Monthly Market Outlook December Equities Invest in Equities for the long-run Fixed Income The appeal remains intact

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Brittney Hart
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1 Monthly Market Outlook December 2015 Equities Invest in Equities for the long-run Fixed Income The appeal remains intact

2 Returns' (%) Source: MFI; Date ending on November 30, 2015 Global Performance Countries with strong manufacturing base gave better returns in the month of November. Stock markets of Germany and Japan were top performing Germany - DAX Index; China - SSE Composite Index; France - CAC 40 Index; Japan - Nikkei; Europe - Euronext 100; HongKong - HangSeng; US - Dow Jones; Singapore - Strait Times; Russia - RTS Index; Indonesia - Jakarta Composite Index; U.K. - FTSE; Taiwan - Taiwan Weighted; South Korea - Kospi; Brazil - Ibovespa Sao Paulo Index

3 Returns' (%) Indian Indices At A Glance The best performing index was Consumer Durables while Health Care was the Laggard. A number of sectors were in the negative territory Month Returns Index Name 1 Month Returns (%) S&P BSE LargeCap S&P BSE Mid Cap 0.14 S&P BSE Small Cap 2.84 S&P BSE SENSEX Meanwhile, small-caps continued to outperform its larger peers S&P BSE Bankex - S&P BSE Bank; S&P BSE CD - S&P BSE Consumer Durables; S&P BSE CG - S&P BSE Consumer Goods; S&P BSE FMCG - S&P BSE Fast Moving Consumer Goods; S&P BSE HC - S&P BSE Health Care; S&P BSE Infra - S&P BSE India Infrastructure; S&P BSE IT - S&P BSE Information Technology Source: MFI; Date ending on November 30, 2015

4 FII Investment in Rs 000 Crore Invest when FIIs are showing less interest If FIIs are investing less or are withdrawing from equity market then it is good time for domestic investors to participate as the investment from FIIs in coming years could increase the Sensex level thus generating wealth for domestic investors % % 60% 40% 20% 0% -20% -40% Sensex Returns (%) * FII S&P BSE Sensex 4% 72% 12% 41% 47% 46% -52% 76% 17% -25% 25% 8% 30% -5% -60% FII Foreign Institutional Investors; Source: NSDL; *till 02-Dec-2015; FII Foreign Institutional investors FII is equity investment

5 Invest in Equities for the long-run

6 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 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 Urban expenditure continues to pick up 50% 40% 30% 20% 10% 0% -10% -20% -30% % YoY % YoY, 3MMA Passenger car sales is among the first signal of economic recovery. As higher discretionary spending reflects increase in consumer confidence. Source: CEIC, Morgan Stanley Research; YoY - year on year; MMA Monthly Moving Average

7 Tax Collections 25.0% Gross tax revenue growth Total expenditure growth Shortfall in tax revenue made-up by contracting expenditure by more than target levels 25.0% 20.0% 15.0% 10.0% Target Actual Target 20.0% 15.0% 10.0% In FY16 gross tax revenues are growing faster than target levels 5.0% Actual 5.0% 0.0% YoY% F2013 F2014 F2015 FYTDF % Tax revenue is growing at faster pace than target set level in FY2016, while expenditure growth is growing below target. This is expected to result in reducing the over all deficit level. Thus, it would give government spending power in FY Source: CEIC, Budget Document, Morgan Stanley Research, FYTDF Fiscal Year Till Date For

8 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Deficit Control 6.5% 6.0% Fiscal deficit as % of GDP (12M trailing sum) 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% Target 3.9% 3.3% Central government s fiscal deficit to track below target levels in FY2016. A controlled fiscal deficit is expected to allow the government to increase spending in FY2017 Source: CEIC, Morgan Stanley Research; GDP Gross Domestic Product

9 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Recovery in capex led by public capex 20% 15% 10% 5% 0% -5% -10% With the public sector taking the lead in capex expenditure, growth will get a new anchor. Projects under implementation - YoY% Steady improvement Public, 17% Total, 7% Private, -2% Source: CMIE, Morgan Stanley Research,

10 Mar-12 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 Strong correlation between WPI inflation and S&P BSE Sensex revenue growth S&P BSE Sensex revenue growth (% yoy) Qtrly WPI growth (% yoy) (RHS) 20% 15% 10% 5% 0% -5% -10% WPI inflation expected to edge up into positive territory in coming quarters 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% Source: Deutsche Bank, Bloomberg Finance L.P., RBI Survey of Professional Forecasters; RHS Right Hand Side; YoY Year on Year; WPI Whosesale Price Index;

11 Equity Valuation Index Book Profits/ Stay Invested Invest Systematically Invest in Equities Aggressively Invest in Equities As our equity valuation index reflects fair value, we recommend investing through systematic investment plans (SIPs). If markets witness substantive correction then investing in lump-sum would be recommended. Equity Valuation index is calculated by assigning equal weights to Price-to-Earnings (PE), Price-to-Book (PB), G-Sec*PE and Market Cap to GDP ratio. G-Sec Government Securities. GDP Gross Domestic Product

12 Our View The central government announced Foreign Direct Investment (FDI) reforms, easing norms across 15 sectors including defence, banking, construction, single brand retail, broadcasting and civil aviation Latest quarterly GDP figures, showed growth of 7.4% growth for Q as against 7.1% in the previous quarter There are high expectation that the GST (Goods and Services Tax) bill could pass during this winter session of the parliament We expect volatility to continue in the near term, hence, we recommend to invest in funds that are structured to benefit from volatility From a valuation perspective, large-caps are at a discount compared to mid-cap companies, hence large-cap funds or flexicap funds with a tilt towards large-cap are part of our recommendation Source: Bloomberg; RBI Report; MOSPI;

13 We recommend Large-cap over Mid-cap because S&P BSE Midcap PE, S&P BSE Sensex PE, Jan-2015 Feb-2015 Mar-2015 Apr-2015 May-2015 Jun-2015 Jul-2015 Aug-2015 Sep-2015 Oct-2015 Nov-2015 Source: Bloomberg; PE Price to Equity Ratio

14 Our Recommendation ICICI Prudential Balanced Advantage Fund ICICI Prudential Multicap Fund ICICI Prudential Equity Income Fund ICICI Prudential Long Term Equity Fund (Tax Saving) ICICI Prudential Value Discovery Fund ICICI Prudential Dynamic Plan ICICI Prudential Focused Bluechip Equity Fund

15 Fixed Income: The appeal remains intact

16 Interest Rates Linkage Increase in Financial Savings Lower Inflation Falling Interest Rates

17 Why Inflation Was High During 2009 To 2013? Subsidies as % of GDP increased significantly MSP hikes were significant during Subsidies 35.0 MSP Growth YOY Data Source: Bloomberg; MSP - Minimum Support Price; GDP Gross Domestic Product; RE Revised estimates; BE Budget Estimates

18 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Why Inflation Was High During 2009 To 2013? Rural Wage growth was significantly high during Real Estate Prices were rising sharply until % Rural Wage Growth 30 Real Estate Price Growth (%) 25% % 15 15% 10 10% 5 5% 0 0% FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 Data Source: Bloomberg

19 Data Source: Bloomberg; CAD Current Account Deficit; GDP Gross Domestic Product; RE Revised Estimate Why Inflation Was High During 2009 To 2013? CAD worsened during (1.0) (2.0) (3.0) (4.0) (5.0) (6.0) CAD as % GDP Currency was overvalued during which allowed cheap import Thereby increasing CAD and leaving currency under pressure

20 Has Inflation Always Been High In India? 20.00% 18.00% 16.00% CPI Inflation 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% There were periods when inflation was low; These were best periods for investment in fixed income The phase of high growth is usually one with controlled inflation. Data Source: Bloomberg; CPI - Consumer Price Index

21 CAD Current Account Deficit; MSP Minimum Support Price Inflation To Stay Low Better government policies like Food Supply, low MSP hikes, etc. Low Crude Oil prices is benefiting the CAD, Fiscal Deficit Low/stable demand and ample supply is ensuring that price rise is contained Lower inflation

22 Source: Bloomberg: Data as on Dec 1, 2015 High gap between repo-rate and 10 year gsec yield rate Gsec, Repo-Rate, The gap between the repo-rate and the 10 year G-Sec yield is high. This shows that there is additional scope Gsec to come down furthermore in India.

23 May-00 Nov-00 May-01 Nov-01 May-02 Nov-02 May-03 Nov-03 May-04 Nov-04 May-05 Data as on Nov 30, 2015; WPI Wholesale Price Index; CPI Consumer Price Index Nov-05 May-06 Nov-06 May-07 Nov-07 May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 Debt Valuation Index Aggressively in High Duration High Duration Moderate Duration Low Duration Ultra Low Duration Debt Valuation Index Debt Valuation Index considers WPI and CPI over G-Sec Yield, Current Account Balance and Crude Oil Movement for calculation. Equal weights are assigned to each of these parameters for calculating the index.

24 Our View RBI has not done any rate cut in the December 2015 policy. Will continue with accommodative policy as per requirement. We expect CPI to undershoot RBI s target of 6% in January 16 and target of 5% in FY 17. We continue to recommend high to medium term duration funds for investors who want to take benefit from falling interest rates. Accrual Funds with moderate duration are also recommended for investors as a conservative strategy. CPI Consumer Price Index; RBI Reserve Bank of India

25 Our Recommendations Aggressive investors seeking to benefit from higher duration Investors with moderate risk appetite seeking to benefit from duration Conservative investors seeking to earn from Accrual + Duration ICICI Prudential Long Term Plan ICICI Prudential Income Plan ICICI Prudential Dynamic Bond Fund ICICI Prudential Short Term Plan ICICI Prudential Regular Savings Fund ICICI Prudential Corporate Bond Fund ICICI Prudential Long Term Gilt Fund ICICI Prudential Income Opportunities Fund ICICI Prudential Regular Income Fund (Income is not assured and is subject to availability of distributable surplus)

26 Riskometer ICICI Prudential Balanced Advantage Fund is suitable for investors who are seeking*: Long term wealth creation solution An equity fund that aims for growth by investing in equity and derivatives. ICICI Prudential Dynamic Plan is suitable for investors who are seeking*: Long term wealth creation solution A diversifed equity fund that aims for growth by investing in equity and debt (for defensive considerations) ICICI Prudential Equity Income is suitable for investors who are seeking*: Long term wealth creation solution An equity Scheme that seeks to generate regular income through investments in fixed income securities and using arbitrage and other derivative strategies and also intends to generate long term capital appreciation by investing in equity and equity related instruments. ICICI Prudential Value Discovery Fund is suitable for investors who are seeking*: Long term wealth creation solution A diversified equity fund that aims to generate returns by investing in stocks with attractive valuations 26

Riskometer ICICI Prudential Multicap Fund is suitable for investors who are seeking*: Long term wealth creation solution A growth oriented equity fund that invests in equity and equity related

27 Riskometer ICICI Prudential Multicap Fund is suitable for investors who are seeking*: Long term wealth creation solution A growth oriented equity fund that invests in equity and equity related securities of core sectors and associated feeder industries. ICICI Prudential Focused Bluechip Equity Fund is suitable for investors who are seeking*: Long term wealth creation solution A focused large cap equity fund that aims for growth by investing in companies in the large cap category ICICI Prudential Long Term Equity Fund (Tax Saving) is suitable for investors who are seeking*: Long term wealth creation solution An Equity Linked Savings Scheme that aims to generate long term capital appreciation by primarily investing in equity and related securities. ICICI Prudential Regular Income Fund (Income is not assured and is subject to availability of distributable surplus) is suitable for investors who are seeking*: Medium term regular income solution A hybrid fund that aims to generate regular income through investments primarily in debt and money market instruments and long term capital appreciation by investing a portion in equity. 27

28 Riskometer ICICI Prudential Short Term Plan is suitable for investors who are seeking*: Short term income generation and capital appreciation solution A Debt fund that aims to generate income by investing in a range of debt and money market instruments of various maturities. ICICI Prudential Income Opportunities Fund is suitable for investors who are seeking*: Long term savings solution A debt fund that invests in debt and money market instruments of various credit ratings and maturities with a view to maximising income while maintaining optimum balance of yield, safety and liquidity. ICICI Prudential Dynamic Bond Fund is suitable for investors who are seeking*: Medium term wealth creation solution A debt fund that invests in debt and money market instruments with a view to provide regular income and growth of capital. ICICI Prudential Long Term Gilt Fund is suitable for investors who are seeking*: Long term wealth creation solution A Gilt Fund that aims to generate income through investment in Gilts of various maturities. 28

29 Riskometer ICICI Prudential Long Term Plan is suitable for investors who are seeking*: Medium term savings solution A Debt Fund that invests in debt and money market instruments with a view to maximise income while maintaining optimum balance of yield, safety and liquidity. ICICI Prudential Income Plan is suitable for investors who are seeking*: Long term wealth creation solution A Debt Fund that invests in debt and money market instruments of various maturities with a view to maximise income while maintaining optimum balance of yield, safety and liquidity. ICICI Prudential Corporate Bond Fund is suitable for investors who are seeking*: Long term savings solution A debt fund that invests in debt and money market instruments of various maturities with a view to maximise income while maintaining optimum balance of yield, safety and liquidity. ICICI Prudential Regular Savings Fund for investors who are seeking*: Medium term savings solution A debt fund that aims to deliver consistent performance by investing in a basket of debt and money market instruments with a view to provide reasonable returns while maintaining optimum balance of safety, liquidity and yield. 29

30 Disclaimer Mutual Fund investments are subject to market risks, read all scheme related documents carefully. All figures and other data given in this document are as on 2 th December 2015 unless stated otherwise. The same may or may not be relevant at a future date. The AMC takes no responsibility of updating any data/information in this material from time to time. The information shall not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Prudential Asset Management Company Limited. Prospective investors are advised to consult their own legal, tax and financial advisors to determine possible tax, legal and other financial implication or consequence of subscribing to the units of ICICI Prudential Mutual Fund. Data source: Bloomberg, except as mentioned specifically. Disclaimer: In the preparation of the material contained in this document, ICICI Prudential Asset Management Company Ltd. (the AMC) has used information that is publicly available, including information developed in-house. Some of the material used in the document may have been obtained from members/persons other than the AMC and/or its affiliates and which may have been made available to the AMC and/or to its affiliates. Information gathered and material used in this document is believed to be from reliable sources. The AMC however does not warrant the accuracy, reasonableness and / or completeness of any information. We have included statements / opinions / recommendations in this document, which contain words, or phrases such as will, expect, should, believe and similar expressions or variations of such expressions, that are forward looking statements. Actual results may differ materially from those suggested by the forward looking statements due to risk or uncertainties associated with our expectations with respect to, but not limited to, exposure to market risks, general economic and political conditions in India and other countries globally, which have an impact on our services and / or investments, the monetary and interest policies of India, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices etc. ICICI Prudential Asset Management Company Limited (including its affiliates), the Mutual Fund, The Trust and any of its officers, directors, personnel and employees, shall not liable for any loss, damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss of profit in any way arising from the use of this material in any manner. Further, the information contained herein should not be construed as forecast or promise. The recipient alone shall be fully responsible/are liable for any decision taken on this material. 30

Equity: Buy on dips. Build portfolio for long term wealth creation Fixed Income: Invest in short to medium duration funds

Equity: Buy on dips. Build portfolio for long term wealth creation Fixed Income: Invest in short to medium duration funds 1 Month Returns' (%) Global Indices Among the emerging countries India outperformed