A brave new world Outlook January 2017

Transcription

1 A brave new world Outlook 2017 January 2017

2 Content Global economy India - A bright spot Reforms pave way for growth Catalyst at work Indian fixed income 2

3 Global economy

4 What happened in 2016? 2015 was a tough year for asset allocators. But 2016 was a much better scenario, with occasional episodic volatility (China worries, global growth concerns, Brexit) Variability in asset performance reminds us that what we buy and when we buy is the key investment decision Total returns, USD (%) US 10Y Bonds Global Aggregate Global IG Global HY EM Debt DM Equities US Equities DM (ex US) Equities China Equities (Hshares) Asia ex Japan Equities EM Equities Source: Bloomberg, HSBC Global Asset Management, as of 30 th December Investment involves risks. Past performance is not indicative of future performance. 4

5 Trumponomics and US equities Within our Fragile Equilibrium framework, market perceptions of risk has shifted towards the scenario of a strong demand recovery This is driven by expectations that Trump will try and implement more growth-friendly policies: (i) USD500bn infrastructure spending, (ii) lower corporate and personal tax rates, (iii) deregulation, anti-trust laws etc. These policies also reinforce our theme of the end of fiscal austerity. The prospect of pro-cyclical fiscal policy has increased the odds of reflation and this environment is less bond-friendly Corporate tax reform gives some upside risk to earnings. But the US profits outlook remains under pressure Margins are being squeezed as wage costs intensify Low nominal growth continues to weigh on the top-line US 30-year total return index and yield Employment cost US 30Y Total Return Index, LHS US 30Y Yield, RHS % yoy, % Average Hourly Earnings, Total Employment Cost Index, Total Atlanta Fed Wage Growth Tracker Source: HSBC Global Asset Management, Global Investment Strategy, November Investment involves risks. Past performance is not indicative of future performance. 5

6 Fiscal and monetary policy co-ordination The end of austerity Concerns about the sustainability of high gross debt levels and therefore the need for austerity have dominated thinking in most advanced economies since the crisis But (i) a new populist political agenda, (ii) the lacklustre recovery and (iii) the perceived limits of monetary policy are now forcing a reconsideration An arsenal of monetary tools and measures (negative rates, QE, direct financing) still means that global liquidity conditions remain highly supportive for reflation But central banks focus is now shifting away from the size of balance sheet toward yield curve control (BoJ bond yield caps, Fed dot plot ) Fiscal boost*, % of potential GDP *Fiscal boost calculated as the inverse change in the cyclically adjusted primary balance estimated using IMF forecasts. Source: HSBC AMG Global Investment Strategy, IMF Fiscal Monitor, October Any forecast, projection or target contained in this presentation is for information purpose only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purpose only. 6

7 Emerging market equities outperformed Emerging market equities outperformed developed market equities in 2016 YTD Interest rates remain high in many markets. There is potential for a secular equity market re-rating This was logical given the relative valuations and prospects of emerging markets versus the developed markets although the absolute difference was relatively small MSCI Emerging Markets Index vs. MSCI World Index in Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Emerging Market Equities Developed Market Equities Source: Bloomberg, HSBC Global Asset Management, as of November 2016 Emerging market equities MSCI Emerging Markets Index, Developed Market Equities MSCI World Index 7

8 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Emerging market vs. developed market equities EM equities have been a major laggard over the last decade, as disappointing earnings growth, multiple contraction and depreciating currencies have all weighed on total returns EM equities have lagged DM peers in the last decade 30% 20% 10% 0% -10% -20% Source: HSBC Global Asset Management, DataStream as at 30 September For illustrative purposes. Any performance information shown refers to the past and should not be seen as an indication of future returns.. 8

9 The case for emerging market equities Emerging markets now contribute about a third of global GDP and half of global GDP growth In the short to medium term, we expect economic fundamentals to be supportive for EM equities Continued, rapid, industrialisation will boost growth while potential moves up the value chain could improve corporate earnings in some economies Contribution to global GDP growth 6% 4% 2% 0% -2% Emerging markets Developed markets Source: HSBC Global Asset Management, DataStream as at 30 September For illustrative purposes only.. 9

10 Looking ahead 2017 and beyond Going into 2017, global economy remains in a state of fragile equilibrium with a low growth/inflation mix Combination of reflationary policies, corporate fundamentals and compelling valuations form a supportive backdrop for equities in the year ahead Equity premiums look attractive in a low return world, especially when compared with government bonds Emerging market equities, particularly in Asia, continue to stand out in terms of growth prospects, positive earnings revisions and valuations 2017 will see an overhang from many of the risks that materialised in the previous year and new ones including de-globalisation and potential policy missteps On a longer time perspective, geopolitical events play much less important role than fundamentals and economic and market development 10

11 India - A bright spot

12 We have come a long way in 2016 Source: Kotak Institutional Equities December 2016 Key events and performance of the Indian market (Nifty-50 Index) in CY

13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 GDP Onus is on government to revive investments Expect growth to be a slow recovery path GDP growth (y-o-y): expenditure components Industrial production and manufacturing PMI % yoy; ppt Q12 3Q13 3Q14 3Q15 3Q Private consumption GFCF Net exports GDP growth Government consumption Change in stocks Discrepancies 45 Manufacturing PMI Industrial production -6 Source: CEIC, HSBC Global Asset Management, LHS: data as of September 2016, RHS: data as of November Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purpose only 13

14 Decline in oil prices Potential savings of USD61bn How is the reduction in oil burden distributed? 12-month trailing peak net oil imports as of Dec 12 USD 108 bn 12-month trailing net oil imports as of Nov-16 US$ 47 bn Every US$ 10/bbl increase in oil prices will increase annualised net oil import bill by ~US$ 10bn Current reduction in oil burden USD 61 bn Government budget USD 35 bn Lower oil subsidy USD 14 bn Household sector USD 8.5 bn Higher tax revenue USD 20.5 bn Corporate sector USD 17.5 bn State Govt lower oil sales tax - No change Source: CEIC, Morgan Stanley Research as of December Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purpose only 14

15 Fiscal deficit On track as per roadmap Central government fiscal deficit % of GDP Govt s fiscal consolidation path FY 00 FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 Note: Any forecasts, projections or targets contained in this presentation is for information purpose only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purpose only Source: Budget documents, CEIC, HSBC, as of February

16 (BE) Fiscal deficit Reduction in subsidies allows government to reallocate to capital investments 3,000 Fertiliser, food and fuel subsidies INRbn Capital expenditure as % of total expenditure 14% 2,500 13% 2,000 13% 1,500 1,000 12% % 0 11% (RE) (BE) Note: RE = Revised Estimate, BE = Budget Estimate; Any forecasts, projections or targets contained in this presentation is for information purpose only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purpose only Source: Nomura, Ministry of Finance, Budget documents, CEIC, HSBC, as of May

17 Fiscal deficit Supply in 2H FY reasonably revised downwards Better technical backdrop overall FY 14 FY 15 FY 16 FY 17 (budgeted) Fiscal deficit (% to GDP) Fiscal deficit (INRbn) 5,245 5,311 5,351 5,339 Gross borrowings (INRbn) 5,486 5,857 5,842 6,000 Net borrowings (INRbn) 4,536 4,469 4,406 4,252 % financed by market borrowings Q4 net supply truncated due to larger tax revenues; provides a favourable technical backdrop FY 17 FY 16 (INRbn) Gross issuance Net issuance Gross issuance Net issuance October November December Q3 1,610 1,610 1,640 1,566 January 550 (previous 700) February 110 (previous 140) March Q4 660 (previous 840) H2 2,270 (previous 2,450) 1,795 2,340 2,266 Note: Any forecasts, projections or targets contained in this presentation is for information purpose only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purpose only Source: RBI, Bloomberg and HSBC Research, as of January

18 Current Account Deficit (CAD) Improving and structurally resilient CAD Structurally sustainable CAD (% of GDP) 0 Lower oil and gold imports supportive of CAD Oil imports decline to 2.5% of GDP -1-2 Expected -3 Oil and gold imports (y-o-y%) -4-5 Gold imports contracted on y-o-y basis for third consecutive month Note: Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purpose only Source: LHS IMF, data as of October 2016, RHS- CEIC, Bloomberg, HSBC Global Asset Management, data as of 31 December

19 CAD FX reserves provide a reasonable cushion FX reserves RBI to stay on the bid 70 USDbn 390 FX reserves to imports and short term external debt Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 0 Q2 11 Q1 12 Q4 12 Q3 13 Q2 14 Q1 15 Q4 15 Q3 16 INR/USD exchange rate (LHS) FX Reserves (RHS) Import cover (months of imports of goods and services) FX reserves over short-term external debt (times) Source: IMF, CEIC, Bloomberg, HSBC Global Asset Management; LHS: data as of 23 December 2016; RHS: data as of 30 September

20 CAD narrowed considerably while funded by growing net FDI inflows FDI inflows picked up significantly over the last 10 years CAD is well financed by FDI inflows USDbn Net FDI (US bn) CAD (US bn) Year to Sep Sep 2016 Source: LHS and Upper RHS: RBI, Bloomberg, HSBC Global Asset Management, data as of December 2016; Bottom RHS: CEIC, HSBC Global Asset Management, data as of 17 June 2016 Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in anyway. HSBC accepts no liability for any failure to meet such forecast, projections or targets. For illustrative purpose only. 20

21 Inflation Down from historical highs RBI s inflation target is achievable % y-o-y 25.0 Core inflation remains sticky % y-o-y RBI target: 4% +/- 2% Nov-02 Nov-04 Nov-06 Nov-08 Nov-10 Nov-12 Nov-14 Nov Dec-13 May-14 Oct-14 Mar-15 Aug-15 Jan-16 Jun-16 Nov-16 CPI WPI RBI Target of 4% - 2% RBI Target of 4% +2% Core WPI Core CPI Source: CEIC, Bloomberg, HSBC, November 2016 Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purpose only. 21

22 Food inflation Remains under control through supply side measures Food inflation remains under control 12% 10% 8% 6% 4% 2% 0% Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Minimum support prices kept flat over past two years Rs/quintal 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Global food prices have levelled off Rice Coarse cereals Wheat Pulses (urad) Oilseeds (groudnut) Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 CRB FOOD Index Source: CEIC, Bloomberg, RBI, December

23 Food Inflation Good monsoon and Govt s supply measures keep prices under control Good monsoon has started to have a salutary impact on food prices Government measures include importing vegetables and banning hoarding / stocking of pulses Pulses inflation remains high but has started to head lower on increased farming and Government s INR 9 billion buffer for pulses in Budget Agflation remains under control thanks to food supply management Weight in CPI Jan Feb Mar Apr May Jun Jul Aug 16 Sep Cereals Pulses inflation Oilseeds inflation Vegetables inflation Sugar Milk Tea loose Salt pack CPI food inflation Note: Any forecasts, projections or targets contained in this presentation is for information purpose only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purpose only Source: Indian Meteorological Department, BofA Merrill Lynch Global Research, HSBC Global Asset Management, Department of Consumer Affairs, PMC, 20 September

24 Reforms pave way for growth

25 The government s big initiatives Higher public investment Higher outlays for rural India New mechanisms for crowding in private investment Making Make in India possible Ease of doing business; Bankruptcy code Skilling India Decentralising decision-making and spending Untied funds to states Better targeting of subsidies The JAM trinity Direct transfer for fertilisers as well Tax reforms GST bill has been approved New institutions Inflation targeting via new Monetary Policy Committee Public debt management office 25

26 India s competitiveness is accelerating at its fastest pace 20 The Global Competitiveness Index th The gauge of productivity and long-term prosperity Areas considered: Institutions Infrastructure Macroeconomic environment Health and primary education Higher education and training Goods market efficiency Labor market efficiency Financial market development st '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Technological readiness Market size Business sophistication Innovation Source: World Economic Forum, data as of

27 Reforms pave way for growth: Aadhar World s largest dual biometric citizen identification scheme Improved transmission of subsidies, wages and pension proceeds as the individuals can link their bank accounts and other utility accounts to Aadhar More Aadhar-linked schemes and benefits in the works Rapid ramp up in Aadhar enrollments Apr million Jan million Dec million Nov million Source: Motilal Oswal, data as of September 2016 Latest available data updated in the slide 27

28 Reforms pave way for growth: GST Successful implementation of GST should: Support fiscal stability Bring down cost of doing business, including logistics costs Help companies deliver better margins Pass along some of the gains to consumers Average time spent by truck during a trip Traffic hurdles 9% Other halts 3% Rest and meals 13% Running time 40% Fuelling 6% Repairs 5% Other official stoppages 8% Check posts 16% Note: Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets Source: Nomura data as of August 2016 GST - The Constitution Amendment Bill for Goods and Services Tax (GST) has been approved by The President of India post its passage in the Parliament on 3 August The Government of India is committed to replace all the indirect taxes levied on goods and services by the Centre and States and implement GST by April

29 Roadmap to GST implementation GST Council Formed Actions in parallel GST Rate Structure Finalised Synchronisation and Mapping of final rates to categories Rules for implementation (eg dual control, valuation of interstate stock transfers, dispute resolution etc) GSTN software Commercial ERP systems Centre to pass GST Act and a separate IGST Act; States to pass GST Act Colour code: Decreasing difficulty and time taken Training and implementation of software Implementation Source: Credit Suisse estimates, as of 31 December

30 Reforms pave way for growth: Bankruptcy Law India lags in bankruptcy resolution New law to establish a transparent and time bound process for bankruptcies Help improve confidence in India as an investment destination Vietnam India Brazil Pakistan South Africa SA China US Germany UK Malaysia Australia HK Japan Time to resolve insolvency (No of years) Vietnam India Indonesia China Thailand US Malaysia HK UK Singapore Recovery Rate (cents on the Dollar) Note: Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets Source: Credit Suisse, data as of December

31 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17E RBI s asset quality review led to banks clean up of bad loans Net slippage ratio (%) Net slippage ratio spiked as banks redefined more loans as non-performing under RBI review Source: MOSL, company, data as of December 2016 Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets Source: Credit Suisse, data as of December

32 Change in rates since December 2014 (%) Percent change since January 2015 Repo Rate -1.5% Bank Base Rate -1.0% Source: Credit Suisse, as of 31 December 2016 Investment involves risks. Past performance is not indicative of future performance 32

33 Impact of Demonetization - Good Intent but Short Term Pain Over, longer term demonetization coupled with GST will nudge the shadow economy to formalize itself thus boosting efficiencies and growth. However, four negative impacts of demonetization: Near term halt as physical cash had disappeared. This is a logistical problem; the Govt./RBI will eventually replace old notes Loss of income : Services account for 61% of India s GDP. For this part, the current disruption is not a postponement of income, but is lost revenue (no haircut today doesn t imply two haircuts tomorrow) Large negative wealth effect: This could impact 60% of Indian household assets (physical savings). Propensity to consume both in the black and the formal economy will fall Body blow to the shadow economy: The black economy is estimated to be 25-30% of GDP Autos: Rural demand may get disrupted in the near term Consumers: ST pressure but LT consolidation gains to accrue Maruti s rural volumes Source: Bank of America Merrill Lynch, December Unbranded share of total

34 Catalysts at work

35 MSCI India PE against its historical average 33.0 MSCI India PE (x) MSCI EM PE (x) MSCI India Avg: 19.2x MSCI EM Avg: 13.6x 5.0 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec MSCI India Vs EM PE Premium (%) 75 Average of 42% Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Source: Bloomberg, as of 31 December 2016 Investment involves risks. Past performance is not indicative of future performance 35

36 Cyclicals valuations starting to normalise Taper tantrums Global Financial Crisis Source: Credit Suisse, as of 31 December

37 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 MSCI India PE relative to MSCI EM and MSCI Asia ex Japan 70% 60% 50% 40% 30% 20% 10% 0% Prem to MSCI EM fwd PE Source: Bloomberg, as of 1 January 2017 Investment involves risks. Past performance is not indicative of future performance Prem to MSCI Asia Ex Japan 12m fwd PE 37

38 ROE of Indian stocks trending up (%) Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 India EM Asia Ex Japan BRIC World Source: Bloomberg, as of 31 December 2016 Investment involves risks. Past performance is not indicative of future performance 38

39 India Fixed Income

40 Indian bond market Large, liquid domestic market The market has rapidly grown in the past few years A market still dominated by government issuance Corporate market is still underdeveloped, but likely to grow strongly in the coming years Bonds outstanding Ownership pattern of Indian government securities USDbn 1,400 % GDP 62% ,200 60% ,000 58% % % 52% Q 2016* Government bonds Corporate bonds % GDP 50% Commercial Banks Non-Bank PDs Insurance Companies Mutual Funds Co-operative Banks Financial Institutions Corporates Foreign Portfolio Investors Provident Funds RBI Others Source: RBI, Ministry of Finance, New Delhi. Chart 1: *1Q2016 is based on best estimate, data as of January 2016, Chart 2: data as of September

41 Indian bond market Broad and deep structure Indian Debt Market is broadly classified in three segments: Government Securities comprising the Central and State Government securities and treasury bills Public Sector Undertaking (PSU) bonds, generally treated as surrogates of sovereign paper, often due to the comfort of Government ownership of the PSUs Corporate securities comprising debentures/corporate bonds and commercial papers Indian Debt Market is predominantly wholesale market with dominant institutional investor participation which includes Banks Insurers Retirement funds Mutual funds Financial Institutions India s central banking authority The Reserve Bank of India (RBI), regulates transactions in sovereign securities Exchange-listed debt securities come under the concurrent purview of the Stock Exchange where they are listed All transactions of FPI s in the debt market are governed by Securities Exchange Board of India (SEBI) 41

42 Indian bond market Access for FPI s FPI s can access Indian market by securing an FPI license from Designated Depository Participant (DDP) FPIs can invest in Debentures of Indian Companies Units of domestic mutual funds Exchange traded derivatives Dated Government Securities State Development Loans Coupons and capital gains are taxed Investment limit for FPI s are as follows: Debt limit in respective category is freely available till the aggregate FPI investments reaches 90% of the limit, after which the auction mechanism will be triggered for the balance limit FPIs can invest in dated government securities and corporate bonds having residual maturity of three years or above Depositories will monitor the different thresholds Switching (buying/selling) within the quota limit is allowed for the same day The USD10bn limit in sovereign segment is available for investments only to specified FPIs Total FPI government securities limit is at 5% of total outstanding bonds, denominated in INR terms. The quota is reviewed every 6 months and released every quarter 42

43 Indian bond market Recent changes to FPI Investments Policy In the policy meeting on 29 September 2015, RBI announced significant changes to the FPI investments policy: Total FPI government securities limit has been adjusted to 5% of total outstanding bonds, implying an additional INR1.2 trillion in quota The limit was previously set in absolute dollar terms; the quota has also now been redenominated into INR The quota will be reviewed every 6 months and released every quarter, adding much more transparency to the system RBI has opened up State Development Loans (SDL) to foreign investors SDLs are issued by states as opposed to the central government SDLs were previously inaccessible for foreign investors 2% of outstanding SDL will be opened up to foreign investors RBI introduced Masala bonds which are bonds issued by Indian companies offshore, denominated in INR and settled in USD Not subject to FPI license Subject to 5% withholding tax 43

44 Indian bond market Recent market reforms In August 2016, RBI announced a series of measures to develop the onshore fixed income and currency markets. Some of these include: Allowing banks to raise capital through Masala bonds in the overseas market Allowing both residents and non residents to maintain large open positions (up to limit of USD 5 million) Proposed to permit listed companies to lend money to banks through repo market mechanism Granting direct access to foreign portfolio investors (FPIs) to bond trading for both government and corporate bonds To further develop the corporate bond market, the following measures have been put in place: Permitting brokers to repo in corporate bonds Allowing FPIs to trade directly in corporate bonds Accepting corporate bonds under the liquidity adjustment facility of the RBI Introduction of the Electronic Dealing Platform for repo in corporate bonds These measures are intended to: enhance market participation facilitate greater market liquidity and improve communication & transparency 44

45 South Africa Indonesia Mexico India Philippines Malaysia Hungary China Thailand US Spain UK Germany Indian bond market Attractive absolute and relative yields Indian government bond yields are attractive relative to emerging market peers, but especially so against developed markets Yield curve is flat, which means we don t give up yield irrespective of our duration view Selected 10 year government bond yields Indian government yield curve Yield (%) Yield to maturity (%) Dec Y 2Y 3Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 15Y 30Y Years to maturity Source: Bloomberg, data as of 30 December

46 Dec-11 May-12 Oct-12 Mar-13 Aug-13 Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Jul-16 Dec-16 INR Appreciation potential over the long term Indian rupee is among the most undervalued major currency on PPP in the world Performance of Indian rupee % under/over valued versus USD on PPP USDINR exchange rate INR IDR MYR VND THB PHP TWD CNY SGD KRW HKD GBP EUR JPY CHF -80% -60% -40% -20% 0% 20% 40% 46 Source: IMF World Economic Database number as of October Spot rate as of 30 December Investment involves risks. Past performance is not indicative of future performance

47 Yields Look attractive vis-à-vis policy rate and inflation 10y vs policy rate Real rates (Policy rate CPI inflation) Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 10y yields Policy rate Source: Bloomberg, data as of December

48 RBI s Monetary Policy MPC maintains accommodative stance The Monetary Policy Committee (MPC) held the 5 th Bi-Monthly Monetary Policy meeting on 7 December 2016 Policy rate put on hold due to the following factors: Rise in prices in some items and uptick in inflation expected due to base effects and oil prices; Global developments especially the monetary and fiscal policy stance by the US Federal Reserve; Withdrawal of Specified Bank Notes (SBN) expected to have temporary effect on inflation MPC maintains its accommodative stance Neutral liquidity stance continues The inflation expectation for Q is retained at 5%, given the improvement in food inflation, with a minor upside bias Key decisions at the meeting: Repo rate kept unchanged at 6.25% Cash Reserve Ratio left unchanged at 4.00% RBI continues to follow developments on: CPI data which is expected to be in the range of 5% with upside risk lower than last time Imminent tightening of monetary policy in the US triggering high volatility Supply disruptions due to currency replacement may drag down growth this year Note: Any forecasts, projections or targets contained in this presentation is for information purpose only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purpose only Source: HSBC Global Asset Management, data as of January

49 Interest rate view Further easing dependent on inflation trajectory MPC believes the upside risks to the 5% inflation target for Jan-Mar 2017 have diminished Acknowledges the possibility of risks to inflation from the implementation of the 7 th Pay Commission and GST bill However, declining food inflation momentum should guide headline CPI lower Stance of policy continues to be accommodative Fiscal prudence, lower inflation, lower neutral real rate with focus on growth should keep rates on an easing bias We see scope for the MPC to cut rates further by at least 25bps before Mar 2017 Bond supply The government has revised the supply in the remainder part of H revised downwards to 66,000 crore from 84,000 crore previously due to larger tax revenues provides a favourable technical backdrop for bonds Statutory demand from insurers, pensioners and retirement funds to drive demand for yield Slow credit growth leads to demand from banking system Expect 10Y government bonds to trade between % with softening bias to yields given improved liquidity Note: Any forecasts, projections or targets contained in this presentation is for information purpose only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purpose only Source: HSBC Global Asset Management; data as of January

50 Currency Expect a rangebound rupee in the medium term Macroeconomic factors supportive of INR: Accommodative monetary policy positive in medium term Investment reform to be positive for FDI/divestment programme/equity capital flows Current account deficit has narrowed and sustainable Capital flows cover current account deficit adequately Higher real rates imply move from gold to financial assets Expect INR to move in line with USD vs Asian currencies, but with greater resilience given: Healthy FX reserves Improving fundamentals Foreign investor appetite for Indian debt appears to remain healthy Note: Any forecasts, projections or targets contained in this presentation is for information purpose only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purpose only 50

51 Dawn of a brave new world

52 Dawn of a brave new world Interest rates in India down sharply, improving outlook on the banking sector and a revival in external demand can pave the way for a sustained rally in the Indian markets A world which will return to a growth orientation, away from the stagnation seen in the past few years We feel, Indian equity markets are reasonably valued and offer an attractive alternative to other emerging markets, much more challenged by the new world order at this time, especially China. Increasing propensity for sustained discretionary spending, reduction in the asset quality problem with banks and a stable increase in discretionary spend in the US points to some beneficiaries in the local stock markets A revival in investment demand fueled by government spending, may also throw up interesting opportunities in Industrials and basic manufacturing Our asset allocation prefers an overweight stance in equities and intermediate debt duration 52

53 Important information Specific risks to the Indian equity market include: government inaction, high oil prices, pressure on current account, INR weakness and sticky inflation investors should be reminded that investment in some of the developing Asian countries may involve special considerations and risks. Below could affect adversely the economies of such countries or the value of the investment: Political changes Government regulation Social instability Diplomatic development Global economic development, etc Emerging markets can be significantly more volatile than developed markets, so that the value of investments may be subject to larger fluctuations Currency movement and market condition may affect the value of investments Risk Considerations. There is no assurance that a portfolio will achieve its investment objective. In addition, there is no guarantee that any investment strategy will work under all market conditions, and each investors should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline. Accordingly, you can lose money investing in any of these strategies. Please be aware that these strategies may be subject to certain additional risks, which should be considered carefully along with the strategy s investment objectives and fees before investing. Equity. In general equity securities values also fluctuate in response to activities specific to a company. Foreign and emerging markets. Investments in foreign markets entail special risks such as currency, political, economic, and market risks. The risks of investing in emerging-market countries are greater than the risks generally associated with foreign investments. Derivative instruments. Derivatives can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on performance. Non-diversification. Focusing investments in a small number of issuers, industries, foreign currencies or particular countries or regions increases the risks associated with a single economic, political or regulatory occurrence. Sector concentration. When a strategy will invest more than 25% of its total assets in securities issued by companies in the financial services group of industries. Accordingly, a strategy will be more susceptible to developments that affect such industries, such as economic cycles, interest rate changes, business developments and regulatory changes, than other strategies that do not concentrate their investments. Commodity-related investments. Exposure to commodities markets, including investments in companies in commodity-related industries, may subject a strategy to greater volatility than investments in traditional securities. The value of commodity-related investments may be affected by overall market movements and factors specific to a particular industry or commodity. Gross performance information. Performance data is calculated gross of fees and assumes the reinvestment of dividends, income and any capital gains and is net of transaction costs. The results are shown before the deduction of investment advisory fees and other expenses, which would reduce a return. Information about investment advisory fees is available in our Form ADV Part 2A, which is available upon request. The following hypothetical illustrates how investment advisory fees, compounded over time, could impact performance. Assuming a portfolio s annual rate of return is 15% for 5 years and the annual investment advisory fee is 50 basis points, the gross cumulative five-year return would be 101.1% and the five-year return net of fees would be 96.8%. 53

54 Disclaimer This document has been prepared by HSBC Asset Management (India) Private Limited (AMIN) for information purposes only and should not be construed as an offer or solicitation of an offer for purchase of any of the funds of HSBC Mutual Fund. All information contained in this document (including that sourced from third parties), is obtained from sources, which AMIN/ third party, believes to be reliable but which it has not been independently verified by AMIN/ the third party. Further, AMIN/ the third party makes no guarantee, representation or warranty and accepts no responsibility or liability as to the accuracy or completeness of such information. The information and opinions contained within the document are based upon publicly available information and rates of taxation applicable at the time of publication, which are subject to change from time to time. Expressions of opinion are those of AMIN only and are subject to change without any prior intimation or notice. It does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies that may have been discussed or recommended in this report and should understand that the views regarding future prospects may or may not be realized. Neither this document nor the units of HSBC Mutual Fund have been registered in any jurisdiction. The distribution of this document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe, any such restrictions. Copyright. HSBC Asset Management (India) Private Limited 2017, ALL RIGHTS RESERVED. HSBC Asset Management (India) Private Limited, 16, V.N. Road, Fort, Mumbai Mutual fund investments are subject to market risks, read all scheme related documents carefully. 54