSBC Global Asset Management will not be held responsible for any investment or disinvestment decision taken on the basis of the commentary and/or analysis in this document. Source: HSBC Global Asset Management; Latest available data as of 28 January

14 Current Account Deficit (CAD) Improving and structurally resilient CAD structurally sustainable CAD (% of GDP) 0 Lower oil and gold imports supportive of CAD Oil imports decline to 2.5% of GDP -1-2 Expected -3 Oil and Gold Imports (y-o-y%) -4-5 Gold imports contracted on YoY basis for third consecutive month Note: 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 Source: IMF, CEIC, Bloomberg, HSBC Global Asset Management, data as of 31 December

15 CAD FX reserves provide a reasonable cushion FX reserves RBI on the bid 68 USDbn 370 FX reserves to imports and short term external debt Apr-12 Oct-12 Apr-13 Oct-13 May-14 Nov-14 May-15 Nov Q1 11 Q3 11 Q1 12 Q3 12 Q1 13 Q3 13 Q1 14 Q3 14 1Q 15 INR/USD exchange rate (LHS) FX Reserves (RHS) Import cover (months of imports of goods and services) FX reserves over short-term external debt (times) Source: IMF, CEIC, Bloomberg, HSBC Global Asset Management; LHS: data as of 15 January 2016; RHS: data as of 30 June The commentary and analysis presented in this document reflect the opinion of HSBC Global Asset Management on the markets, according to the information available to date. They do not constitute any kind of commitment from HSBC Global Asset Management. Consequently, HSBC Global Asset Management will not be held responsible for any investment or disinvestment decision taken on the basis of the commentary and/or analysis in this document. 15

16 Currency view Expect a rangebound rupee in the medium term Macroeconomic factors supportive of INR: Accommodative monetary policy positive in medium term Investment reform to be positive for FDI/divestment programme/equity capital flows Current account deficit to improve and sustainable Capital flows to cover current account deficit adequately Higher real rates imply move from gold to financial assets Expect INR to move in line with USD vs Asian currencies, but with greater resilience given: Healthy FX reserves INR tends to be less correlated with the RMB Foreign investor flows and appetite for Indian assets appear to remain healthy Note: Any forecasts, projections or targets contained in this presentation is for information purpose 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 16

17 Portfolio strategy and fund details

18 HSBC GIF India fixed income Portfolio strategy Overweight duration through INR government bonds Marginally shifted towards the belly of the curve (5-10Y) Will add to 5-10Y segment on inflows Increased supply of State Government bonds and the potential increase in gross issuance of bonds next year due to fiscal deficit slippage could put pressure on long end Underweight INR corporate credit Apart from liquid corporate bonds in 5Y/10Y segment as a duration proxy Would evaluate vs State Government bonds based on spread Selectively add to 3Y non-banking financial names to supplement yield accrual Underweight USD corporate bonds Still an attractive spread in the offshore IG BBB space Overlay with 6m NDF (carry 6.3%) Attractive on a total yield basis Notes: 1. Any forecasts, projections or targets contained in this presentation is for information purpose only and is not guaranteed in any way 2. Allocations is as at the date indicated, may not represent current or future allocation and is subject to change without prior notice. 3. HSBC accepts no liability for any failure to meet such forecasts, projections or targets 4. For illustrative purpose only 5. As at end of December

19 HSBC GIF India fixed income Supplemental information as of 31 December 2015 Key features The Fund seeks access to the Indian fixed income market by investing in investment and non-investment grade, as well as unrated Indian domestic fixed income securities denominated in Indian Rupee (INR). The Fund will also invest in fixed income securities denominated in other currencies The Fund gives investors access to high yields and an undervalued currency through an innovative approach to a market which is difficult to access Launched in 20 August 2012 AUM as of 31 December 2015: USD333.85m Gross Returns % Months 3 Months 6 Months YTD 1 Year 3 Year Fund Portfolio characteristics Fund Average Modified Duration 5.82 Average Yield to Maturity (%) 7.86 Source: HSBC Global Asset Management and Bloomberg, data as of 31 December Returns are gross of fees in USD terms. Fund inception date: 20 August 2012 Returns will be reduced after fees deduction. Investment involves risks. Past performance is not indicative of future performance 19

20 HSBC GIF India fixed income Supplemental information as of 31 December 2015 (cont d) Breakdown by currency SGD 0.02% USD 0.63% GBP 0.01% Portfolio breakdown % of portfolio Duration Yield INR Corp 10.34% % INR Quasi 16.16% % INR Sov 52.74% % INR 99.34% USD Corp 12.08% % USD Quasi 5.78% % Credit rating breakdown Sector allocation Weight (%) Sovereign Quasi-Sovereign Financial Bank Oil & Gas BBB NR Cash 2.9 Cash Source: HSBC Global Asset Management 31 December 2015; Investment involves risks. Past performance is not indicative of future performance 20

21 Conclusion A high yield opportunity in a low yielding world Strong macro tailwinds for one of the world s fastest growing economies Flexible strategy taking advantage of a full opportunity set of Indian bonds The commentary and analysis presented in this document reflect the opinion of HSBC Global Asset Management on the markets, according to the information available to date. They do not constitute any kind of commitment from HSBC Global Asset Management. Consequently, HSBC Global Asset Management will not be held responsible for any investment or disinvestment decision taken on the basis of the commentary and/or analysis in this document. 21

22 Appendix

23 India fixed income GIPS report Investment involves risks. Past performance is not indicative of future performance 23

24 India fixed income Disclosures 24

25 India fixed income Supplemental GIPS report Note: This report is supplemental to the full presentation produced at the last calendar quarter-end 25

26 India fixed income Disclosures 26

27 Key risks and disclosures

28 Key risks Investor should be reminded that investment in some of the developing Asian countries may involve special considerations and risks. Political changes, government regulation, social instability or diplomatic development, etc. could affect adversely the economies of such countries or the value of the investment Change of interest rate may affect the value of the investments. Bonds and other fixed income securities are more susceptible to fluctuation in interest rate and may fall in value if interest rates change The assets and liabilities of the investments may be denominated in Asian currencies which is different from the base currency of the investments. Therefore, the investments maybe affected favorably or unfavorably by exchange control regulation or changes in the exchange rates between the base currency and other currencies The investments may have exposure in credit risk whereby investments in non- investment grade debt obligations involves a high amount of risk. An issuer suffering an adverse change in its financial condition could lower the credit quality of a security, leading to greater price volatility of the security Investments made may have exposure in financial derivative instruments, such as futures, forwards and swaps, etc. Investments in financial derivative instruments may involve a greater degree of risk than in case with conventional securities and may subject to liquidity and counterparty risks Currency movement and market condition may affect the value of investments 28

29 Explanatory notes and disclaimers The document is confidential and is supplied to you solely for your information. This document should not be reproduced or further distributed to any person or entities, whether in whole or in part, for any purpose. Investment involves risk and past performance is not indicative of future performance. Please refer to the offering document for further details including the risk factors. The material contained herein is not intended to provide professional advice and should not be relied upon in that regard. Readers should seek appropriate professional advice where necessary. The opinions expressed herein should not be considered to be a recommendation by HSBC Global Asset Management (Hong Kong) Limited to any reader of this material to buy or sell securities, commodities, currencies or other investments referred to herein. HSBC Global Asset Management (Hong Kong) Limited, its ultimate and intermediate holding companies, subsidiaries, affiliates, clients, directors and/or staff may, at any time, have a position in the markets referred to herein, and may buy or sell securities, currencies, or any other financial instruments in such markets. HSBC Global Asset Management (Hong Kong) Limited has based this document on information obtained from sources it believes to be reliable but which it has not independently verified. HSBC Global Asset Management (Hong Kong) Limited and the HSBC Group make no guarantees, representations or warranties and accept no responsibility or liability as to its accuracy or completeness. Information in this report is subject to change without notice. This presentation is intended for Professional Investors as defined in the Securities and Futures Ordinance in Hong Kong. 29

30 Important information This presentation is distributed by HSBC Global Asset Management (France) and is only intended for professional investors as defined by MiFID. The information contained herein is subject to change without notice. All non-authorised reproduction or use of this commentary and analysis will be the responsibility of the user and will be likely to lead to legal proceedings. 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 commentary and analysis presented in this document reflect the opinion of HSBC Global Asset Management on the markets, according to the information available to date. They do not constitute any kind of commitment from HSBC Global Asset Management (France). Consequently, HSBC Global Asset Management (France) will not be held responsible for any investment or disinvestment decision taken on the basis of the commentary and/or analysis in this document. All data come from HSBC Global Asset Management unless otherwise specified. Any third party information has been obtained from sources we believe to be reliable, but which we have not independently verified. Representative overview of the investment process, which may differ by product, client mandate or market conditions. The fund presented in this document may not be registered and/or authorised for sale in your country. The performance figures displayed in the document relate to the past and past performance should not be seen as an indication of future returns. It is important to remember that the value of investments and any income from them can go down as well as up and is not guaranteed. 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