HDFC MF Yearbook 2019 Contents 1. Global Economy and Markets 2. Key Future Trends 3. Indian Economy 4. Equity Markets 5. Fixed Income Markets
Global Economy and Markets There are two kinds of forecasters: those who don t know, and those who don t know they don t know --- Economist John Kenneth Galbraith
Range bound global growth continues Global growth In 2018 was supported by robust US (fastest growing G10 economy) and stable Emerging Markets (EMs) growth Normalisation of accommodative monetary policies poses risk going forward United States (US) Impact of rate hikes and tapering of bonds purchase program was offset by fiscal stimulus/tax cuts Effect of rising rates and unwinding of monetary stimulus need to be monitored % Real Global GDP Growth (YoY, %) 5.0 4.5 4.0 3.5 3.7 3.8 3.0 3.6 3.5 2.5 2.0 1.5 1.0 2013 2014 2015 2016 2017 2018 (E) 2019 (E) 2020 (E) Euro Area China Growth slowed down in major economies in 2018 As QE has ended in 2018, its impact needs to be monitored Economy is maturing after rapid growth over last 20 years, hence growth rates are moderating Deleveraging efforts moderated economic growth in 2018 Growth in GDP (%) 2012-16 2017 2018E 2019E 2020E G10 1.7 2.2 2.2 1.9 1.6 United States 2.2 2.2 2.9 2.3 1.9 Euro Area 0.9 2.5 1.9 1.6 1.5 United Kingdom 2.1 1.7 1.2 1.3 1.6 Japan 1.2 1.7 0.8 1.3 0.6 Emerging Markets 4.8 4.8 4.8 4.7 4.8 Brazil (0.3) 1.0 1.3 2.3 2.5 Russia 0.7 1.5 1.6 1.5 1.6 India 6.7 6.2 7.7 7.6 7.5 China 7.3 6.9 6.6 6.3 6.1 South Africa 1.7 1.3 0.7 2.0 1.5 Trade war, monetary easing and tax breaks are key events to watch out for in 2019 Source: Morgan Stanley estimates 3
Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct-16 Mar-17 Aug-17 Jan-18 Jun-18 Nov-18 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct-16 Mar-17 Aug-17 Jan-18 Jun-18 Nov-18 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct-16 Mar-17 Aug-17 Jan-18 Jun-18 Nov-18 Falling unemployment rates 12.0 10.0 8.0 6.0 4.0 2.0 % US Unemployment Rate 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 % Japan Unemployment Rate % Euro Area Unemployment Rate 13.0 12.0 11.0 10.0 9.0 8.0 7.0 6.0 % China Unemployment Rate (Quartely) 4.4 4.2 4.0 3.8 3.6 3.4 Source: Bloomberg; Data updated till Nov 18 for US, Euro Area and Japan. Data for China available till Sep 18 4
Global Liquidity Background of Quantitative Easing US Federal Reserve (US Fed) European Central Bank (ECB) Bank of Japan (BoJ) Post Global Financial Crisis (GFC) in 2008, US Fed embarked on Quantitative Easing (QE) to support economic growth ECB embarked on asset purchase program in March 2015 Commenced asset purchase program in 2012 Over 2010-15, US Fed Balance sheet grew by ~USD 3.0 trillion ECB purchased bonds worth ~EUR 2.6 trillion BoJ is estimated to have bought bonds worth USD 3 trillion With US economy strengthening, US Fed began unwinding its Balance sheet in 2017 and is likely to continue in 2019 Though bond purchases have ended in 2018, rollover of bonds on maturity is likely Likely to continue this program in 2019, though pace might reduce Since 2010, combined balance sheet of these 3 Central banks increased by ~USD 8 trillion, which supported global growth. This phase is now ending and may impact growth 5
Global liquidity Likely to tighten in 2019; Policy rates might go up US Fed to continue unwinding and shrinking its balance sheet EU stopped QE in Dec 18, though likely to roll over bonds on maturity Japan expected to continue QE, albeit at slower pace In 2019, combined balance sheets of these central banks likely to shrink USD bn Net injection of liquidity* by Global central banks 3,000 Fed ECB BoJ Total liquidity injection 2,000 1,000 0 This may impact interest rates, capital flows and global growth (1,000) 2011 2012 2013 2014 2015 2016 2017 2018E 2019E *change in assets Source: Kotak Economics Research estimates % Central Bank Policy Rates and Inflation 7.0 6.0 5.0 4.0 US Euro Area US CPI Euro Area CPI 3.0 2.0 1.0 0.0 GFC, -1.0 Strong global growth, Sharp Low interest rates and expanding Balance Normalization of Rise in Yields rate sheets of Central Banks liquidity and rising -2.0 cuts yields 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 Source: Bloomberg, Data beyond Sep 18 is Morgan Stanley estimate 6
Yields across major economies declined in 2018, except US % US 10 Year Yield 3.50 3.25 3.00 2.75 % 0.20 0.15 0.10 Japan 10 Year Yield 2.50 2.25 2.00 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 US 10Y yields increased on the back of increase in fed rate, steady growth, historically low unemployment and unwinding of asset purchase program 0.05 0.00 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Japan s 10Y Yields remained range bound with benign inflation outlook. BoJ adjusted QE to allow yields movement within wider range China 10 Year Yield % % German 10 Year Yield 4.25 0.85 0.70 0.55 4.00 3.75 0.40 3.50 0.25 3.25 0.10 3.00 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Growth and Inflation in Europe remained muted. Uncertainty over Brexit and concerns in Italy led to fall in yields Source: Bloomberg. Data updated till 31 st December 2018 Escalation of trade wars & slow down in domestic growth resulted in PBoC easing monetary policy with Reserve Ratio Requirement cut 7
Real Yields for major economies near two decade lows % US Real Yield 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0-1.0-2.0-3.0 Jan/98 Aug/00 Mar/03 Oct/05 May/08 Dec/10 Jul/13 Feb/16 Sep/18 Japan Real Yield % 5.0 4.0 3.0 2.0 1.0 0.0-1.0-2.0-3.0-4.0 Jan/98 Aug/00 Mar/03 Oct/05 May/08 Dec/10 Jul/13 Feb/16 Sep/18 % German Real Yield 5.0 4.0 3.0 2.0 1.0 0.0-1.0-2.0-3.0 Jan/98 Aug/00 Mar/03 Oct/05 May/08 Dec/10 Jul/13 Feb/16 Sep/18 % China Real Yield 6.0 4.0 2.0 0.0-2.0-4.0-6.0 Jan/06 Aug/07 Mar/09 Oct/10 May/12 Dec/13 Jul/15 Feb/17 Sep/18 Low real yields create uncertainty for future interest rates Real Yields = Month-end 10Y GSec Yield and CPI; Source: Bloomberg. Data updated till 30 th Nov 18 8
Global Equity Markets deliver negative returns in 2018 Major equity markets delivered negative returns Impact of high base given the strong returns of past 2 years Escalation of Trade war between China and US Emerging markets faced capital outflows on strong USD and unwinding of QE Developed Markets^ DAX (Germany) -18.3 FTSE (UK) -12.4 SSE Composite (China) Kospi (South Korea) HangSeng (Hong Kong) Emerging Markets^ -24.7-17.3-13.5 % 110.0 100.0 90.0 Global market Cap to GDP Ratio corrected sharply in 2018* World Market Cap to GDP Ratio LTA Nikkei (Japan) -12.1 Taiwan Weighted (Taiwan) -8.6 80.0 CAC 40 Index (France) Strait Times (Singapore) S&P 500 (US) -12.0-9.8-7.1 KLSE (Malaysia) Jakarta Composite Index (Indonesia) Nifty 50 (India) -5.9-2.5 3.1 70.0 60.0 % Ibovespa Sao Paulo Index (Brazil) % 15.0 50.0 2003 2006 2009 2012 2015 2018E India s equity market (Nifty 50) significantly outperformed despite delivering low returns * Global Market Cap to GDP ratio is calculated using world market cap from bloomberg and GDP from world bank. For 2018, current market cap is divided by world bank s estimated global GDP. ^Returns for Calendar year 2018; Returns as on 31 st Dec 2018. All returns are calculated in local currency. Source: Bloomberg, World Bank, MFI;; LTA Long term average
US Marketcap/GDP & Profits/GDP are above long term average US market cap to GDP remains higher than the long term average; though corporate profits to GDP is also high % 180 US Market Cap to GDP Ratio* % 7.0 US Corporate Profits 160 140 US Market Cap to GDP LTA 6.0 Corporate Earnings as a % of GDP (US) 120 5.0 100 80 4.0 60 3.0 40 20 2.0 0 Dec-03 Dec-06 Dec-09 Dec-12 Dec-15 Dec-18 1.0 FY 92 93 94 95 97 98 99 00 02 03 04 05 07 08 09 10 12 13 14 15 17 Recent correction in US equity markets should be viewed in the context of US Market Cap to GDP ratio being above long term average and bottoming out of yields in US Source: Bloomberg, Morgan Stanley. * Data updated till 31 st December 2018 10
Global commodity prices softened in 2018 CRY Index* 220 210 200 190 180 170 160 Jan-17 Apr-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 USD / bbl Brent Crude Oil 85 80 75 70 65 60 55 50 45 40 Jan-17 Apr-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 * CRY index i.e. Thomson Reuters/CoreCommodity CRB Commodity Index acts measures the aggregated price direction of various commodity sectors. 180 175 FAO Index # 120 115 110 JOC-ECRI Industrial Price Index^ 170 105 165 160 Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18 Nov-18 # UN Food and Agriculture World Food price index Tracks the change in prices consumers pay for food at the retail level 100 95 90 Jan-17 Apr-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 ^ index indicating weighted price movement of industrial materials like cotton, burlap, steel, aluminum, zinc etc. Softening in global commodities is positive for net commodity importers like India Source: Bloomberg. CRY Index, Brent Crude oil prices and JOC-ECRI Industrial Price index updated till 31 st Dec 2018. FAO Index is updated till 30 th Nov 2018. 11
INR Index USD strengthened against most currencies in 2018 Most currencies depreciated vs the USD in CY18 USD appreciation is due to: Rising interest rates in the US Strong US economic growth Repatriation of USD 570 bn in 9MCY18 & more expected in 2019 under Tax Cuts and Jobs Act of 2017 Movement of Major currencies vs USD -39.3-15.9-17.2-20.2-4.1-4.5-5.6-5.7-6.2-8.5-9.2-9.7-45.0-40.0-35.0-30.0-25.0-20.0-15.0-10.0-5.0 0.0 5.0 % 2.7 Japanese Yen 0.0 Mexico South Korean Won Euro Pound Chinese Yuan Indonesian Rupiah Canada Indian Rupee AUD South African Rand Brazilian Real Russian Ruble Turkish Lira INR and EM Index movement Vs USD Dec/17 Mar/18 Jun/18 Sep/18 Dec/18 60 80 75 INR fall has been largely in line with other EM currencies 65 70 USD INR (Inverted Scale,LHS) JP Morgan EM Currency Index (RHS) 70 65 60 55 Source: Bloomberg, Data updated till 31 st Dec, 2018 12 75 50
Key Future Trends 1. Electric Vehicles 2. Solar energy 3. Changing supply dynamics of Oil 13
USD / KWH Electric Vehicles (EVs), fully charged EV growth drivers: Policy push led by environmental concerns Declining battery prices ICE costs are expected to move up due to tightening environment norms Source: UBS Declining battery price outlook Global EV sales are projected to grow at a CAGR of 40% between 2016-2025 with sales crossing 17.5 million vehicles in 2025 (Source:UBS) China is taking the lead, penetration (in PVs) to reach 9% in next 3 years (Source:UBS) Electrification is one of the key pillars of the Group s Strategy, By 2025, BMW Group will have 12 all-electric models BMW CEO Harald Krüger^ % of new car sales 2015 2020E 2025E China 1.0% 6.7% 27.4% US 0.7% 2.5% 5.3% Europe 1.0% 4.1% 28.5% World 0.6% 3.4% 16.6% China taking the lead in EVs Source: UBS Company will help electric cars go mainstream using its new MEB platform, which is developed for the mass market. Volkswagen s CEO Herbert Dies* Source: UBS Toyota envisions to sell 5.5 million traditional hybrids, EVs and hydrogen fuel vehicles by 2030. Toyota EVP Shigeki Terashi + Success of EVs is positive for India. Net oil Imports in India are 4% of GDP and CAD is 2%. As EV penetration increases in India, oil imports should moderate in long term Global growth in EVs should also keep pressure on oil prices, benefitting India PV Passenger vehicle, ICE - Internal combustion engine, ^dated Nov 07, 2018, *dated Oct 10, 2018, + dated Dec 25, 2017 14
Minimum Bid (In Rs/kWhr) GW Solar energy is emerging as a key power source Global solar capacity installed (cumulative), GW Global solar capacity has been growing 50% CAGR since 2000 Source: Goldman Sachs Solar energy installed capacity in India has grown at CAGR of ~70% between FY14 and FY18. Target to reach ~97 GW by 2022 Share of Solar energy in India Rose from 8% to 33% in renewal energy capacities Stands at ~7% of total power capacity Key Drivers for the rise in Solar energy Fall in the solar panels costs 100 80 60 40 20 0 3 4 Total Solar Installed Capacity in India 7 12 22 FY14 FY15 FY16 FY17 FY18 FY19T FY20T FY21T FY22T 45 62 80 97 Source: ICICI Securities, T Government of India targets Total Capital Costs per MW Source: ICICI Securities Unit FY14 FY15 FY16 FY17 Current Rs lakh 806 691 606 501 391 Policy push from Government and tax incentives/subsidy Easy Implementation and higher certainty of power / costs India has an estimated potential of about 750 GW of solar power (Source: MNRE). To put things in perspective India s total capacity from all sources is 350 GW 20 18 16 14 12 10 8 6 4 2 0 17.9 12.0 Fall In Solar Power Tariffs Source: ICICI Securities 8.4 7.0 6.5 5.1 4.3 3.3 2.4 2.5 2.4 1 GW (Gigawatt) = 1000 MW (Megawatt) 15
million barrels per day Oil Changing Demand / Supply Dynamics US becomes largest oil producer US, on the back of increase in shale oil production, has become largest oil producer in the world US share in world supply has increased from 9% in 2009 to 14% in 2017 Oil demand to peak by 2030 as per BP^ Demand has peaked in developed markets like the US, EU and Japan EV push, slowing demand growth in India / China should lead to global oil demand peaking by 2030 14 13 12 11 10 9 8 7 US Russian Federation Saudi Arabia 2009 2010 2011 2012 2013 2014 2015 2016 2017 Million Barrels Per Day United States EU China India World 1990 17 14 2 1 66 1995 18 14 3 2 70 2000 20 15 5 2 77 2005 21 15 7 3 84 2010 18 14 9 3 87 2016 19 13 12 4 94 2020 19 12 14 5 99 2025 18 11 16 6 103 2030 18 10 16 8 106 2035 16 9 17 9 106 2040 15 8 16 10 105 1990-2016 (CAGR) 2016-2040 (CAGR) 0.3% -0.4% 6.7% 5.2% 1.4% -0.8% -1.9% 1.0% 3.5% 0.5% Source: ^British Petroleum (BP), above chart Includes crude oil, shale oil, oil sands and NGLs (natural gas liquids) Rising shale oil production, peaking global demand driven by EVs indicates moderate long term trends for oil prices. Positive for India 16
Indian Macro Economy Outlook India remains a long term secular growth story India set to become world s third largest economy in 2028 Bank of America Merrill Lynch* *Report India 2028: The last BRIC in the wall dtd 10 th Nov 2017 17
Indian economy Breaking into top 5 economies Ranks in terms of size of economy* 2017 GDP USD United States China 19,485 bn 12,015 bn Japan Germany India 4873 bn 3700 bn 2602 bn France United Kingdom 2587 bn 2628 bn India s rank has jumped from 11 th to 5 th largest economy in just 12 years Source: IMF, *From 2018 onwards figures are IMF estimates. 18
India s Ease of Doing Business ranking - Targets to be in top 50 Parameters 2016 ranking 2017 ranking 2018 ranking Overall 130 100 77 Starting a business 155 156 137 Construction permits 185 181 52 Getting electricity 26 29 24 Registering property 138 154 166 Getting credit 144 29 22 Protecting minority investors 13 4 7 Paying taxes 172 119 121 Trading across borders 143 146 80 Enforcing contracts 172 164 163 Resolving insolvency 136 103 108 Key reforms that have made this possible Replacement of majority of state and central sales taxes with one nationwide Goods & Services Tax (GST) Faster and less expensive to obtain a construction permit. Strengthening legal rights and access to credit by amending insolvency law Reduction in the time and cost to export and import Upgradation of port infrastructure Electronic submission of documents Reduction in procedures / documentations and time for starting new business World Bank has recognized India as one of the top improvers for the year 2018 Source: World Bank, Economic times article dtd. 2 nd Nov 2018; DIPP Department of Industrial Policy and Promotion 19
Steady economic growth, stable macro economic parameters Improving macros FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E Real GDP at market price (% YoY) 5.5 6.4 7.5 8 7.1 6.7 7.1 7.2 Centre's fiscal deficit (% GDP) 4.8 4.4 4.1 3.9 3.7 3.5 3.5 3.3 Current Account Deficit (CAD) (% GDP) 4.7 1.7 1.3 1.1 0.7 1.9 2.7 2.6* Balance of Payment 0.2 0.8 3.0 0.9 0.9 1.7 (0.8) (0.2) Net FDI (% of GDP) 1.1 1.2 1.5 1.7 1.6 1.2 1.2 1.1 Consumer Price Inflation (CPI) (Average) 9.9 9.4 6.0 4.9 4.5 3.6 3.6 4.1 Foreign Exchange Reserves (USD bn) 292.6 303.7 341.4 359.8 370.0 424.4 393.3^ na Source: CEIC, Kotak Institutional Equities; Economic Survey, E-Estimates, ^ as of 21 st Dec 18. na not available * Calculated by assuming crude prices at USD 72.5 per barrel. With oil at USD 60 / barrel, CAD is estimated to be ~2.0% of GDP Key Reforms / Initiatives taken over past 4 years have created a favourable economic environment Introduction of Goods & Services Tax (GST) Introduction of Indian Bankruptcy Code (IBC) RERA and Housing for all Liberalisation of FDI in various sectors including railways, defense, coal mining, construction, aviation, pharma etc. Direct Benefit Transfer (DBT), UJJAWALA LPG for poor households Power - Focus on Transmission and Distribution, Target 24*7 electricity, Saubhagya scheme Make in India - Focus on domestic manufacturing and design Transparent auctioning of natural resources 20
Revival in capex to support growth Consumption expenditure grew faster than capex in FY16 & FY17 % 20.0 15.0 Signs of capex reviving, consumption stable Real GDP Growth Consumption Gross Capital Formation Capex grew faster than consumption in FY18 - It should further accelerate in FY19 - This should be positive for economic growth 10.0 5.0 0.0 Infrastructure capex has improved over last few years led by roads etc. -5.0 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 H1FY19 Signs of private capex recovery with capacity utilisation increasing Cement and Steel majors have announced significant capex % 80 78 76 Rising capacity utilisation driving capex recovery Capacity Utilisation Capacity Utilisation (SA) Long term Average 74 72 70 Jun-11 May-12 Apr-13 Mar-14 Feb-15 Jan-16 Dec-16 Nov-17 Source: CMIE, RBI, SA: Seasonally Adjusted 21
Sustained low inflation led by benign food prices Over the past 4 years, average inflation has been less than 4.3% as compared to 9.4% in 5 earlier years Food inflation has fallen significantly to 3.4% from 9.7% Driven by high agriculture growth in India and low global food prices (refer slide 11), food inflation in India has been low over past 4 years as compared to previous10 years Average non-food inflation over past 4 years has been ~5%, significantly lower than 9% in earlier 5 years % Sustained Low Inflation 25.0 20.0 15.0 10.0 5.0 0.0 Food CPI Headline CPI Average Headline CPI % 2000-2004 2005 2009* 2010 2014 2015-2018 Headline CPI 3.9 6.3 9.4 4.3 Non -Food CPI* 4.8 5.6 9.3 5.0 Food CPI* 2.6 9.4 9.7 3.4 Real Agriculture growth Average inflation for the period 1.7 3.2 4.1 3.3-5.0 Nov/09 Nov/12 Nov/15 Nov/18 *details of 2006 not available. Hence Food and non-food CPI is calculated using average of 2005, 2007-09. - CPI-IW is used for the period before 2012 Low food inflation has adversely impacted farmers incomes Source: CMIE, Bloomberg, World Bank 22
Summary of Indian Economic Outlook India remains a secular long term growth story driven by Excellent demographics and rich natural resources Large availability of skilled, young, English speaking and competitive manpower Low penetration of consumer goods and improving affordability Large unmet needs of infrastructure and strong reforms momentum Spate of reforms in past 4 years (refer slide 20) has created a favourable economic environment for sustained growth over medium to long term Macro economic indicators are stable and healthy Infrastructure capex continues to gain momentum; Definite signs of revival in industrial / private capex By 2028, India is likely to become the third largest economy in the world* Source: *Bank of America Merrill Lynch Report India 2028: The last BRIC in the wall dtd 10th Nov 2017 23
Equity Markets What the wise man does in the beginning, the fool does in the end. Warren Buffett 24
2018 An eventful year for Indian Equities Markets end flat despite volatility 40000 39000 38000 37000 36000 Introduction of LTCG in Equity S&P BSE Sensex US Fed rate Hike NASDAQ reached all time high of 8109 Q1 earnings majorly in line with expectations IL&FS Default Oil reached $86/b, rupee closed at all time high of 74.4 per $ Volatility due to weak global cues, US Fed rate hike 35000 34000 Strong Q4FY18 Earnings Growth Oil at $50/b, corrected by ~40% 33000 First correction in 15 months due to 32000 trade war Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Indian equity markets outperformed global markets in 2018 (slide 9) Source: Bloomberg. Data updated till 31 st December 2018 25
Sharply Divergent Performance across sectors and Large / Mid / Small caps Sectoral Performance Nifty Realty Nifty Media Nifty Auto Nifty Metal Nifty PSU Bank Nifty Infrastructure Nifty Pharma Nifty India Consumption Nifty Energy Nifty 50-32.8-25.8-23.0-19.8-16.5-12.6-7.8-2.3 0.6 3.1 % 2018 returns across Large/Mid/Small cap indices 5.0 3.1 1.1 0.0-5.0-10.0-15.0-20.0-25.0-30.0-35.0-15.3 Nifty 50 Nifty 100 Nifty Midcap 100-28.9 Nifty Smallcap 100 Nifty Bank Nifty Private Bank Nifty FMCG 6.3 8.1 13.6 Absolute Returns % As on December 31, 2018 1 year 3 years 5 years Nifty 50 3.1% 36.7% 72.3% Nifty IT % 23.7 Nifty Midcap -15.3% 33.4% 121.5% Nifty Smallcap -28.9% 14.1% 89.5% IT, FMCG and Private banks outperformed while Auto, Metal & PSU Banks underperformed IT was the top performing sector driven by weak INR, while Realty was the worst performing sector. Large caps outperformed mid and small caps; Performance of small and mid caps indices should be viewed in the context of strong performance over past 3 and 5 years Source: MFI; Returns for Calendar year 2018. Data updated till 31 st Dec 2018 26
2018 A watershed year for Indian Equity markets The Power of Retail investors Strong domestic flows have reduced impact of FII selling and thus volatility Since Jan 17, FII were net sellers (greater than USD 2.5 bn on 90 days cumulative basis) on three occasions but unlike in the past, Indian equity markets held up well on each of these three occasions as seen in table below 90 Days Period ending FII Outflows (In USD Bn)* Indian Market capitalization (USD bn) FII outflows as % of Market cap Fall in Sensex # 03-Apr-08-4.5 1,270 0.4% -10.9% 03-Dec-08-5.7 543 1.1% -43.6% 24-Oct-11-2.5 1,208 0.2% -13.5% 04-Sep-13-3.9 917 0.4% -5.7% 22-Jan-16-3.1 1,362 0.2% -13.1% 05-Jan-17-5.1 1,589 0.3% -1.2% Source: Bloomberg * Maximum outflow on a 90 day rolling period and greater than USD 2.5 bn # 6 months returns till date 24-Oct-17-4.2 2,154 0.2% 8.9% 14-Nov-18-5.6 1,956 0.3% -0.7% This was due to sustained domestic flows into equity funds currently (Rs 10,000-12,000 crs a month)^, of which SIPs flows itself are Rs 7,000-8,000 crores (25 million SIPs of Rs 3,000 each on an average) A shift in power in capital markets from offshore players to domestic individual investors! Source: AMFI; ^considering the average flows in past 6 months ending Nov18 27
Equity Markets Valuations India market cap to GDP ratio, calendar year-ends 2005-20E (%) 160 140 120 100 80 60 40 20 13 69 15 88 149 23 11 56 17 99 98 16 Mcap/GDP (%) 14 13 61 71 16 NIFTY 12M forward P/E (X) 20 18 17 64 81 76 72 19 92 79 17.4 71 16.5 14.2 63 25 20 15 10 5 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E - Market Cap to GDP for 2018E to 2020E are based on current market cap and GDP estimate by Kotak Institutional Equities Marketcap to GDP at 63% is attractive, specially at a time when NIFTY EPS growth is estimated at 17% CAGR over FY18-21E (slide 29) Markets are trading at CY20(E) P/E of ~14x, which is reasonable, especially given improving earnings outlook Given depressed earnings, Marketcap to GDP is a better valuation parameter Data Source: Kotak Institutional Equities, updated till 30 th Dec, 2018, From 2005-18, NIFTY50 PE is based on 12 month forward estimated EPS. For 2019E, by Kotak Institutional Equities has calculated PE based on EPS numbers as of Mar-20 end and for 2020E based on EPS of Mar-21 end 28
Strong earnings growth ahead NIFTY EPS growth of 17% CAGR expected between FY18 and FY21 Earnings - The worst is behind, strong improvement ahead FY13 FY14 FY15 FY16 FY17 FY18 NIFTY EPS CAGR 13-18 FY19E FY20E FY21E NIFTY EPS CAGR 18-21E NIFTY EPS 377 410 398 384 439 448 513 629 722 3.5 17.2 Growth % 8.8-2.9-3.5 14.4 2.0 14.2 22.7 14.8 Source: Kotak Institutional Equities, E: Estimates Reasons for weak NIFTY Earnings growth in FY13-18 Metals & Mining Low prices in China and rest of the World Low demand growth & large imports in India Corporate Banks & Financials Utilities Significant increase in stress in steel, power & infra sectors Higher provisioning on NPAs impacted profitability sharply Change in CERC (Central Electricity Regulatory Commission) regulations Earnings growth in FY18-21E should be driven by Metals & Mining Higher prices led by MIP (Minimum Import Price) in steel and higher global prices across metals & INR depreciation Growing Infra / Housing spends / improving volume growth Corporate Banks & Financials Recognition phase of NPAs is largely over, GNPA provisioning is at 54% as on Sep 18 With falling slippages and increasing resolution of NPAs, provisioning costs are expected to fall sharply Utilities Capacity led growth Interestingly, most of the sectors that witnessed weak profit growth / declining profits are the ones expected to witness healthy growth going ahead 29 HDFC Mutual Fund/AMC is not guaranteeing any returns
Convergence of Largecap and Midcap Indices and valuations No material difference in revenue growth of largecaps and midcaps Revenue growth 5 year CAGR 10 year CAGR NIFTY Midcap 4.7 11.6 NIFTY 50 5.6 9.7 Large caps underperformed midcaps in last few years due to weak NIFTY EPS growth (refer slide 29) 600 500 400 300 NSE Midcap NIFTY 50 With improving prospects of NIFTY EPS growth and correction in Mid Cap stocks, Largecaps and Midcap indices have now converged 200 100 0 05 07 08 09 10 12 13 14 15 17 18 After correction in 2018, midcaps valuations have also converged with largecaps 40 20 0 (20) (40) (60) NSE Midcap premium to Nifty 50 Source: CLSA, Bloomberg, Midcap refers to NIFTY Midcap 100. Largecap refers to NIFTY 50, data updated till Dec 29, 2018 (80) 05 06 07 08 09 10 11 12 13 14 15 16 17 18 30
Worried about elections? Elections and equity returns Spot the pattern*! Represents year of elections *As can be noticed there is no pattern in S&P BSE Sensex returns during the year in which elections were held or in years before or after the elections **The base year of S&P BSE Sensex is 1978-79 and the base value is 100 Source: Sensex : www.bseindia.com, Election Commission of India for election years, Returns computation internal HDFC Mutual Fund / AMC is not guaranteeing or promising or forecasting any returns on investments Year Ending BSE S&P Sensex** 1 year absolute returns Mar-79 100 Mar-80 129 29 Mar-81 173 35 Mar-82 218 26 Mar-83 212-3 Mar-84 245 16 Mar-85 354 44 Mar-86 574 62 Mar-87 510-11 Mar-88 398-22 Mar-89 714 79 Mar-90 781 9 Mar-91 1168 50 Mar-92 4285 267 Mar-93 2281-47 Mar-94 3779 66 Mar-95 3261-14 Mar-96 3367 3 Mar-97 3361 0 Mar-98 3893 16 Mar-99 3740-4 Mar-00 5001 34 Mar-01 3604-28 Mar-02 3469-4 Mar-03 3049-12 Mar-04 5591 83 Mar-05 6493 16 Mar-06 11280 74 Mar-07 13072 16 Mar-08 15644 20 Mar-09 9709-38 Mar-10 17528 81 Mar-11 19445 11 Mar-12 17404-10 Mar-13 18836 8 Mar-14 22386 19 Mar-15 27957 25 Mar-16 25342-9 Mar-17 29621 17 Mar-18 32969 11 Above chart is illustrative and for general information. Historical performance indications and financial market scenarios are not reliable indicators of current or future performance. HDFC Mutual Fund/AMC is not guaranteeing any returns on investments made. In view of the individual circumstances and risk profile, each investor is advised to consult his / her professional advisor before making a decision to invest 31
Equity Markets Summary Strong outlook for economic growth and earnings growth (NIFTY EPS growth estimated at 17% CAGR over FY18-21E (Slide 29) Markets are trading at CY20(E) P/E of ~14x and Marketcap to GDP ratio of 62% CY20E (Slide 28) Strong profit growth outlook, steady local flows and reasonable valuations lead to a positive view of markets Post correction in 2018, midcaps valuations have converged with largecaps Trade wars, rise in oil prices, sharp increase in US rates, sharp deterioration in local / FII flows, setback to NCLT etc. are key risks in near term 32
Fixed Income Markets Itdoesn t matter how slow you go so long as you do not stop 33
2018 Fixed Income markets Flat ending to a volatile year % 10-Year G-Sec Yield and Repo Rate 8.4 India 10 Yr G-Sec Repo Rate,RHS 7.5 7.3 8.2 8.0 7.8 Reduced H1FY19 borrowing program Dovish RBI commentary Oil prices continue to rise FII remains net sellers 7.1 6.9 6.7 6.5 7.6 6.3 7.4 RBI Pause; Muted Inflation Larger OMOs Purchases 7.2 Concern of fiscal slippages Sharp correction in oil prices Rising oil prices and weak INR 7.0 FII turns net sellers Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 6.1 5.9 5.7 5.5 G-Sec yields remained volatile - High sensitivity to INR & Oil, RBI OMO purchases and FII outflows RBI hiked policy rates twice by 25 bps each in 2018 and also changed its stance from neutral to calibrated tightening US yields remained at elevated level for most part of the year Headline CPI remained lower than RBI s forecast led by benign food prices Source: Bloomberg 34
Build-up of risks in NBFC Sector; Increased reliance on MFs for funding 15% CAGR growth in NBFCs/HFCs asset book over past 3 years. NBFCs share in total credit increased to 21% in FY18 from 18% in FY14 HFC & NBFC's ex PFC/REC (Borrowing) Mar-14 Mar-16 Mar-18 Aug-18 Bank Funding (Rs bn) 4,333 5,504 7,197 7,602 MF Funding (Rs bn) 939 1,792 3,938 4,678 Insurance/Pension/Deposit (Rs bn) 2,073 3,243 4,101 4,226 Total 7,345 10,539 15,236 16,506 Banks exposure to NBFCs/HFCs has also increased to 13.8% in FY18 from 11.7% in FY14 MF s exposure to NBFCs has increased to 35% in Aug18 from 21% in Mar14 Bank Funding % 59 52 47 46 MF Funding % 13 17 26 28 Insurance/Pension/Deposit (%) 28 31 27 26 MFs Non Equity AUM 4,542 7,213 11,986 13,443 MF Funding as % of MFs non equity AUM 21 25 33 35 Sharp increase in share of CPs in the borrowing mix of NBFCs and HFCs (ex- PFC and REC) from 5.3% in FY14 to 16.3% in Aug18 leading to Asset Liability mismatch (ALM) concerns HFC & NBFC's ex PFC/REC Mar-14 Mar-16 Mar-18 Aug-18 Commercial Papers (INR bn) 392 830 1,685 2,691 % of total borrowing 5.3 7.9 11.1 16.3 MFs contributed 40% of incremental funding since Mar 14 Source: Nomura, Global Markets Research, Sept 2018, RBI PFC- Power Finance Corporation Limited; REC Rural Electrification corporation Limited Refer disclaimer on slide 41 35
Liquidity concerns for NBFCs addressed, outlook is mixed Liquidity concerns post IL&FS default addressed by Timely actions by RBI and Government Securitisation / asset sale, unutilised bank lines etc. Growth expected to moderate for NBFCs Cost of funds rising with widening of spreads bps 325 275 225 175 NBFC Spread rises post IL&FS default* Average AAA Spread Average AA Spread Risk aversion amongst lenders 125 75 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 bps Corporate bond spreads widens^ 190 Corporate bond spreads have also widened during this period 140 40 Sep/18 Oct/18 Nov/18 Dec/18 * AAA Average spread is average spread of 10 large AAA rated NBFCs 3 Yr. bond yields over 3 Yr benchmark Gsec. AA Average spread is average spread of 5 large AA rated NBFCs 3 Yr. bond yields over 3 Yr benchmark Gsec ^ AAA spread is spread of 3 Year AAA rated corporate bond yields over 3 Yr benchmark Gsec yields. AA spread is spread of 3 Year AA rated corporate bond yields over 3 Yr benchmark Gsec yields 36 Source: Daily valuation provided by ICRA/CRISIL; Bloomberg; Data is updated till 31 st Dec 2018. Refer disclaimer on slide 41 90 3 yr AAA Spread 3 yr AA Spread
Interest Rates Outlook Conflicting Forces at Play Positives Negatives High Real yields in India Healthy real rates differential between India & US Soft oil, commodity and food prices (refer slide 11) Low rural wages growth Expectation of large OMO purchases by RBI Headline CPI outlook remains benign Higher Credit growth vs Deposit growth Capex recovery should boost credit demand Excess SLR securities holding of PSU banks Concerns over fiscal slippages Global liquidity tightening & increase in yields Core inflation sticky at elevated level Yields likely to fall at the short end 37
Interest Rates Outlook - Forces favouring lower Interest rates Real Yields in India at historical high CPI outlook remains benign led by food inflation Healthy Differential with US Real yields % India's Real Rates at near historic high 6.0 1.0-4.0-9.0-14.0 Jan/03 Sep/05 May/08 Jan/11 Sep/13 May/16 % Healthy spread between US and India Real Rates 3.0-12.0 Jan/03 Sep/05 May/08 Jan/11 Sep/13 May/16 Real Yields = Month-end 10Y GSec Yield and CPI; Updated till 30 th Nov 18. CPI-IW is used to calculate real yields for period before 2012-2.0-7.0 Sharp fall in oil prices eases pressure on CAD Fall in oil prices beneficial for CAD and INR outlook Every USD 10 per barrel fall in crude prices results in CAD falling by ~0.4% of GDP FY16 FY17 FY18 H1FY19 Crude prices (USD /bbl) 50.2 48.8 56.7 75.0 CAD as % of GDP -1.1-0.7-1.9-2.7 US Federal Governor s comment that rates are just below neutral rate indicates benign outlook for rise in Fed rates US 10Y yields have come off materially from the high made in Nov 18 % 3.50 US 10 Year Yield 3.00 2.50 2.00 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Source: Bloomberg, RBI, Kotak Institutional research. 38
Interest Rates Outlook - Forces adversely impacting interest rate outlook 16.0% Credit Growth Vs. Deposit Growth Bank credit growth accelerating Outpacing the deposit growth 14.0% 12.0% 10.0% Deposit growth % Credit growth % 15.1% Recovery in capex cycle likely to accelerate credit growth further 8.0% 6.0% 4.0% 8.0% 2.0% Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Excess SLR Investments, especially with PSU banks 33.0% Excess SLR Securities with PSU Banks Regulatory Requirement # Adj SLR* Incremental demand for G-sec could remain muted 28.0% 23.0% 18.0% Jun/15 Dec/15 Jun/16 Dec/16 Jun/17 Dec/17 Jun/18 Debt FII Flows remain volatile on back of rising USD and global liquidity unwinding Net FII Debt Outflows CY18 stood at USD 6.9 bn * Adj SLR = Investments in Statutory Liquidity Ratio (SLR) Securities adjusted for securities under LAF # Regulatory Requirements = SLR + Liquidity coverage requirement requirements (~15-17% of NDTL) carve out allowed from SLR Source: RBI, Kotak Institutional research, NSDL USD bn 3.0 2.0 1.0 - -1.0-2.0-3.0-4.0 1.3 Jan18-0.0 Feb18 Net FII Debt flows 0.5 0.0-1.4-1.5-1.6-2.9 Aug18 Jul18 Jun18 May18 Apr18 Mar18-1.4-1.3 Sep18 39 Oct18 0.8 0.7 Nov18 Dec18
Fixed Income Summary Some factors support lower yields, while others don t (refer slide 37) Yields likely to fall at the short end (upto 3-5 years) Immediate liquidity concerns of NBFCs reduced; ALM mismatch still remains a challenge Asset quality of NBFCs needs to be monitored Cautious approach on credit and duration recommended Key risks to yields Sharp rise in global yields & oil prices FII flows remain uncertain Wish you and your family a very Happy New Year - HDFC Mutual Fund Refer disclaimer on slide 41 40
Disclaimer & Risk Factors This presentation dated 2 nd January 2019 has been prepared by HDFC Asset Management Company Limited (HDFC AMC) based on internal data, publicly available information and other sources believed to be reliable. Any calculations made are approximations, meant as guidelines only, which you must confirm before relying on them. The information contained in this document is for general purposes only. The document is given in summary form and does not purport to be complete. The document does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. The information/ data herein alone are not sufficient and should not be used for the development or implementation of an investment strategy. The statements contained herein are based on our current views and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Past performance may or may not be sustained in future. Stocks/Sectors referred in the presentation are illustrative and should not be construed as an investment advice or a research report or a recommended by HDFC Mutual Fund / AMC. The Fund may or may not have any present or future positions in these sectors. HDFC Mutual Fund/AMC is not guaranteeing any returns on investments made in the Scheme(s). The data/statistics are given to explain general market trends in the securities market, it should not be construed as any research report/research recommendation. Neither HDFC AMC and HDFC Mutual Fund nor any person connected with them, accepts any liability arising from the use of this document. The recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein. Mutual fund investments are subject to market risks, read all scheme related documents carefully. 41
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