1 FIXED INCOME UPDATE AUGUST 17
Aug-16 Aug-16 Sep-16 Sep-16 Oct-16 Oct-16 Nov-16 Nov-16 Dec-16 Dec-16 Jan-17 Jan-17 Feb-17 Feb-17 Mar-17 Mar-17 Apr-17 Apr-17 May-17 May-17 Jun-17 Jun-17 Jul-17 Jul-17 Aug-17 10 year yield relatively stable immediately post the policy % 8.00 7.50 Yield August Policy 7.00 6.50 6.00 5.50 10 Year G-sec 3 month T-Bill Source 2 of Data: Bloomberg, Data for the period June 30 th, 2016 to June 30 th, 2017 2
RBI August Policy Update MPC of the RBI cut the benchmark repo rate by 25 basis points to 6% Persistent undershooting of headline and moderation of core to RBI s target of 4% has given central bank room to cut rates Maintained a neutral stance of policy preferring to wait for further data to decide further course of action Way forward From a structural perspective, it appears that we are very close to the end of the rate cycle Market expected to remain range-bound in near term Short- end of the curve is strongly recommended (play on liquidity) MPC: Monetary Policy Committee 3 3
US fed paused in August; prepares market for balance sheet unwind % US 10 Year Yield 3.00 2.50 2.00 1.50 2.22% 1.00 0.50 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Source of data: Bloomberg 4 4
Key market drivers and its impact on FI Markets 1. External & Macro 2. Growth & Consumption 3. Monetary Policy & Fiscal Policy 4. Liquidity & Spreads 5 5
#1. External & Macro 6 6
India s macro conditions vastly improved provide insulation during global EM risk-off phases Post Global recession (2010) Taper crisis (2013) Current (Jul/Aug-17) GDP* 8.5% 5.1% 7.1% CPI Inflation 9.4% 9.5% 2.36% FX Reserves ($bn) 297 276 393 Current Account Deficit -3.3% -4.7% -0.7% Fiscal deficit Target -6.5% -4.8% -3.2% Crude Oil ($per barrel) 94 116 52 Source of data: ACEMF, Bloomberg, RBI, BIS 2010 refers to Dec 31 st 2010, 2013 refers to 31st Aug 2013 and current refers latest data available as on August 13 th, 2017 * 7 GDP New Series. GDP & CAD for full year 2016-17. 7
Controlling twin deficits has paid off % of GDP 0% 2013-14 2014-15 2015-16 2016-2017 -1% -2% -1.70% -1.30% -1.10% -0.70% -3% -4% -5% -4.50% -4.10% -3.90% -3.50% Source: Axis Capital 8 Current Account & Fiscal Account Deficit for full year period 8
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18* Forex reserves at all time high; currency strong USD INR Exchange Rate Rs. 70 68 66 64 62 60 58 56 54 52 50 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 (US$ bn) 500 450 400 350 300 250 200 150 100 50 0 FX Reserves Source: Bloomberg, IIFL, *FY18 data based on reserves as on 4 9 th Aug., 2017 9
Macro-economic stability brings beginning to a virtuous cycle of growth Lower fiscal deficit Lower inflation Lower CAD Higher FX Reserves Domestic stability External Stability Lower policy rates Sustainable growth 10 10
#2. Fiscal & Monetary Policy 11 11
Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17RE Mar-18BE Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17RE Mar-18BE Central government has front loaded spending; hit 80% of its budgeted deficit target in Q1 Several states have announced farm loan waivers which could result in fiscal expansion In Rs. crores Net market borrowings Fiscal Deficit & 10 Year G-sec 500,000 450,000 7 (% of GDP) (%) 13 400,000 350,000 300,000 250,000 5 Target: 3.2% 11 9 200,000 150,000 100,000 3 7 50,000 0 1 5 Net market borrowings Fiscal Deficit 10 Gec (RHS) RE: Revised Estimates; BE: Budget estimates Source: 12 Axis Capital, Budget Documents 12
RBI delivers cut, in wait and watch mode to decide further course of action 12% Monetary policy loses credibility on sustained double digit inflation Inflation roadmap for RBI RBI sets glide path for achieving sustained lower inflation New Monetary Policy Framework 10% 8% 6% Initial Target 8% Intermediate Target 6% Formal Inflation Target of 4% +/- 2% 4% 2% 0% 2012-14 2014-17 March 2017 onwards Source of Data: Bloomberg 13 13
Falling food price inflation has been the story of the year Headline Consumer Price Index inflation dropped to a new low of 1.5% in June Non-food, non-fuel (a measure of core inflation) has also dropped consistently over the past three months to 4% July CPI at 2.36% YoY Consumer price Inflation measures 8 6 4 2 0 (2) Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Headline CPI Food CPI Core CPI 14 Source of Data: Edelweiss 14
#3. Liquidity & Spreads 15 15
(% of NDTL) Abundant system liquidity here to remain 3 Total banking system overnight deficit with RBI as % of NDTL 2 1 0 (1) (2) Jul 12 Jul 13 Jul 14 Jul 15 Jul 16 Jul 17 16 Source of Data: Edelweiss 16
3-5 year corporate bonds continue to look attractive 3 Year AAA spread over operative rate 5 Year AAA spread over operative rate 9.50 10.00 9.00 9.50 8.50 9.00 8.00 7.50 7.00 6.50 6.00 5.50 5.00 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 8.50 8.00 7.50 7.00 6.50 6.00 5.50 5.00 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 BCOPAAA3 Index INRPYLD Index BCOPAAA5 Index INRPYLD Index Past performance may or may not be sustained in future. 17 Source: Bloomberg 17
Expanding spreads in lower rated corporate bonds Spread Spread 300 100 90 250 80 70 200 60 50 150 40 100 Spread between 1 yr A and 1 yr AAA PSU yields 30 20 Spread between 1 yr AA yields and 1 yr AAA PSU yields 10 50 Jun-14 Jun-15 Jun-16 Jun-17 0 Jun-14 Jun-15 Jun-16 Jun-17 18 Source: Bloomberg. 18
#4. Consumption & Growth 19 19
June-July industry indicators see positive surprise due to prepurchases ahead of GST led discounts YoY % 25 PV and two-wheeler Sales YoY 20% Petrol Diesel Consumption 20 15% 15 10% 10 5% 5 0-5 -10-15 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Passenger car sales Two wheelers sales 0% -5% -10% -15% Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 India petroleum products consumption India High Speed Diesel Consumption 20 Source: Edelweiss, Bloomberg 20
(3MMA, % YoY) Services Indicators show uptick 35 Service tax YoY % 50 Air passenger traffic growth 40 28 21 30 20 10 14 7 0 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 0 (10) (20) (30) Jul-07 Jul-09 Jul-11 Jul-13 Jul-15 Jul-17 Service tax (3MMA, % YoY) YoY% 3mma YoY% 21 Source: IIFL, Edelweiss 21
Manufacturing PMI hit by de-stocking; Services PMI collapses 54 India Manufacturing PMI 56 India Services PMI 53 54 52 52 51 50 50 48 49 Neutral :50 46 Neutral :50 48 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 44 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 India Manufacturing PMI (3 month average) India Services PMI (3 month average) Source 22 of data: Bloomberg 22
Pulses Cotton Coarse cereals Total Sugarcane Oilseeds Rice Aggregate rains are normal IMD classifies rainfall in the 96-104% of long period average as normal So far, rainfall is 3 percent deficient, though still within normal range % as of 28 th July Sowing progresses well Water storage (end march) in major reservoirs 40 30 20 10 70 60 50 0 (10) (20) 40 30 20 10 0 2009 2010 2011 2012 2013 2014 2015 2016 % of Normal % YoY Resovoir levels (bn CM) Source 23 of data: CLSA 23
Our Recommendations Tactical opportunities in long duration bonds may come from time to time Short-term corporate bond funds, which are relatively insulated from duration risks but take advantage of the steep short term yield curve Investor should look to invest in short to medium term funds as a core portfolio allocation Investors looking to take duration exposure can look to do it through funds having dynamic duration management Incremental focus will remain on moving from duration to higher yielding short term corporate bonds over the next few months - To be incrementally added across portfolios wherever mandate permits 24 24
Sharply lower deposit rates (YoY%) 20 Credit Deposit Growth (%) % 9.0 Deposit Rates 8.5 15 8.0 10 5 0 7.5 7.0 6.5 6.0 5.5 6.5% (5) Jul-14 Jul-15 Jul-16 Jul-17 5.0 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Credit Growth Deposit Growth 25 Source of data: IIFL, Bloomberg 25
Short Term Funds well positioned to benefit from liquidity & spreads Category & Risk Return Tradeoff CAGR Returns (3 yr) Standard Deviation (3 yr) Expectation Outlook Liquid Low Risk; Low Return 7.8% 0.1% Ample liquidity to aid CD rates Positive but limited due to maturity cap of 91 days Short Term Medium Risk; Medium Return 9.2% 0.7% Ample liquidity to aid short term rates Positive Long Duration High Risk; High Return 11.0% 2.0% Limited room for rate cuts Positive but limited Source of data: ACEMF. Liquid Category : CRISIL Liquid Fund Index, Short Term Category : CRISIL Short Term Bond Fund Index, Long Term Category: CRISIL Composite 26 Bond Fund Index 26
Statutory Details and Risk Factors Disclaimer: Past performance may or may not be sustained in the future. Sector(s) / Stock(s) / Issuer(s) mentioned above are for the purpose of disclosure of the portfolio of the Scheme(s) and should not be construed as recommendation. The fund manager(s) may or may not choose to hold the stock mentioned, from time to time. Investors are requested to consult their financial, tax and other advisors before taking any investment decision(s). Statutory Details: Axis Mutual Fund has been established as a Trust under the Indian Trusts Act, 1882, sponsored by Axis Bank Ltd. (liability restricted to Rs. 1 Lakh). Trustee: Axis Mutual Fund Trustee Ltd. Investment Manager: Axis Asset Management Co. Ltd. (the AMC) Risk Factors: Axis Bank Limited is not liable or responsible for any loss or shortfall resulting from the operation of the scheme. This document represents the views of Axis Asset Management Co. Ltd. and must not be taken as the basis for an investment decision. Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors or associates shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information contained herein. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Source of Data: Bloomberg, RBI, ACEMF Data as on July 31 st, 2017 unless specified differently 27