Monthly Market Outlook August. Equity to remain range bound.. Fixed income is reasonably valued

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Myles Hutchinson
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1 Monthly Market Outlook August Equity to remain range bound.. Fixed income is reasonably valued

2 Returns' (%) Source: MFI; Date ending on July 31, 2015; *as on July 24, 2015 Global Performance 1 Month Returns Though over a one-year period China has been the best performing index (+66% returns) but over the last 1 month it has seen a fall of approx. 15% despite government support. Source: Bloomberg. China SSE Composite; Russia RTS; Brazil Ibovespa; South Korea Kospi; UK FTSE; US Nasdaq; Japan Nikkei; Singapore Straits Times Index; France CAC 40; India S&P BSE Sensex; Germany DAX; Indonesia Jakarta Composite; Europe -Euronext 100; England FTSE100; Hong Kong Hang Seng Index

3 Returns' (%) Source: MFI; Date ending on July 31, Indian indices at a glance The best performing index was health care and the most negative performance was by Metals Year Returns Index Name Year Returns (%) 1 Month Returns (%) S&P BSE Mid-cap S&P BSE Small-cap S&P BSE Large-cap Meanwhile by marketcap the small-caps continued to outperform its larger peers HC Health care; CD Consumer Durables; CG Capital Goods; FMCG Fast Moving Consumer Goods; IT Information Technology

4 Debt Market Overview Money Market : Change in basis points Tenure CD Change CP Change 1-Month 7.29 % % Month 7.50 % % Month 7.71 % % Month 7.91 % % -9 Bond Market : Change in basis points AAA Tenure G-Sec Change Change CB 1-Year 7.59 % % Year 7.86 % % Year 7.94 % % Year 7.81 % % -17 Yields on CDs and CPs have fallen. Meanwhile in the bond market the Corporate bond have fallen more than G-Sec. CP Commercial Paper; CD Certificate of Deposit; G-Sec Government Securities; CB Corporate Bonds; Source: CRISIL

5 CRISIL; Reuters; Bloomberg Key Events During the Month EU Greece: As Greek exit from the Euro-zone looked imminent, on July 13, a bailout was hammered by the two sides buying some more time. China: The stock markets in China were in a falling spree, though government has come out with a slew of measures to control. But securing the stock market may not help the real economy. Capital Infusion by the government in Public Sector Banks by Rs 70,000 crore as capital infusion in public sector banks in next 4 years Iran, and world powers clinched nuclear deal putting an end to the isolation of the Iranian economy, hence the expectation is that now there can be a supply glut of oil. Govt. Approval of a composite cap on Foreign investments

Rs Million Source: CMIE, BSE Web for DII Equity.

31-May-15 30-Jun-15 31-Jul-15 FII Foreign

6 Rs Million Source: CMIE, BSE Web for DII Equity. FII and DII Investment 200, , ,000 50,000 0 (50,000) FII Equity MF Equity DII Equity (100,000) 31-Jan Feb Mar Apr May Jun Jul-15 FII Foreign Institutional Investors. DII - Domestic Institutional Investors. MF Mutual Fund

7 EQUITY MARKET OUTLOOK

8 India Long Term Growth Story Intact Earnings Growth % Index Country E 2016E AS51 Index Australia CAC Index France Dax Index Germany Sensex Index India Nifty Index India JCI Index Indonesia NKY Index Japan KOSPI Index South Korea FBMLCI Index Malaysia MEXBOL Index Mexico PCOMP Index Phillipines SHCOMP Index Shanghai FSSTI Index Singapore TWSE Index Taiwan SET Index Thailand UKX Index UK INDU Index USA SPX Index USA India amongst the top countries in terms of projected earnings growth for next 2 years Source: Bloomberg; Kotak Institutional Equities. E refers to Estimates.

9 Source: Bloomberg. Large Caps are relatively attractive The Forward Price-to-Earnings (PE) for large-cap stocks, represented by S&P BSE SENSEX, is available at a discount when compared to S&P BSE Midcap. (Data is on estimated basis.) BSE S&P Midcap BSE Midcap Forward PE BSE S&P BSE SENSEX Forward PE Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18

10 Source: Bloomberg. EPS Earnings Per Share Near Term Challenges Earning Growth Muted 440 EPS (Rs) 410 Earnings Per Share (EPS) has shrunk, though now the rate has reduced. This can bring in near term challenge

11 Near Term Challenges - Markets may remain volatile Fed Rate Hike China Growth concerns Political Headwinds for Government Muted Earnings

12 Our View The Greece crisis was averted after, Greece and European Central Bank (ECB) agreed to a new bailout deal. In the near term, muted earnings can affect the sentiments of investors, and thereby increase volatility. Other factors that may push volatility in markets are political headwinds, as the Government faces problems in passing key legislative bills & the US Fed rate hike. Hence we continue to believe there could be reasonable volatility in equity markets in the near term even though over the long-term equity remains a suitable investment avenue for investors.

13 Our Recommendation - ICICI Prudential Select Large Cap Fund 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Sectoral Performance from Jan 2008 June 2013 Bull Market 39.76% 7.99% 9.60% 2.63% 3.64% 76.36% 65.45% 59.09% 60.44% 55.50% 15.00% 5.00% -5.00% % % Sectoral Performance from Jan 2008 June % 12.44% 12.12% 4.19% 2.61% Bear Market -0.83% -2.11% -7.03% % %-17.43% % Cyclicals performed well during Bull Market and underperformed in Bear Market. With the start of economic recovery, it is suitable time to shift to a cyclical portfolio. ICICI Prudential Select Large Cap Fund has been positioned with an aim to take advantage of cyclical upturn. 13 CD Consumer Durables; FMCG Fast Moving Consumer Goods; IT Information Technology Source: Bloomberg. Past performance may or may not be sustained in future

14 Other Recommendations - Equity ICICI Prudential Focused Bluechip Equity Fund ICICI Prudential Balanced Fund ICICI Prudential Equity Income Fund ICICI Prudential Value Discovery Fund ICICI Prudential Midcap Fund 14

15 DEBT MARKET OUTLOOK

16 Rebased to 100 Global Yield uptick cause of recent Volatility in debt markets German Bond Yield 10 years US Govt Bond Yield 10 yr There are questions on why the Indian yields are increasing even when fundamentally the macro-economy seems to be strong. The reason being yields have gone up in Germany and USA. However, now the yields in the US have stabilised. Source: Bloomberg US and German bonds yield rates rebased to 100.

17 Source: Kotak Institutional Investors Case for interest rate cut - Global Food Inflation on downtrend IMF Global Food index Falling food prices India s inflation problem were acute due to higher food inflation. International Monetary Fund (IMF) Global Food Index shows that food prices at a global level have fallen. Thereby, CPI inflation is expected to be in control due to lower food inflation and can provide room for rate cuts.

18 US Dollars / bbl Case for interest rate cut - Crude continue its downtrend 110 Brent Crude (US $ per Barrel) India can benefit on the deficit front with downward pressure on the oil price. This can rein in inflation and provide room for rate cuts Source: Bloomberg; Last data point as on July 31, 2015

19 Case for Interest Rate Cut Improved Monsoon Looking at long-term average the monsoon was near normal in India by the end of July. Central, North and East India came out as winners in July, leaving Peninsular India at a loss. Monsoon forecast now stands at being normal at 98% (normal) of the long term average, says Skymet. Data from India Meteorological Department (IMD) website Disclaimer - Indian Map not to scale. This map has been used for design and representational purpose only. It does not depict the geographical boundaries of the country. These do not confirm to the external boundaries of India recognized by the Survey of India.

20 Fixed Income at an Advantage A case for interest rate fall building up Expected normal monsoon. Global food inflation on a downward spiral. Food inflation could be low Better control on Current Account Deficit. Falling gold price. Low crude price. RBI Policy Stance remains accommodative 50 to 75 bps rate cuts expected in next 12 months

21 Fixed Income Outlook A case for Rate Cuts building up RBI s decision of keeping policy rate unchanged while maintaining an accommodative stance reinforces our view that there is scope for further rate cuts. Case for Rate cut by the RBI seems to be gaining ground amid (1) mitigating risks from monsoon, (2) plunging commodity prices, and (3) lowering external risks from Greece and China. We see a possibility of at least 25 to 50 bps of rate cut in the remaining part of this fiscal year. At current repo rate of 7.25% and possibility of further rate cuts, the 10 year bond yields at 7.81% remain reasonably valued and could come down closer to repo rate over the next 6-9 months. Data source: CRISIL, Bloomberg

22 9.5 Yields trading well above repo rate Opportunity in duration India G-Sec 10 Year RBI Repo-Rate Investment Opportunity In Jan 2014 Similar investment Opportunity exists today The difference between the G-Sec and RBI rate is 60bps which gives an opportunity for investors Invest in ICICI Prudential Long Term Plan, ICICI Prudential Income Plan and other high duration funds with an aim to benefit from this. Data source: Bloomberg

23 Other Recommendations Fixed Income ICICI Prudential Short Term Plan ICICI Prudential Dynamic Bond Fund ICICI Prudential Long Term Gilt Fund 23

24 Disclaimer ICICI Prudential Balanced Fund is suitable for investors who are seeking*: Long term wealth creation solution A balanced fund aiming for long term capital appreciation and current income by investing in equity as well as fixed income securities. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them ICICI Prudential Midcap Fund is suitable for investors who are seeking*: Long term wealth creation solution An equity fund that aims for capital appreciation by investing in diversified mid-cap stocks. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them ICICI Prudential Select Large Cap Fund is suitable for investors who are seeking*: Long term wealth creation solution An equity fund that aims to generate capital appreciation by investing in equity and equity related securities of large market capitalisation companies, with an option to withdraw investment periodically based on triggers. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them 24

25 Disclaimer ICICI Prudential Equity Income Fund 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. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them 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 *Investors should consult their financial advisers if in doubt about whether the product is suitable for them 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 *Investors should consult their financial advisers if in doubt about whether the product is suitable for them 25

26 Disclaimer 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. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them 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. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them 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. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them 26

27 Disclaimer 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. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them 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. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them 27

28 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 6 th August 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. 28

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