Market Outlook. March 2018

Transcription

1 Market Outlook March 2018

2 EQUITY MARKET

3 Global equity market snapshot: February 2018 Performance in February 2018 (local currency returns) (1) (2) (3) (4) (5) (6) (7) CHINA HANG SENG GERMANY KOREA INDIA NIFTY MSCI EM JAPAN DOW JONES UK S&P 500 PHILIPPINES FRANCE MSCI EM - EUROPE TAIWAN PAKISTAN INDONESIA RUSSIA BRAZIL SRI LANKA Performance YTD (local currency returns) (2) (4) (6) (8) UK GERMANY JAPAN KOREA CHINA PHILIPPINES INDIA NIFTY FRANCE DOW JONES S&P 500 TAIWAN SRI LANKA HANG SENG MSCI EM INDONESIA PAKISTAN MSCI EM - EUROPE RUSSIA BRAZIL Equities delivered negative returns across most markets in February Brazil and Russia are few key economies with positive returns during the month. NIFTY was down by 4.9% during the month. On YTD basis, NIFTY delivered negative 0.4% return. On a YTD basis, emerging markets (MSCI EM index) has delivered 3% returns. Source: Bloomberg, SBIMF Research

4 Weaker FII traction in the emerging market equity in February Barring Russia, Brazil and South Africa, emerging market economies witnessed a sell-off from the FIIs in February 8,000 6,000 Net FII inflows in Equity (USD mn) Jan-18 Feb-18 4,000 2,000 - (2,000) Taiwan S Korea India Thailand Brazil Indonesia Philippines Mexico Sri Lanka South Africa India and Taiwan have been receiving net positive equity investment for six years in succession ( ) in USD million (till Feb) India -12,918 17,639 29, ,548 19,754 16,162 3,274 2,903 8,014-1,487 Indonesia 1,753 1,384 2,396 2,956 1,712-1,806 3,766-1,580 1,259-2, Philippines -1, ,225 1,331 2, ,256-1, , S Korea -36,641 24,682 19,823-8,542 15,084 4,875 5,684-3,626 10,480 8, Sri Lanka Taiwan -15,484 15,680 9,593-9,066 4,913 9,188 13,190 3,345 10,956 5,757 0 Thailand -4,805 1,136 2, ,503-6,211-1,091-4,372 2, Brazil -13,332 11, ,369 4,858 8,995 5,711 3,949 4, Mexico -3,503 4, ,566 9, ,833 3,601 9, ,690 South Africa -6,114 9,067 4,851-2, , ,604-2,579 2,088 Russia 15,561-3,006 5,953 10, ,747 13,809 7,877 7,878 7,879 N/A Source: Bloomberg, SBIMF Research

5 Indian stock market snapshot: February 2018 Performance in February (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) BANKEX PSU CAP GOODS REAL ESTATE OIL & GAS SENSEX BSE 100 NIFTY MID CAP BSE 500 AUTO SMALL CAP PHARMA FMCG METALS IT Performance YTD (2) (4) (6) (8) (10) (12) -9.1 PSU -7.2 AUTO -7.1 MID CAP -5.7 SMALL CAP -5.4 REAL ESTATE -4.8 OIL & GAS -4.6 PHARMA -2.2 BSE BANKEX -1.8 FMCG -1.5 BSE NIFTY -0.3 CAP GOODS 0.4 SENSEX 1.6 METALS 10.9 IT Indian equity market delivered negative returns across all sectors in February. Nifty and Sensex are down by ~5% each in February. Performance down the capitalization were broadly on same lines. Mid-cap was down 4.6% and small-cap by 3.1%. YTD, small and mid-cap has under-performed NIFTY. Sector-wise: All the sectors delivered negative returns. Bank, PSU and Capital Goods were the under-performers during the month. YTD, Nifty is down by 0.4%. Sector-wise performance has been negative across most of the sectors on a YTD basis (barring IT and Metals). PSU and Auto are the sector laggards YTD (down 9% and 7% respectively). Source: Bloomberg, SBIMF Research

6 Liquidity: FIIs sold while DIIs invested in February FIIs pulled out US$ 1.9 billion in February 2018 driven by the global sentiments and profit booking post change inn India s LTCG* Sep-14 US$ billion Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep-17 Dec-17 Mutual fund Inflows continue to witness robust inflows US$ billion Insurance companies were also a net buyer during the month US$ billion Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Source: MOSL, SBIMF Research; NB: LTCG is long-term capital gain tax which was changed from nil to 15%, effective 1 st February

7 Earnings see downgrades post 3Q FY18 results Corporate profit as percentage of GDP Average of 5.4% Q FY18 earnings trajectory was treading fine at the start, but were marred by the later results of select larger companies. Consequently, the overall PAT growth was down to single digit (7% vs. initial expectations of 13-15%). In terms of sectors, IT, NBFCs, Oil& Gas (ex ONGC) and metals have reported numbers ahead of estimates while auto, building materials and banks have been disappointing. Within infrastructure, L&T has been a positive surprise. FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY19 NIFTY EPS downgraded sharply; FY18 earnings growth now expected at 6-8% vs % earlier FY10 FY11 FY12 FY13 FY14 FY FY03 FY04 FY05 FY06 FY07 FY08 FY09 Nifty EPS FY10 FY11 FY12 FY13 FY14 YoY, RHS FY15 FY16 FY17 FY16 FY18e 580 FY19e FY17 40% 30% 20% 10% 0% -10% -20% Qualitative trends point to on-going economic recovery. Robust volume growth across consumption driven sectors- FMCG, cement, strong performance from retail focussed private banks, strong operating performance in cyclical like L&T are encouraging. But the on other hand, lingering issues in banks balance-sheet is concerning. Nifty FY18 earnings estimates were cut by 1-3%. With this, FY18E is likely to see 8-10% EPS growth (vs. 20% projected at start of the year) seventh straight year of earnings downgrades. FY19E asking rate remains steep (+20%), especially given the impending provisions of banks owing to the RBI s revised resolution. Corporate profits as percentage of GDP has hit an extremely low point and logically should mean revert. Earnings revival is absolutely critical for such rich valuations to sustain. Source: Antique, SBIFM Research

8 Growth recovery seen in last two quarters India s growth has improved in Q2 and Q3 FY Real GVA at basic prices (%y-o-y) Real GDP (% y-o-y) Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 India s growth has improved and is recovering from last 2 quarters (2Q and 3Q FY18 GDP growth at 6.3% and 7.2% respectively) after hitting the lows of 5.7% in Q1 FY18. Source: CMIE economic outlook, SBIMF Research,

9 Supply and demand side break-up of growth Both demand side and supply side growth accelerated in Q3 FY18 Supply side (% growth) % share in GDP FY17 Q1 FY18 Q2 FY18 Q3 FY18 GVA at basic prices Agriculture, forestry and fishing Industry Mining and quarrying Manufacturing Utilities Construction Services Demand side (% growth) % share in GDP FY17 Q1 FY18 Q2 FY18 Q3 FY18 Real GDP Private Consumption Government Consumption Gross Capital Formation (GCF) Investment Exports of G&S Imports of G&S GDP growth accelerated to 7.2% in Q3 FY18 vs. 6.5% in Q2. It is driven by ramp up in investments and government spending which were strong enough to offset the moderation in private consumption growth and deterioration of external trade. Surprisingly, GFCF growth nearly doubled. Investment rate in the economy marginally improved to 28.7% (Q1 FY18) vs. 28% (Q2 FY18). On the supply side, Q3 FY18 GVA growth improved to 6.7% vs. 6.2% in Q2. Agriculture, Manufacturing, Construction and Services improved while, Utilities growth moderated and Mining output declined. Source: CMIE economic outlook, SBIMF Research,

10 Manufacturing and construction activity witness pick-up Manufacturing production is on the recovery path Apr-11 % y-o-y, 3mma Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 IIP: Manufacturing Nov-15 Apr-16 Sep-16 Domestic sale of CVs depicting double digit growth Jan-14 % y-o-y Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Domestic sale of CV Oct-16 Jan-17 Apr-17 Feb-17 Jul-17 Jul-17 Oct-17 Jan-18 Increased construction activities leading to pick-up in steel and cement output 30 % y-o-y Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Steel production Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Cement production IIP manufacturing increased by 8.4% y-o-y in December 2017 and 10.2% y-o-y in November. Cyclical pick-up in exports, government s focus towards infrastructure investment, and easing of the GST and demonetization issues are helping towards improved manufacturing sector output. In line with the increasing construction and manufacturing activities, we see higher production of steel and cement along with, and domestic sales of commercial vehicles. Oct-17 Source: CMIE economic outlook, SBIMF Research,

11 Investment can show cyclical recovery in Sharp growth in investments Auto, metals, food processing, and electronics sector show improved capacity utilization Jun-12 % y-o-y Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 GFCF (Investments) Aug-16 Jan-17 Jun-17 Nov Capacity Utilization (in %) Textiles Machinery Leather & Footwear Capital Goods Electronics & Electricals Cement Q2 FY18 Food Processing Auto Chemicals & Fertilizers Textiles Avg b/w FY 13-FY17 Metals GFCF growth has nearly doubled from last quarter. This is in contrast to some of the other high frequency indicators such as CMIE projects under implementation and rate of projects completion. Looking ahead, there are pockets of optimism on the investment front. Order inflow for capital goods and infrastructure companies (particularly roads) has shown strong growth. Steel, Cement and auto-ancillaries depict improved capacity utilization. These sectors can drive growth in private investment. However, persistence of low capacity utilization in sectors with high capital requirement (power, textiles) could limit the pace of recovery. To that extent, India needs an aggressive infrastructure push from the government. But this will be contingent on the tax-collection buoyancy (particularly the GST revenue trends). Source: CMIE economic outlook, FICCI, SBIMF Research,

12 Services growing at a healthy pace Tourist arrivals, domestic sales of CVs and MUVs growing at a healthy rate. Bank credit growth has bottomed out % y-o-y Domestic Sale of CV & Multiutility vehicles Real Credit to Trade Tourist arrivals ('000) Total freight handled at rail, ports & airways Domestic Passengers handled at airport Real Bank deposit growth Real Bank Credit growth AUM of MFs Real central govt revenue spending Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Majority of the high-indicators in services showing healthy growth. Specifically, domestic sales of CVs and MUVs, tourist arrivals, domestic passengers handled at airport and AUM of MFs are growing at a healthy growth rate. Real bank credit has bottomed out and increasing at an average of 6.9% y-o-y in last 2 months. Green: Growth is higher than previous quarter Pink: Growth is lower than previous quarter Source: CMIE economic outlook, SBIMF Research,

13 Widening trade deficit is a concern for overall growth Rising trade deficit is a risk to overall GDP growth Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Trade Deficit (USD bn)- RHS Exports (USD bn) Imports (USD bn) Imports are rising faster than export resulting in widening of trade deficit (4.5 year high), despite of year beginning seasonality (generally, January - March sees lower trade deficit). FYTD (till Jan 2018) trade deficit stands at US$ 132 billion, 49% higher than US$ 89 billion during Apr-Jan Rising trade deficit is a risk to overall GDP growth. Source: CMIE economic outlook, SBIMF Research,

14 Outlook: FY19 growth is expected to surge back to 7.6% Growth to improve further to 7.2% y-o-y in 2H FY % growth 8.1 FY18: 6.7% FY13 FY14 FY15 FY16 FY17 1H FY18 2H FY18e FY19e Real GDP FY18 growth is expected at 6.7% y-o-y and FY19 growth is expected to surge back to 7.6%. Higher oil prices, widening of trade deficit and any shortfall in monsoon pose downward risk, while government infrastructure push, fading away of GST disruptions, rising global growth and improved business sentiments will provide the positive support. Source: CMIE economic outlook, SBIMF Research,

15 Indian Equity Valuations relative to emerging markets India s valuation relative to other EMs is above historical average of last 5 years 90% 80% 70% 60% 50% 40% 30% Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 MSCI India's P/E prem. wrt MSCI EM Apr-17 Jul-17 Oct-17 Jan % 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% and the relative return on equity has fallen Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 MSCI India RoE relative to EM (in %) Apr-17 Jul-17 Oct-17 Source: Morgan Stanley, SBIMF Research,

16 Valuations have corrected in January and February; but still high Mean: 16 Valuations across the capitalization curve are rich when compared to history Sensex 1Y fwd PE S&P Mid Cap 1Y fwd PE S&P Small Cap 1Y fwd PE SD -1 SD Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Mar-15 Aug-15 Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Feb Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 Aug-17 Dec-17 Market Cap to GDP rose to eight year high Average of 76% for the period FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Source: Bloomberg, MOSL, SBIMF Research,

17 Rising debt yields reduces the scope of valuation re-rating Valuations relative to the bond market is at a three year high implying that either the rates tread lower or growth surprises on the upside Jan-06 Jun-06 Nov-06 Apr-07 Sep-07 Feb-08 Jul-08 Dec-08 May-09 Oct-09 Mar-10 Aug-10 Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Mar-15 Aug-15 Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 India Earnings Yield (in %) India 10 Year G-sec (in %) Source: Bloomberg, SBIMF Research,

18 Equity Market outlook Indian NIFTY fell 4.9% during the month on the back of selling by FIIIs. FIIs pulled out US$ 1.9 billion from India in February, driven by the overall selling in the emerging market space. The impact of FIIs outflow was cushion by net positive investment from DIIs (US$ 2.8 billion). Performance down the capitalization were broadly on same lines (Mid-cap: - 4.6% and small-cap -3.1%. YTD, small and mid-cap has under-performed NIFTY. 3Q FY18 earnings trajectory was treading fine at the start, but got marred by the later results of some of the larger companies. Consequently, the overall NIFTY PAT growth was down to single digit. FY18 is likely to see seventh straight year of earnings downgrades. FY19E asking rate remains steep (+20%), especially given the impending provisions of banks owing to the RBI s revised resolution. Looking ahead, NCLT portrays serious commitment to resolve the NPA cases. RBI guidelines are also suggestive of recognizing the pains rather than stretching it any further. Along with the recent events, there could be negative repercussions on the corporate credit growth in the near term and added pressure in the banks profitability. We saw mild growth recovery in last two quarters (2Q and 3Q FY18 GDP growth at 6.3% and 7.2% respectively) and interestingly, led by investment as opposed to consumption. We expect growth to further rise to 7.6% in FY19. Valuations are steep on all parameters. Sensex valuations relative to its own history corrected marginally to ~19.5 times 1 year forward earnings but remains above the longer-term trends (10 year average at 16x). Valuations relative to the bond market is now at a three year high implying that either the rates will tread lower or growth has to surprise on the upside. In sum, overall economic growth and earnings support are crucial for the markets and the revival is a good sign. That said the steep valuations leave the limited scope of further re-rating. To that extent, easy gains drying out, one needs to focus on bottom up stock picking Valuations are 19.5 times on 1 year forward earnings 9 7 Mean: 16 Sensex 1Y fwd PE +1 SD -1 SD Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Mar-15 Aug-15 Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Source: Bloomberg, SBIMF Research

19 Fixed Income Market

20 India 10 year G-sec yields are rising Bond yields moved up by 18 bps on the budget day. Yields has risen by 28bps on YTD basis Factors that drove the yields higher in February Higher than expected fiscal deficit slippage for FY18 and FY19 Measures such as re-calibration of MSP, higher import duty on certain agri-products announced in Budget are being perceived as inflationary Hawkish tones of RBI MPC minutes Deteriorating G-sec demand-supply dynamics: Both FPI and Banks reduced their appetite of Indian government bonds Hawkish statements from US FOMC Marginal strengthening of dollar post US Fed meeting and import tariff by the US Other Global factors: Stable commodity prices, gradual rise in global policy rates along with liquidity tightening India 10 year G-sec yield (In %) Source: Bloomberg, SBIMF Research,

21 Global rates snapshot for February Year Gsec Yield (% mth end) 2016 end 2017 end Nov-17 Dec-17 Jan-18 Feb-18 m-o-m change (in bps) 3m Change (in bps) Developed market US Germany Italy Japan Spain Switzerland UK US, Spain and UK bond yields have increased while, yields in Germany, Italy, Japan and Switzerland inched down during the month. US bond yields have inched up by 20 bps during the month on account of hawkishness in US Jan FOMC meeting, accommodative financial condition and rising investors expectation of future inflation on account of growing confidence in economic expansion and falling unemployment rate. Source: Bloomberg, SBIMF Research

22 Emerging market bond yields February 2018 Bond yields in emerging markets are on gradual rising trend this year, barring Brazil, Russia and China 10 Year Gsec Yield (% mth end) 2016 end 2017 end Nov-17 Dec-17 Jan-18 Feb-18 Emerging Market m-o-m change (in bps) 3m Change (in bps) Brazil China India Indonesia Korea Malaysia Philippines Russia Taiwan Thailand Source: Bloomberg, SBIMF Research

23 India Rates Snapshot for February 2018 Dec-17 Jan-18 Feb-18 m-o-m change (in bps) Change in 2017 (bps) 1 Yr T-Bill M T-Bill year Gsec M CD*** M CD*** Yr Corp Bond* Yr Corp Bond* Yr Corp Bond* Yr IRS Yr IRS Overnight MIBOR Rate INR/USD # 6 # Crude Oil Indian Basket** # 18 # Indian bond yields rose in February on higher inflation, fiscal slippage, clouded GST earnings, hawkishness projected by RBI MPC as well as the US FOMC at their latest policy review meetings. Money market, too inched up during the month as higher currency leakage pull down the liquidity in negative zone during the month. Crude oil prices fell by 5.6% over the month. Rupee depreciated by 2.4% during the month. Source: Bloomberg, PPAC, CCIL, SBIMF Research; NB: **Crude oil price is average $/barrel for the month, rest of the data are % month end; *Corporate bond rate is for AAA rated bonds,*** Refers to PSU Banks CD rate; # INR and Oil price changes are % change

24 Yield curve has risen in February 2018 Yields have risen across the curve in February; yields steepened right after the budget Month 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 1-Jan Jan Feb-18 Source: Bloomberg, SBIMF Research

25 But growth-inflation mix warrants an unchanged policy rate in 2018 Inflation is bottoming out but to stay in desirable limits CPI target range 4% + 2% Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Mar-15 Aug-15 Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 CPI % y-o-y.. And growth is expected to recover marginally from a low base % growth FY18: 6.7% FY13 FY14 FY15 FY16 FY17 1H FY18 Real GDP 2H FY18e 7.6 FY19e Even though MPC meetings were hawkish, we think growth-inflation mix warrants an unchanged policy rate in We expect overall inflation to average at 3.6% in FY18 and 4.9% in FY19. GDP growth to clock 6.7% y-o-y in FY18 and recover to 7.6% in FY19. Growth is recovering and is at its nascent stage, and the current assessment factors in an expected CPI of around 4.5% in H ( with upside risks), which warrants a continuation of the current policy rate for a while. Source: CMIE economic outlook, CSO, SBIMF Research 25

26 Credit is recovering from a low base Credit has started to picking up Personal loans are driving the credit growth Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Nov-17 Growth (% y-o-y) Last 3 yrs. average Last 3 mth average Jan 2018 Dec 2017 Non-Food Credit Agriculture & Allied Activities Industry Services Personal Loans Bank Deposit (% y-o-y) Bank Credit (% y-o-y) Priority Sector Credit has bottomed out but is expected to stay contained on account of process of cleaning the banks. Non-food credit growth decelerated to 9.5%. Retail accelerated to 20% with mortgage growth rising to 15.2%. Industry growth at 1.1% while services growth at 13.2% and agri to 9.4%. 2 of the fastest growing segments are credit cards and personal loans. Both registering a 20%+ growth. Source: CMIE economic outlook, RBI, SBIMF Research 26

27 Liquidity: Back to neutral Sharp leakage in Currency has taken away the surplus banking system liquidity Rs. Billion Currency in Circulation has reached pre-demonetization levels Liquidity at the start of FY18 3,893 (less) Currency Leakage 3,696 9 (less) OMO sales 900 (less) MSS issuances 1,000 (add) Net FX purchase 1,556 Liquidity by end February -147 CIC before demonetization (Rs. Trillion) CIC on 6th Jan CIC as of 23rd Feb (the lowest point) 2018 Banking surplus liquidity stood at Rs 4.7 trillion on 31 st March Along with the RBI s efforts to absorb the excess liquidity via OMO sales and MSS issuances, sharp currency leakage has brought the banking system liquidity to the neutral zone in February. Overall, we expect banking system will be at near-neutral by March 2018 end, despite the maturing MSS bonds in March. Looking ahead in FY19, we have a negative outlook on external account. Hence, RBI s ability to inject permanent liquidity via FX purchases will be limited. To that extent, we expect aggressive OMO purchases in 2H FY19 which will create demand for the government bonds. Source: CMIE economic outlook, RBI, SBIMF Research 27

28 Currency: Rupee is depreciating since start of the year Rupee has under-performed relative to other currencies YTD (till Feb) Philippine Peso Indian Rupee Korean Won Indonesian Rupiah Turkey Lira Hungarian Forint Taiwanese Dollar Polish Zloty Brazil Real Russian Rouble % change 2017 % change YTD Chinese renminbi Malaysian Ringitt Thai Baht Colombian Peso Mexican Peso African Rand Both REER and NEER has moderated in Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Trade weighted 36 currency NEER (LHS) Trade weighted 36 currency REER (RHS) Source: Bloomberg, CMIE economic outlook, SBIMF Research Dollar strengthened marginally in Feb to +90 but weakened again (to ~89) since the start of March May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 DXY Index

29 External account: deteriorating at the margin Imports are rising faster than exports, trade deficit widened May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 Trade Deficit (USD bn)- RHS Imports (USD bn) May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 Exports (USD bn) May-17 Nov-17 FDI investments has moderated (Apr-Dec FY18 FDI at US$ 242 vs. US$ 306 during Apr-Dec FY17) USD billion Apr-Dec FY12 Apr-Dec FY13 Apr-Dec FY14 Apr-Dec FY15 Net FDI inflows Apr-Dec FY16 Apr-Dec FY17 Apr-Dec FY Total FII investments have started to taper off Oct-13 USD mn Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17 Total (Equity + Debt) FII Investment Jun-17 Oct-17 Feb-18 There exists some risk to current account due to widening of trade deficit to 4.5 year high and tapering off FII inflows. Both FII and FDI inflows are also moderating. Unlike FY18, FIIs may not be that robust in FY19. We project FY19 current account deficit to rise to 2.2% of GDP from 2.0% of GDP expected in FY18. Source: CMIE economic outlook, CSO, SBIMF Research 29

30 Commodity: Energy prices fell while metal prices rose Barring WTI, energy prices have decreased YTD WTI Coal Brent Gas Oil Natural Gas Gasoline Heating Oil Uranium % change in 2017 % change in YTD Metals prices are rising on YTD basis Iron Ore Nickel Sugar prices have fallen while Wheat prices have risen Wheat Soybeans Corn Cotton Coffee Sugar % change in 2017 % change in YTD Silver and Palladium prices are falling while Platinum is rising. Gold prices are stable Platinum Tin Zinc Lead % change in 2017 % change in YTD Gold Palladium Copper Aluminium Silver % change in 2017 % change in YTD Source: Bloomberg, SBIMF Research

31 Debt Market Valuations: attractive ~3% is an attractive real returns for foreign investors Spreads relative to Repo at 6 year high 10 Year Gsec Yield (% mth end)-feb 2018 Source: Bloomberg, SBIMF Research CPI Inflation- Jan 2018 Real Rate (in %) Brazil Russia South Africa Indonesia India China Thailand Korea Malaysia Philippines US Taiwan Jan-11 Aug-11 Mar-12 Oct-12 May-13 Dec-13 Jul-14 Feb-15 Sep-15 Apr year GSec yield (mth end, %) Repo Rate (mth end, %) G-sec yield relative to equity earnings yield higher than long-term trend Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11 Jan-12 Oct-12 Jul-13 Apr-14 Jan-15 Oct-15 Jul-16 Apr-17 India Earnings Yield (in %) India 10 Year G-sec (in %) Jan-18 Nov-16 Jun-17 Jan-18

32 Policy Rate Outlook The RBI maintained status quo on policy rate in its latest monetary policy meet in February. 5 out of 6 members voted for in favour of the decision, while one member (Dr. M. Patra) voted for a 25bps rate hike. The MPC has lowered its FY18 GVA growth projection to 6.6% (vs. 6.7% in the December meeting) but taken its Q4 FY18 inflation expectation higher to 5.1% (vs % in the December meeting). For FY19, the central bank expects the GVA growth to improve to 7.2%, while inflation to range % in 1H FY19 and % in 2H FY19. There are upside risks to Inflation emerging from a) rising commodity prices particularly crude prices, b) exceptionally low food inflation leads to a risk of some mean-reversal, c) rising share of revenue expenditure in government spending, and d) Sharp growth rebound leading to higher corporate pricing power. RBI need not be in a hurry to tighten monetary policy despite the rising inflation as the growth recovery in India is still nascent and the overall actual growth till date is still weak (CSO just pared down FY18 growth to 6.6%- lowest in last four years). Further, as the recapitalization exercise has just begun, any rush to the rate hiking will be counter-productive and inhibit the monetary policy transmission. Key banks have already increased its MCLR by 20bps in February even as the Repo rates remain unchanged Repo rate to stay unchanged in Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 Repo Rate (mth end, %) Risks to our call emerges from a) growth improves faster than our current expectations or b) global monetary policy normalization exposes any weakness in India s external balance. In that case the RBI MPC could act early. Source: RBI, SBIFM Research

33 Debt Market Outlook 10-year G-sec stands at 7.77%, nearly 45bps rise YTD, and 130 bps higher than the lows of 6.47% in July By the end of February, bond prices had fallen for seven successive months, the longest decline in two decades. While the RBI has kept the policy rate unchanged, lowered its growth projections for India, and expects inflation to trace back to comfortable range ( %) by 2H FY19, the minutes of the Feb meeting were relatively hawkish. Further, the central bank has put to rest unwarranted expectations of liquidity management operations being used as an yield management tool. Over the near term, more than RBI stance, the bond market movements would be dictated by other factors such as domestic credit growth, overall demand-supply dynamics, and global crude and rate cycle. The evolving global trends such as FOMC minutes, trade reforms, rising global growth, relatively higher commodity prices, expectations of higher inflation and tighter monetary policy, and reduced domestic banks appetite may keep the near-term sentiments bearish in the Indian debt market. Valuations look attractive at G-sec vs. Repo rate spread of 160 bps (as of 2 nd Feb) Jan-11 Aug-11 Mar-12 Oct-12 May-13 Dec-13 Jul-14 Feb-15 Sep-15 Apr year GSec yield (mth end, %) Repo Rate (mth end, %) Nov-16 Jun-17 Jan-18 We believe, investor should build exposure gradually as bond yields inch up over the next few months. Source: Bloomberg, SBIFM Research

34 Thank you

35 Disclaimer This presentation is for information purposes only and is not an offer to sell or a solicitation to buy any mutual fund units/securities. These views alone are not sufficient and should not be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All opinions and estimates included here constitute our view as of this date and are subject to change without notice. Neither SBI Funds Management Private Limited, nor any person connected with it, accepts any liability arising from the use of this information. The recipient of this material should rely on their investigations and take their own professional advice. Mutual Funds investments are subject to market risks, read all scheme related documents carefully. Asset Management Company: SBI Funds Management Private Limited (A joint venture with SBI and AMUNDI). Trustee Company: SBI Mutual Fund Trustee Company Private Limited.

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