Market Outlook Presentation September - 2014 1
KEY HIGHLIGHTS Equity Market Overview Macro indicators, Sentiments and Valuations Debt Market Overview Outlook Recommendations 2
EQUITY MARKET OVERVIEW Sensex scales 27000 level after strong foreign fund flows and better than expected first quarter GDP numbers India s GDP grew at 5.7% in the first quarter fastest in more than two years FIIs have invested over $13Bn in 2014 and $887 million in August 2014 Easing of geo-political concerns and falling crude oil prices provided a much needed support to the markets Fall in Crude Oil Prices augurs well for the twin deficits and eases inflation trajectory 3 Source: SEBI; GDP Gross Domestic Product; FII Foreign Institutional Investor; Twin deficits Fiscal Deficit and Current Account Deficit
EQUITY MARKET OVERVIEW First Quarter CAD remained in the comfort zone at 1.7% of GDP Corporate earnings have increased optimism about the sustainability of earnings growth among market participants Festive season consumption trends in September/October and expected Government announcements post impending state elections, could be key domestic drivers going ahead US Fed further reiterated that U.S. Economy still needs help in the form of ultra-low rates and that U.S Inflation is yet to reach its high 4 Source: SEBI; CAD Current Account Deficit
% MARKET CAP PERFORMANCE 70 Absolute Returns Year To Date Absolute Returns in Aug-14 60 58.71 50 40 40.85 30 28.26 20 10 0 2.75 1.2 2.78 S&P BSE SMALL CAP S&P BSE MID CAP S&P BSE 100 Key domestic indices fared well during the month 5 Source: Bloomberg; Past Performance may or may not be sustained in future
% SECTORAL PERFORMANCE Absolute Returns Year To Date Absolute Returns in Aug-14 70 60 57.71 50 40 41.07 34.02 38.47 45.29 37 30 20 10 11.64 8.23 7.29 26.61 25.83 12.71 10.75 4.05 3.24 2.96 2.87 1.93 1.79 1.05 22.97 20.51 0-10 -6.21-8.75-20 S&P BSE AUTO S&P BSE HC S&P BSE CD S&P BSE Oil & Gas S&P BSE FMCG S&P BSE Bankex S&P BSE Sensex S&P BSE Teck S&P BSE CG S&P BSE PSU S&P BSE METAL S&P BSE Realty Auto was the top gainer while Realty was the top laggard for the second consecutive month 6 Source: Bloomberg, HC Healthcare, CG- Capital Goods, CD Consumer Durables, PSU Public Sector Undertaking; Past Performance may or may not be sustained in future
INDIA ON TOP OF THE EQUITY PACK India Indonesia Brazil Taiwan Hong Kong Singapore China South Korea US France UK Malaysia Germany Japan Russia -15.44-5.1-0.94 6.16 5.14 3.77 3.2 3.03 1.63 0.84 0.47 10.07 17.05 21.3 25.83-20 -15-10 -5 0 5 10 15 20 25 30 India has been an attractive destination for foreign investors. YTD Sensex has delivered the highest returns India Sensex, Indonesia Jakarta Stock Exchange, Brazil Bovespa, Taiwan Taiwan Stock Exchange, Hong Kong Hang Seng, Singapore SGX, China SSE, South Korea Kospi, US S&P 500, France CAC 40, UK FTSE, Malaysia KLSE, Germany DAX, Japan Nikkei, Russia - RTS 7 Source: Bloomberg, YTD Year to date, absolute performance has been computed from 1 st Jan 2014 till 28 th Aug 2014
KEY HIGHLIGHTS Equity Market Overview Macro indicators, Sentiments and Valuations Debt Market Overview Outlook Recommendations 8
MACRO INDICATORS ARE FAVOURABLE Economy Turning Around NEGATIVE POSITIVE 9 IIP Index of Industrial Production, PMI Purchasing Managers Index, CPI Consumer Price Inflation, BOP Balance of Payment, WPI Wholesale Price Inflation
% GROWTH 8 7 7.6 7 6.5 6 5 5.4 4.5 4.6 4.4 4.4 4.7 5.2 4.6 4.6 5.7 4 3 2 1 0 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 India s Q1 GDP for FY15 rose 5.7% y-y from 4.6% in Q4 of FY14 and 4.7% in Q1 of FY14 with pickup in manufacturing and services growth 10 Source: Bloomberg, y-y means year on year
USD Billion Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 CURRENT ACCOUNT DEFICIT 0.0-5.0-10.0-6.2-5.2-4.1-1.2-7.8-15.0-13.4-11.2-20.0-25.0-17.2-17.5-18.9-20.2-21.7-17.1-21.1-18.2-21.8-30.0-35.0-31.8 India s CAD narrowed significantly from 4.8% of GDP (-21.8 USD Bn) in QE Jun-13 to 1.7% (-7.8 USD Bn) of GDP in QE Jun-14 on account of reduced trade balance and high foreign investment 11 Source: Bloomberg
FISCAL DEFICIT Fiscal Deficit for FY15 has already crossed 60% of the full year s target However, following factors can help the Fiscal Deficit to be contained at 4.1% of GDP PSU Disinvestment RBI s Mega Surplus Transfer Pick Up In July Corporate Tax And Excise Duty Collections Lower Crude Oil Prices To Help Cut Petroleum Subsidy 12
MACRO STABILITY CONTINUES TO IMPROVE Domestic Demand Improving External Demand Remains Healthy Core Inflation Remains Steady Trade Deficit in Check Domestic Savings Increases Silent economic transformation continues with major macroeconomic indicators showing a positive outlook We expect macro stability conditions to improve further with the key driver being sustained deceleration in CPI Inflation However, near term risks exist in the form of strength of recovery in exports growth, pace of policy reforms and monsoon impact on agriculture GDP 13 Source: Morgan Stanley Research
POLICY REFORMS TRACKER Improving Governance Measures to Manage Food Prices Fiscal Policy: Measures to improve tax and expenditure management Measures to improve Macro Outlook Banking/Finan cial Sector Reforms Increasing flexibility in the labour market Improving Investment Climate Government policy action to improve productivity dynamics is critical to revive growth and investment in the economy. The new government has already initiated reforms and productivity improvement measures 14 Source: Morgan Stanley Research
US$/bbl DECLINE IN GLOBAL CRUDE PRICES 116 114 112 110 108 106 104 102 102.73 100 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Crude oil prices are down 11.73%* since 19 th June, 2014 when it touched a peak of US$115.06/bbl in YTD14 The correction in crude oil prices have abated worries in areas such as Current Account Deficit, Core Inflation, Oil Subsidies, Fiscal Deficit and Corporate Earnings 15 Source: Bloomberg, *till 27 th Aug, 2014, YTD Year to Date
MONSOON CHEER Region Wise Cumulative Rainfall up to Sep 03, 2014 North West East South All India 2013 10.40% 24.50% -21.00% 17.80% 8% 2014-41.60% -14.40% -10.20% 1.60% -15% India s rainfall deficiency vis-à-vis the long period average has decreased to 15% over 1 June 03 September The IMD s weekly report predicts above-normal rainfall across most of the country in the coming period 16 Source: Batlivala and Karani; IMD Indian Meteorological Department, LPA Long period average
In Cr. In Cr. FII AND MF NET INVESTMENT FII Flows Mutual Fund Flows 25000 22352 8000 6958 20000 15000 10000 7300 16512 11005 11614 6437 6000 4000 2000 0 106 3340 5064 5000 2594-2000 -1345 0-142 -4000-2515 -3890-2698 -5000 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14-6000 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 FII and Mutual Fund investments into Indian equities have been very encouraging off late FIIs have invested close to Rs.77,672 Crores while MFs have invested Rs.5019 Crores till August 2014 17 Source: Bloomberg
27,000 26,000 25,000 24,000 23,000 22,000 21,000 20,000 19,000 18,000 17,000 16,000 15,000 14,000 13,000 12,000 11,000 10,000 9,000 8,000 VALUATIONS STRETCHED 19x plus FAIR VALUE PLUS 16x-18x FAIR 13x-15x ATTRACTIVE 11x-12x CHEAP 8x-10x 27.0 26.0 25.0 24.0 23.0 22.0 21.0 20.0 19.0 18.0 17.0 16.0 15.0 14.0 13.0 12.0 11.0 10.0 9.0 8.0 Sensex (LHS) Valuations (RHS) As valuations move ahead of fair value zone, we maintain our stance on equity as Cautiously Bullish Cautiously Bullish does not in any way means we have turned cautious on equities, but only describes that we want investors to moderate their return expectations 18 Source: Bloomberg, Past Performance may or may not be sustained in future
KEY HIGHLIGHTS Equity Market Overview Macro indicators, Sentiments and Valuations Debt Market Overview Outlook Recommendations 19
CAD CORRELATION WITH INTEREST RATES 3.0 2.0 1.0 0.0 (1.0) (2.0) (3.0) (4.0) (5.0) (6.0) CAD/GDP (%) 10 Year Gsec (RHS) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 10.00 9.00 8.00 7.00 6.00 5.00 4.00 CAD has high correlation with interest rates During 2001-04 period, India witnessed a surplus Current Account balance, this led to strong rally in the Government securities India s CAD has improved over the past few quarters and our view is that CAD can remain moderated at less than 2% of GDP 20 Source: Bloomberg
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 350 300 250 200 150 Foreign Exchange Reserves ($ bn) Increase in forex reserves was followed by drop in interest rates FOREX Large reserves built Between 2001 to 2007, India had built good reserves for foreign currency. This cushioned the economy against the Global Financial crisis witnessed in 2008 100 50 0 Currently, India has built good forex reserves of $319.35 bn, marginally below Sep 2011 high High forex reserves can help to counter external shocks and can also bring stability in the interest rates 21 Source: Bloomberg
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15Q1 SAVINGS IN THE ECONOMY Real interest rates are positive after long time, this can lead to increase in savings rate 5.4 3.7 Real interest rate (term deposits - CPI) 1.8 1.4 1.9 2.1 2.4 1.6 0.3-0.9-1.8-1.6-2.0-0.9-5.6 Increase in Savings can lead to increase in bank deposits 40 Savings rate % of GDP Increase in bank deposits will provide liquidity in the system which can be positive for bond yields 35 30 25 20 22 Source: Motilal Oswal
10 YEAR G-SEC YIELDS FROM HERE 13 12 Yield movement after 18 months 10 Year Gsec Average 11 10 9 8 7 6 5 4 3 2 1 0-1 -2-3 -4 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Whenever 10 Year G-Sec yields were above its long term average, we have seen steep fall in the next 18 months 23 Source: Bloomberg; Past Performance may or may not be sustained in future
PRESENT SCENARIO Parameters 2001-04 2005-07 2010-2012 Last 1 year Current Account Balance of Payment FII flows in Debt Surplus Low Deficit High Deficit Improving Surplus Surplus Deficit Has turned positive Low Robust Low Robust Liquidity Structural Structural Artificial Structural GDP Growth Low High Low Improving Inflation Low Low High Decelerating THE PRESENT SCENARIO SEEMS TO BE SIMILAR TO 2001 PERIOD What happened in 2001-04? Sensex delivered 13.52% CAGR returns 10 Year G-Sec yields fell from 10.56% in Jan-01 to 5.12% in Apr-04 24 Source: Bloomberg, Past Performance may or may not be sustained in future
KEY HIGHLIGHTS Equity Market Overview Macro indicators, Sentiments and Valuations Debt Market Overview Outlook Recommendations 25
26 OUTLOOK ON EQUITY The long term belief is that India is in a long term structural bull market given a growth oriented government at the centre From tax policy, environment approvals, labour laws to land acquisition issues, the new government is slowly putting in place building blocks to ensure India regains the confidence of investors Macro fundamentals have improved considerably and investors have lot of confidence on the new government This may set the stage for markets to scale new highs in the coming months. Investors can look at investing in equities for a long term
OUTLOOK ON DEBT Economy has turned the corner and is possibly out of the low growth-high inflation cycle Real rates have turned positive after a long time and can enhance savings in the economy All these macro developments are positive for fixed income markets and are structurally building-up a case for lower interest rates in the near future We believe, valuations in fixed income are reasonable and sentiments are negative, this makes a good case for investing in fixed income today 27
KEY HIGHLIGHTS Equity Market Overview Macro indicators, Sentiments and Valuations Debt Market Overview Outlook Recommendations 28
EQUITY RECOMMENDATIONS Types of Investor Funds Rationale For long term investors and as a part of core mutual fund portfolio For investors who track their investments frequently For investors who have 3 year investment horizon 1. ICICI Prudential Focused Bluechip Equity Fund 2. ICICI Prudential Value Discovery Fund 1. ICICI Prudential Dynamic Plan 2. ICICI Prudential Balanced Advantage Fund 3. ICICI Prudential Balanced Fund 1. ICICI Prudential Target Returns Fund (There is no guarantee or assurance of returns) 2. ICICI Prudential Infrastructure Fund 3. ICICI Prudential Banking & Financial Services Fund 4. ICICI Prudential Midcap Fund These funds are suitable for investors who are willing to invest for a fairly long term with an aim to benefit from the full investment cycle. These funds have the potential to specifically benefit from volatility in the equity markets and can generate reasonable return per unit of risk. These funds are suitable for investors seeking to participate in equities with relatively lower risk. These funds can benefit from revival in the economy and provides aggressive investment opportunity over next three years. These funds are suitable for investors aiming for absolute returns rather than risk adjusted returns over next three years. 29
DEBT RECOMMENDATIONS Investment Horizon Funds Relevance 15 to 30 days 6 months and above 15 months and above 24 months and above 3 Years and above ICICI Prudential Savings Fund ICICI Prudential Short Term Plan ICICI Prudential Regular Savings Fund ICICI Prudential Income Plan ICICI Prudential Gilt Fund Investment Plan PF Option ICICI Prudential Corporate Bond Fund Investor with surplus cash may consider investing in this fund for short to medium term parking. This may be an appropriate entry point in the fund to lock in at reasonable level of yields as improving liquidity conditions may bring down short term yields. Short term yields at current levels provide potential entry point as the scheme aims to earn from accrual income. Positive view on interest rates in the medium term pronounces possibility of earning potential capital appreciation in the scheme. Yields in 1 to 5 year maturity segment provide opportunity to earn reasonable accrual as well as potential capital appreciation. 30
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PRODUCT LABELING Note - Risk may be represented as: (BLUE) investors understand that their principal will be at low risk (YELLOW) investors understand that their principal will be at medium risk (BROWN) investors understand that their principal will be at high risk 34
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 4 th September 2014 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. The sector(s) mentioned in this presentation do not constitute any recommendation of the same and ICICI Prudential Mutual Fund may or may not have any future position in these sector(s). Past performance may or may not be sustained in the future. 35
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