India Insights Monthly update on Indian markets

Transcription

1 India Insights Monthly update on Indian markets Summary July 2017 June s historically low CPI print, a large drop in inflation expectations, and the flexibility expressed by MPC members in the June minutes, support our call for a 25bps rate cut in the upcoming August 2 meeting, taking the repo rate to 6.00% Manufacturing output growth slowed to 1.2% in May from 2.3% in April, as firms destocked ahead of the GST implementation on July 1 Since the beginning of 2017, MSCI India has returned 20% in local currency terms and 28% in USD terms (as of 21 July), backed by strong liquidity from both foreign and domestic institutional investors, positive global cues and hopes that the favorable policy environment will stay intact Despite a possible marginal widening of the current account deficit, market consensus still expects the basic balance i.e. CAD plus FDI to be positive this year, which together with portfolio flows should keep the INR relatively resilient Cashless India: Counting down to a digital revolution By Nilang Mehta Portfolio Manager, Indian equity The story of India's digital payments revolution has an unlikely hero its government. With guidance from the regulator (Reserve Bank of India) and supported by the spirit of national service amongst private technocrats, India s political leadership has leapfrogged the country s digital payments landscape in recent years. Governments in the developing world are usually associated with bureaucratic red tape, and rarely with spearheading major technological innovations, making this achievement particularly noteworthy. The National Payment Corporation of India (NPCI) was setup by the government nearly a decade ago as an umbrella institution for all the retail payment systems in the country, with the core objective of consolidating and integrating multiple systems into a standard platform. Since then it has been instrumental in leading payments revolution in India with innovations such as Immediate Payment System (IMPS), National Payments Switch, RuPay, Bharat Bill Payment System and more recently, Unified Payment Interface (UPI) and Bharat Interface for Money (BHIM). Where there s a will, there s a way to pay By 2022, India will have world s second largest mobile, smart phone and internet-user base, which makes this an ideal time to speed up penetration of ecommerce and adoption of digital payments. But with cash usage at around 80% 1, compared with 20-25% 1 in developed countries and 50% 1 in China, the concept of a cashless economy may seem more than a tad unrealistic at this point. Other impediments include - low penetration of smart phones, patchy internet coverage and relatively high cost of digital transactions. 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.

2 Cashless India: Counting down to a digital revolution (cont d) But the NPCI has developed innovative solutions that can work around some of these challenges, such as facilitating digital payments using basic mobile phones without any internet connection to overcome the issue of relatively low smartphone and internet penetration. It also created UPI which is an integrated open architecture system that allows peer to peer, person to merchant and business to business payments using a basic mobile phone - making it the most revolutionary development we have seen in global payment landscape. Penetration of digital payments has also been hampered by availability and cost of infrastructure such as point of sale (POS) terminals and contactless card readers. Here again, the NPCI s ingenuity has come to the rescue, with the development of a QR code (Bharat QR) based technology where the payer can just scan the QR code displayed at the merchants end using his smartphone and make the payment. This solution is also interoperable among different payment systems, facilitating faster and smoother adoption. While these innovations have facilitated multifold growth, from a low base, in digital payments, it is still challenging to scale up usage to cover a sizeable portion of India s vast populace. Cue Aadhaar Enabled Payment System (AEPS), which in our opinion, is likely to emerge the biggest game changer in India s digital payments revolution. AEPS is equipped to overcome the dual challenge of a payer without a mobile phone and a merchant who does have a POS terminal. A regular smart phone at the merchants end can be transformed into biometric reader (finger print and iris scan) by attaching USD10 digital reader, and the payer can use his biometric ID (Aadhaar number), which is linked to his bank account, to make the payment. We have dubbed this Aadhaar Pay - an uniquely Indian solution to address uniquely Indian challenges. Cashless revolution catalysed by currency ban Though India has traditionally been a cash-driven economy, there is a gradual but significant change underway. Cash payments, which had accounted for 92% 1 of the total payments in 2005, declined to 78% 1 by a decline of around 1% each year. Digital payments got a big boost on November 8, 2016 when Indian government demonetised its high value currency notes representing 12% 2 of GDP and 86% 2 of currency (by value) in circulation. This one action forced a large percentage of the population to adopt digital modes of payment while they waited for new notes to hit their banks and ATMs. The usage of both debit and credit cards also sky-rocketed along with mobile wallets. During this period government was able to leverage on the UPI backbone, and launch its own unique payments application called BHIM which enabled instantaneous, one-click transfer of funds for anyone with a bank account and a mobile phone. In June 2017, the BHIM app scaled 16 million 3 downloads, and government has set itself an ambitious target of 400 million 3 downloads by March Adoption rates for UPI have been very encouraging as well, with the number of monthly transactions crossing 10 million 3 (INR 30.7 billion) 3 in June, compared with near-zero usage prior to demonetisation. Usage of mobile wallets which was already on an upswing prior to November 2016, also got a leg up after the currency ban and registered an over 35% 3 growth in number of transactions (80.1 million) 3 and 73% 3 growth in value (INR 22.8 billion) 3. See chart on page 4. More likes and followers Unsurprisingly, India s digital payment space has lured in global players, with China s Alibaba pairing up with leading mobile wallet company Paytm, and more recently, both Facebook and Google trying to piggy back on UPI to integrate payment services into the WhatsApp messenger and various Google applications. WhatsApp had over 200 million subscribers in India as of early 2017, while nine out ten smartphones sold in the country operate on Google s Android system, so the entry of these companies could be a big catalyst for the digital payments revolution. As India makes bigger strides towards digitalisation, there would be less friction in executing transactions, more transparency and more digital footprints. The cost of cash to the Indian economy is estimated at around 1.7% 4 of GDP. With increased adoption of digital payments, over the long run, this cost will come down. We also expect businesses and individuals to benefit from their digital footprint as financial services companies use this consumer behavior and demand data to understand their customers and improve their access to finance at a reasonable cost. In summary, India has begun its countdown to a digital payments revolution, and given its size, economic growth trajectory and the government s commitment to this initiative, this is a story worth clicking into. Source: 1. Data from Boston Consulting Group (BCG) and Google report Digital Payments as of July Data from Reserve Bank of India (RBI) as of November Data from NPCI as of June Data from Visa as of October 2016 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 Indian equities went into consolidation mode in June on the back of high valuations and uncertainty related to the transitory impact of the GST roll-out from July 1. However after that brief pause the market resumed its rally, scaling fresh highs in the current month Indian companies' June quarter earnings have been a mixed bag with some hits and misses amongst the major companies that have reported so far Since the beginning of 2017 the equity market has churned out impressive gains, MSCI India has returned 20% in local currency terms and 28% in USD terms (as of 21 July), backed by strong liquidity from both foreign and domestic institutional investors, positive global cues and hopes that the favorable policy environment will stay intact. However, following this strong performance, the equity markets are currently trading above their historical averages Going ahead, outlook for the market depends largely on the prospects for corporate earnings in the coming quarters. Indian companies' June quarter earnings have been a mixed bag, with some hits and misses amongst the major companies that have reported so far. The rise in the Indian rupee (INR), as well as lower oil and petrochemical prices have impacted bottomlines in select sectors Amidst the winners in the previous quarter, India's largest private company by revenue, reported a better-than-expected jump in first-quarter profit and announced plans to launch an ultra low-cost 4G-enabled phone which could be another potential disrupter for the telecom sector after it rolled out its competitively-priced mobile services, including voice and data, last year MSCI India PE against its historical average Now year average year average Source: Bloomberg, HSBC Global Asset Management as of July2017 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 Sector Views Sector Consumer Discretionary Financials Industrials Real Estate Information Technology Consumer Staples Materials Telecom Healthcare Energy Weighting Overweight Overweight Overweight Neutral Neutral Source: HSBC Global Asset Management as of end-june 2017 Chart in focus Sector focus The Goods and Services Tax (GST) which was rolled out on July 1, is expected to be a positive for fast-moving consumer goods (FMCG) and consumer durables companies In June, consumer durables retailers witnessed a sharp increase in demand for products including TVs, refrigerators, washing machines, and air conditioners as they offered discounts of 20%-50% to clear their pre-gst inventories, creating a short term positive impact Moving into July, FMCG companies have reduced prices of soaps, detergents, toothpastes and hair oil to pass the benefits of lower taxes to consumers. These items are taxed on 18% under GST, as compared with rates ranging from 22% to 27% earlier In the longer run the implementation of GST is expected to benefit listed companies in these sectors as their unorganised counterparts will now face higher taxation and compliance costs. This may eventually force them into the formal fold and create a more level playing field Looking ahead, we expect our holdings in the Consumer Discretionary (OW) sector to potentially directly benefit from elimination of cascading taxes, removal of supply chain inefficiencies, reduced logistic costs and import substitution Increase in electronic payments since demonetisation in millions Source: NPCI, RBI as of June 2017 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. Source : NPCI as of June 2017

5 Fixed income Continuing the trend from May, India s CPI in June slipped further to record a low 1.5% y-o-y from 2.2% y-o-y in May, the lowest since the turn of the millennium. Currency Despite a possible marginal widening of the Current Account Deficit (CAD), market consensus still expects the basic balance i.e. CAD plus FDI to be positive this year, which together with portfolio flows should keep the INR relatively resilient. Continuing the trend from May, India s CPI in June slipped further to a record low of 1.5% y-o-y (May: 2.2% y-o-y), the lowest since the turn of the millennium. The fall was led by further disinflation in food and fuel prices, both in annual and sequential terms Core CPI inflation (CPI ex-food & beverage, fuel) remained benign at 4.0% y-oy (which is also RBI's target for headline inflation) Industrial production growth moderated to 1.7% y-o-y in May from a downwardly revised 2.8% in April, below expectations. Manufacturing output growth slowed to 1.2% from 2.3% in April, as firms destocked ahead of the GST implementation. While capital goods and consumer durables output contracted, consumer non-durables growth held up well June s historically low CPI print, a large drop in inflation expectations and the flexibility expressed by MPC members in the June minutes, support our call for a 25bps rate cut in the upcoming August 2 meeting, taking the repo rate to 6.00% From a strategy standpoint, we have recently rotated out of short dated government and corporate bonds into longer dated government bonds in order to add duration. In addition, incremental inflows have been deployed into government bonds in the 13Y-16Y part of the curve, as well as select credits in the 10Y space. Our current portfolio modified duration has moved up to 5.58 years in June from 4.97 years in April 2017 We continue to hold highly liquid corporate bonds which provide a reasonable carry in a stable to low interest rate environment. We also hold masala bonds where relative valuations have prevailed vs. onshore credits. We continue to be underweight in USD bonds given expectations of Fed rate hikes and since spreads are at their tightest In the six months ended 30 June 2017, net FPI debt inflows have been INR 942 billion vs. an outflow of INR 115 billion for the same period in As of 30 June 2017, the INR has appreciated by 5.18% year-to-date against the USD, adding to foreign investors gains Despite a possible marginal widening of the Current Account Deficit (CAD), market consensus still expects the basic balance i.e. CAD plus FDI to be positive this year, which together with portfolio flows should keep the INR relatively resilient. Given improving economic fundamentals, narrowing inflation differentials and strong FX reserves, we expect the INR to move in line with Asian currencies and to remain range bound going forward. India s core inflation on a downward trend INR continues to be one of the better performing Asian currencies Source: LHS Bloomberg, as of 30 June RHS HSBC Global Asset Management, as of 14 June Investment involves risks. Past performance is not indicative of future performance. 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 52.7 (Jun) 50.9 (Jun) 53.1 (Jun) NA 52.5 (May) 51.6 (May) 52.2 (May) The fall in the manufacturing PMI was led by a retreat in domestic new orders and production ahead of GST implementation. The export orders index rose significantly. New business index led the services PMI to an 8-month high. Industrial Production (IP) (% yoy) 1.7 (May) (Apr) This lower IP growth was partly driven by a higher base effect and some inventory de-stocking ahead of GST implementation. However, any potential GST disruption is likely transitory, and we still expect a gradual recovery in industrial activity amid ongoing re-monetisation, lower domestic rates, hikes to government employee compensation, and increased government capex. Local passenger vehicle (PV) sales (units) 198,399 (Jun) (-11.2% yoy) NA 251,642 (May) (+8.6% yoy) The decline was mainly attributed to de-stocking by dealers before the GST implementation on 1 July. Customer may have postponed their purchases due to uncertainty over pricing post GST. However, vehicles in certain segments will likely become cheaper under the GST, which could be positive for demand in the coming months, while dealers will have to replenish their stocks. Exports (USD) (% yoy) Imports (USD) (% yoy) 4.4 (Jun) NA 8.3 (May) The yoy export growth deceleration partly reflected the base effect, lower oil, commodity and agricultural prices, and the lagged impact of INR appreciation. However, growth remains positive amid an ongoing global cyclical recovery (Jun) NA 33.1 (May) The lower yoy import growth likely partly reflected a higher comparison base, lower prices, and some impact of the GST as firms slowed production ahead of the tax change to reduce inventories. Gold imports fell mom, amid fading effects of the wedding season and restocking by jewellers on GST concerns. Oil imports rose mom despite lower prices. Non-oil non-gold import growth - a proxy for domestic demand - maintained a solid pace of 16.7% yoy. Trade Balance (USD) -13.0bn (Jun) NA -13.8bn (May) Trade deficit narrowed slightly but remained elevated in June. It is likely to widen in FY18 on higher imports due to a recovery in domestic demand. Inflation (% yoy) - CPI - WPI 1.54 (Jun) 0.90 (Jun) (May) 2.17 (May) Headline CPI inflation fell below the lower bound of RBI target range (4%+/- 2%) for the first time, driven by deeper yoy food deflation, lower fuel prices, and moderation in core inflation, which may have also reflected some impact of discounts offered by apparel and consumer durables firms ahead of GST rollout. Going forward, higher house rent allowances would statistically add to headline inflation, although the secondary effect (on a generalised rise in inflation or inflation expectations) may be limited by lack of strong domestic demand growth or firm pricing power. The base effect will turn adverse from August and food prices may normalise. However, some developments bode well for a benign near-term inflation trajectory, including an expected normal monsoon, benign global oil prices, a modest hike in minimum support prices, and moderate tax rates for most consumer products under the GST. Repo rate (%) Reverse repo rate (%) Marginal standing facility (MSF) rate (%) (7 Jun) (6 Apr) Even though it stood pat on rates, the RBI turned dovish at its June meeting, after it slashed inflation forecast and reduced its growth projection for the coming quarters. The RBI s significant inflation markdown, with still elevated levels of real rates, has made the case for future easing, amid benign nearterm inflation outlook. However, the RBI has cautioned against the uncertainty over the sustainability of the current (food price) disinflation and potential fiscal and inflation risks from farm loan wavier, if implemented by more states, as well as the risk of losing its credibility as premature easing now may require a policy reversal later on. We expect the RBI to stay prudent when it cuts rates. GDP at market prices (quarterly, % yoy) Gross valueadded (GVA) at basic prices (quarterly, % yoy) 6.1 (Jan- Mar) 5.6% (Jan- Mar) (Oct- Dec) 6.7% (Oct- Dec) Growth slowdown likely partly reflected the lagged impact of demonetisation. The cash shortage led to a contraction of construction GVA and a drop in real estate and manufacturing GVA growth on the supply side. On the demand side, it led to a contraction in fixed investment growth and slowdown in private consumption, despite a rise in government spending. However, nominal GDP growth picked up to 12.5% yoy from 10.4% in the December-quarter. Highfrequency data suggest a growth recovery post-demonetisation remains on track, driven by consumption, public investment, and exports. GST could pose some risks to near-term growth due to inventory drawdown and potential disruption to SMEs, but the impact, if any, is likely to be transitory. Current Account Balance (CAB) (quarterly, balance in USD and % of GDP) -USD3.4bn -0.6 (Jan- Mar) -USD6.3bn -USD8 bn -1.4 (Oct- Dec) Source: Bloomberg, HSBC Global Asset Management, as of July 2017 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 The narrowing of CAD largely reflected seasonality, with a lower merchandise trade deficit, slower investment outflows and higher remittances helping offset a smaller services trade surplus. CAD narrowed to 0.7% of GDP FY17, the lowest seen since FY05. It is likely to widen in FY18 on higher goods trade deficit, but should remain within sustainable levels with robust FDI inflows. 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 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. This commentary has been produced by HSBC Global Asset Management to provide a high level overview of the recent economic and financial market environment, and is for information purposes only. The views expressed were held at the time of preparation; are subject to change without notice and may not reflect the views expressed in other HSBC Group communications or strategies. This marketing communication 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. The content 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. You should be aware that the value of any investment can go down as well as up and investors may not get back the amount originally invested. Furthermore, any investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in established markets. Any performance information shown refers to the past and should not be seen as an indication of future returns. You should always consider seeking professional advice when thinking about undertaking any form of investment. 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. Mutual fund investments are subject to market risks, read all scheme related documents carefully. 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. 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 for 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. Copyright HSBC Global Asset Management 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 Limited.