Monthly Review July 2018

Monthly Review July 2018

Key Domestic Market Highlights Indian equity markets ended the month on a higher note with benchmark indices touching all-time highs during the month. Optimism over corporate earnings for the quarter ended Jun 2018 coupled with expectation of a favorable monsoon drove the rally. Additionally, the ruling party winning the no-confidence motion and the favorable steps taken by the Goods & Service Tax Council to cut down the rates of several items contributed to the upside. Investors cheered updated Gross Domestic Product (GDP) numbers by the World Bank which brought India ahead of France in terms of GDP in 2017 and made it the world's sixth largest economy. Additionally, the International Monetary Fund s latest World Economic Outlook affirmed that India will be the fastest growing nation among the major economies. Factors that limited market gains included higher inflation numbers in Jun 2018, which led to speculation over an imminent rate hike by the Monetary Policy Committee. Retail inflation increased to a 5-month high for Jun 2018 and index of industrial production fell to a seven-month low in May 2018. Disappointing industrial production numbers for May 2018 also exacerbated the situation. Concerns over U.S. threats of tariffs on an additional $200 billion worth of Chinese goods raised the probability of a full-scale trade war between the two nations. The oil & gas sector rose following various government measures that supported the industry. The government amended the Petroleum and Natural Gas Rules 1959 to include shale in the definition of petroleum. This would allow private companies to explore from fields that are producing conventional oil and gas or coal-bed methane. The banking sector found support from a report by a major global credit rating agency at the end of the month. The report said clean-up of bad loans and expansion of capital base through fund infusion by the government will help strengthen India s banking sector over the next couple of years.

Index values change in YoY % Jun-17 Domestic Economic Indicators % Growth in YoY % change in YoY % Jun-17 May-17 Seasonally adjusted Nikkei India Composite PMI Output Index rose from 53.3 in Jun 2018 to 54.1 in Jul 2018, driven by output growth in both the manufacturing and services sectors IIP plunged to a seven-month low of 3.20% in May 2018 from a revised 4.80% (4.90% originally reported) in the previous month India Composite PMI & GDP Growth Index of Industrial production (IIP) 56 52 48 6.3 7 7.7 54.1 9 7 5 10 8 6 4 2 2.9 1.0 4.8 4.1 1.8 8.5 7.3 7.5 6.9 4.6 4.8 3.2 0 44 3-2 -0.3 India GDP Growth India Composite PMI Index ; PMI >50 denotes expansion and <50 is contraction Consumer inflation grew to a 5-month high and rose to 5.00% in Jun 2018 from 4.87% in May 2018 and 1.46% in the same period of the previous year 7 5 3 Consumer Price Index 5 Wholesale inflation rose to 5.77% in Jun 2018 as prices of vegetables and fuel items increased. WPI was at 4.43% in May 2018 and 0.90% in Jun 2017 6 4 2 Wholesale Price Index 5.77 1 0

% Index values 4QFY16 1QFY17 2QFY17 3QFY17 Domestic Economic Indicators 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 Index values Exports and Imports ($ bn) Jun-17 The Nikkei India Manufacturing PMI fell to 52.3 in Jul 2018 from 53.1 in Jun 2018. The decline can be attributed to moderate rise in output, new orders and employment 58 55 52 49 46 47.9 India Manufacturing PMI 51.2 51.2 50.3 52.6 54.7 52.4 52.1 51 51.6 51.2 53.1 52.3 Seasonally adjusted Nikkei India Services Business Activity Index increased from 52.6 in Jun 2018 to 54.2 in Jul 2018 on the back of improved demand 56 53 50 47 44 45.9 47.5 51.7 50.7 48.5 India Service PMI 50.9 51.7 47.8 52.6 51.4 50.3 49.6 54.2 ; PMI >50 denotes expansion and <50 is contraction Current Account Deficit (CAD) rose to $13.0 billion or 1.9% of GDP in Q4FY18, up from $2.6 billion or 0.4% of GDP in Q4FY17 due to higher trade deficit ; PMI >50 denotes expansion and <50 is contraction India s trade deficit reached its highest level in more than five years in Jun 2018 and stood at $16.60 billion from $14.62 billion in May 2018 3 Current Account Balance as % of GDP 2.4 48 Trade Data -4 2 1 0 0.1 0.1 0.6 1.4 0.6 1.2 2 1.9 41 34 27 20-9 -14-19 -24 Source: Thomson Reuters Rikon Exports Imports Trade Deficit

FII/FPI Movement (INR Cr) Jul-16 Nov-16 Mar-17 Domestic Equity Market S&P BSE Sensex Movement FII/FPI & DII Movement (INR Cr) 2-11- 20-29- S&P BSE Sensex Movement S&P BSE Sensex and Nifty 50 grew 6.16% and 5.99% to close at 37,606.58 and 11,356.50, respectively Both Nifty Midcap 100 and Nifty Smallcap 100 gained 3.83% and 4.01%, respectively 29 Price to Earning Per Share (P/E) (LHS) Nifty 50 (RHS) 11356.5 11,500 64 Price to Earning Per Share (P/E) (LHS) Nifty Midcap 100 (RHS) 61.16 23,200 27 28.22 11,000 52 20,300 10,500 25 10,000 40 18876.9 17,400 23 9,500 28 14,500 Source: NSE Source: NSE Foreign portfolio investors were net buyers of domestic stocks worth Rs. 2,263.92 crore in Jul 2018 unlike net sale of Rs. 4,831.23 crore recorded in the previous month Domestic mutual funds remained net buyers in equity worth of Rs. 3,995.020 crore in Jul 2018 against Rs. 9,231.280 crore a month ago 37000 FII/FPI Investment and S&P BSE Sensex - Last 24 Months 37000 DII, FII/FPI Investment and S&P BSE Sensex - During the 1700 Month 35700 18000 32000 400 35100-1000 27000-900 34500-20000 22000-2200 33900 FII/ FPI Net Investment Source : MFI Explorer S&P BSE Sensex FII/FPI Net investment DII Net investment S&P BSE Sensex Source : MFI Explorer

Yield (%) Yield (%) Domestic Debt Market Change in bps Rates ( %) Spread (in bps) Jul-15 Jan-16 Jul-16 Jan-17 Aug-18 Bond yields witnessed the first monthly fall of the fiscal as global crude oil prices fell sharply in Jul 2018 The MPC, in its third bi-monthly policy review for FY19, increased the key policy repo rate by 25 basis points to 6.50% from 6.25% and retained its neutral stance 8.30 10-Yr Benchmark Bond 7.77 9 Movements of Key Policy Rates in India 7.60 7 6.50 6.90 6.20 5 3 6.25 4.00 Yield on gilt securities fell across 3 to 14-year maturities in the range of 5 bps to 18 bps and increased across the remaining maturities by up to 24 bps 8.30 India Yield Curve Shift (Month-on-Month) 23 26 Source: RBI Yield on corporate bonds fell across maturities in the range of 2 bps to 15 bps. The maximum fall was witnessed on 5-year paper and the minimum on 2-year paper 210 Reverse Repo Repo CRR 10 Year Corporate Bond Spread (for AAA & AA bonds) 7.80 1 2 12 150 90 7.30-5 6.80-13 1 Yr 5 Yr 10 Yr 20 Yr 30 Yr Change in bps -2-16 30 AAA Bond Spread AA Bond Spread

Global Market Highlights U.S. markets traded up on optimism about the Jun 2018 quarter earnings and better than expected U.S. economic data. Gains were extended after the U.S. president and European Commission president reached an agreement to work together in eliminating trade barriers on industrial goods. However, the upside was limited as the U.S. President raised concerns over the rate hike decision of the U.S. Fed and stated that gradual rate hike decision might adversely impact the recent economic progress of the nation. Trade war concerns between U.S. and China kept investors cautious as the U.S. administration proposed new tariffs on additional $200 billion worth of Chinese goods and China threatened to take countermeasures. European markets rose as the market remained optimistic of strong corporate results for the quarter ended Jun 2018 and positive key economic data from Germany, the eurozone and France. Easing trade concerns between U.S. and EU helped sentiment as both the nations agreed to work towards zero tariffs, zero non-tariff barriers and zero subsidies on non-auto goods. Optimism over the post-brexit deal between U.S. and U.K. added to the gains and outweighed initial concerns when two key Brexit proponents resigned from the U.K. government. However, escalating trade tensions between U.S. and China capped the gains. Asian markets largely remained positive after the Chinese Premier said that the government would accelerate plans to reduce taxes by more than 1.1 trillion yuan ($160 billion) and issue 1.35 trillion yuan in local government special bonds for infrastructure. Market sentiments were further boosted after China's central bank lowered its currency to its lowest level in a year in Jul 2018. However, gains were capped due to escalating trade tensions between U.S. and China after the former proposed tariffs on an additional $200 billion worth of Chinese goods and China threatened to take counter measures.

YoY % Index values Jun-17 Global Economic Indicators YoY % YoY % Index values YoY % U.S. GDP increased 4.1% in the Jun 2018 quarter better than 2.2% rise in the previous quarter. The growth reflects increase in consumer spending and exports and federal government spending IHS Markit Eurozone PMI Composite Output Index fell in Jul 2018 as services sector growth eased from four-month high seen in Jun 2018. US Composite PMI & GDP Growth Euro zone Composite PMI & GDP Growth 57 54 51 48 3 2.9 2 4.1 55.7 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 61 59 57 55 53 51 3 2.7 2.5 54.3 3.1 3 2.9 2.8 2.7 2.6 2.5 2.4 2.3 2.2 US GDP US Composite PMI, fxstreet; PMI > 50 denotes expansion and < 50 is contraction Consumer inflation in Jun 2018 touched its highest level in more than six years, contributed by more expensive gas, car insurance, and higher rent Eurozone GDP Eurozone Composite PMI, fxstreet; PMI > 50 denotes expansion and < 50 is contraction Euro zone inflation increased 2.1% YoY in Jul 2018, defying expectations for flat growth, but higher than 2.0% in Jun 2018 due to oil prices 4.00 3.00 2.00 1.00 U.S. Inflation 1.63 1.73 1.94 2.23 2.04 2.20 2.10 2.10 2.20 2.40 2.50 2.80 2.90 2.40 1.90 1.40 0.90 1.30 Eurozone Inflation 1.50 1.50 1.50 1.40 1.40 1.30 1.30 1.20 1.10 1.90 2 2.1 0.00 0.40

YoY % Index values Jun-17 Global Economic Indicators YoY % % Index values YoY % China manufacturing sector improved at the slowest pace in eight months in Jul 2018, with output and new business both expanding at softer rates Japan manufacturing sector witnessed softer growth in Jul 2018 as new orders rose at its slowest pace since Oct 2016 53.00 51.50 50.00 48.50 47.00 China Manufacturing PMI & GDP Growth 50.80 6.80 6.80 6.80 6.70 7.00 6.90 6.80 6.70 6.60 6.50 56.00 55.00 54.00 53.00 52.00 51.00 50.00 Japan Manufacturing PMI & GDP Growth 2.2 1.6 52.30-0.6 2.5 2 1.5 1 0.5 0-0.5-1 China GDP China Composite PMI Source: Reuters, fxstreet; PMI > 50 denotes expansion and < 50 is contraction China s consumer prices grew 1.9% YoY in Jun 2018 higher than 1.8% in May 2018. Also, China s producer prices increased 4.7% in Jun 2018 as against 4.1% rise in May 2018. Japan GDP Japan Manufacturing PMI Source: Reuters, fxstreet; PMI > 50 denotes expansion and < 50 is contraction Interest rates in major developed economies remained unchanged in Jul 2018. Bank of England increased key interest rate by 25 bps to 0.75% on Aug 2, 2018 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 China Inflation 1.50 1.40 1.80 1.60 1.90 1.70 1.80 1.50 2.90 2.10 1.80 1.80 1.90 2.4 1.8 1.2 0.6 0-0.6 Interest Rates in Major Developed Economies 2 0-0.10 Source: Reuters Source: Reuters ECB Refinance rate US Fed rate Japan Interest rate

Index Value Index Value Global Equity Markets P/E P/E Index values Index Values P/E P/E U.S. markets traded up on optimism about the quarter earnings and better than expected U.S. economic data European markets rose as market remained optimistic of strong corporate results for the quarter ended Jun 2018 and key economic data from Germany, the eurozone and France 28000 U.S. Dow Jones Index and PE ratio 29 420 Euro Stoxx Index and PE ratio 19 25415.19 389.82 25000 25 390 17 22000 21 360 15 19.75 14.81 19000 17 330 13 Dow Jones PE ratio Chinese Premier said that the government would accelerate plans to reduce taxes by more than 1.1 trillion yuan ($160 billion) and issue 1.35 trillion yuan in local government special bonds for infrastructure China Shanghai Index and PE Euro Stoxx 50 PE ratio Japanese equity market rose following its other Asian peers and tertiary activity index increased for the second straight month in May, 2018. Japan Nikkei Index and PE ratio 3600 17 26000 20 22544.84 3300 2876.40 15 23000 18 3000 12.55 13 20000 16.40 16 2700 11 17000 14 China Equity Market PE ratio Japan Equity Market PE Ratio

Yield (%) Yield (%) Global Debt Yield (%) Yield (%) 1 Month 3 Months 6 Months 1 Year 2 Years 3 Years 5 Years 7 Years 10 Years 30 Years Change in bps Yield on the 10-year U.S. Treasury bond grew 11 bps during the month to close at 2.96% compared with the previous month s close of 2.85% U.S. Treasury prices fell following strong economic data in Jun 2018 3.20 U.S. 10 Year Treasury Yield 2.96 3.3 U.S. Treasury Yield Curve Shift (Month-on Month) 18 13.9 14.1 14.4 11.7 2.80 2.7 11.3 9.9 9.5 10.8 11.3 9.7 12 2.40 2.1 6 2.00 1.5 0 Gains in global equity market and heavy supply of bonds led to rise in bund yields Change in bps 31-29- Japanese 10-year yield increased from 0.025% in Jun 2018 to 0.035% in Jul 2018 2.10 German & Spanish 10 Yr Treasury Yield 0.12 Japan 10 Yr Benchmark Yield 1.40 1.338 0.07 0.70 0.44 0.02 0.035 0.00-0.03 German 10 Year Yield Spanish 10 Year Yield

$ Ounce $ Ounce Global Commodity Market Index value $ Barrel Gold prices moved down on concerns over rise in interest rates in the U.S. and after the U.S. Fed painted positive outlook for the U.S. economy 1400 Gold Brent crude prices fell as OPEC forecasted that trade tensions might adversely impact the oil market. Libya reopened its crude oil production facility 84.00 Brent Crude 74.8 1320 70.00 1240 56.00 1223.41 1160 42.00 Over the month, silver prices moved down in line with gold prices on concerns over rise in interest rates by the U.S. Fed. Trade tension between U.S. and China further impacted demand The Baltic Dry Index moved up 26.14% MoM in Jul 2018 owing to improved capesize and panamax activities 18.30 Silver 1900 Baltic Dry Index 1747 17.20 1400 16.10 900 15.00 15.514 400

Global Currency Market The Indian rupee weakened against the U.S. dollar and went below the 69 level for the first time but closed above that level Pound fell against the greenback on mounting uncertainty over Brexit negotiations but losses were limited on expectations of a rate hike by Bank of England, which came as expected 70 USD/INR 68.45 1.45 GBP/USD 68 1.40 66 1.35 1.3124 64 1.30 62 1.25 Euro was little changed against the U.S. dollar after moving in a narrow range during the month Yen fell against the U.S. dollar after Bank of Japan said it intends to keep rates low for an "extended period of time 1.28 EUR/USD 118.00 USD/YEN 1.24 114.00 111.86 1.20 1.16 1.1691 110.00 106.00 1.12 102.00

Mutual Fund News According to media reports, senior officials at the Securities and Exchange Board of India (SEBI) met independent trustees of mutual funds. SEBI received suggestions on the commission structure of distributors. The market regulator is expected to consider reforms on issues such as Total Expense Ratio (TER) and the commission structure. According to media reports, the Securities and Exchange Board of India has written to all the asset management companies, cautioning against 25 malpractices the mutual fund industry is engaged in. The letter was addressed to the chief executive officers of the fund houses and the chairman of Association of Mutual Funds in India (AMFI). According to a media report, SEBI would soon finalise the guidelines to allow mutual funds to invest in commodity derivatives segment. This will increase institutional participation in the commodity segment. According to media reports, an analysis showed that the Asset Under Advisory (AUA) of top 10 distributors have grown from Rs. 1.43 lakh crore in FY14 to Rs. 3.72 lakh crore in FY18, recording a robust growth of 161% in five years. Additionally, the gross commission of these distributors rose 244% from Rs. 1,223 crore in FY14 to Rs. 4,237 crore in FY18. These distributors account for 17% of the total industry s Asset Under Management (AUM) as on Mar 2018. The growth in the business volume of the distributors can be attributed to the resurgent interest in mutual funds.

Real Estate and Private Equity News According to real estate advisory firm Knight Frank India Ltd, home sales in India s prime eight cities failed to witness momentum during the first six months of 2018 despite lower prices and a series of new launches. During the period Jan-Jun 2018, total new housing units launched stood at 91,739, marking a jump of 46% from the year-ago period. However, sales grew only 3% to 124,288 units during the period. According to the advisory firm, the report included data from Mumbai, Delhi-NCR, Bengaluru and Pune. The report added that growth in both sales and launches reached their highest levels since demonetization in Nov 2016. According to media reports, real estate developers sought immediate government intervention to tide over the stress in the real estate sector that has resulted in poor demand and high inventory, at a meeting chaired by housing and urban affairs minister. A follow-up meeting will be held shortly with the finance minister. At the meeting, builders demanded GST on construction services to be reduced from 12% and better access to finance. Industry representatives expect the government to offer ways to revive the sector. Canada-based private equity (PE) firm Brookfield Asset Management Inc. has invested $100 million in residential projects of Hyderabad-based real estate company INCOR. The investment was made from Brookfield s $4.5 billion global PE fund. It is a structured investment with an equity upside. According to internal sources, Brookfield has so far been associated with 11 transactions in Indian residential projects, and now plans to expand exposure in the segment by building a portfolio worth $1 billion. Bigtree Entertainment Pvt. Ltd, owner and operator of the online entertainment ticketing platform BookMyShow, raised $100 million in Series D funding from investors led by TPG Growth. TPG Growth is the equity investment platform of U.S.-based PE firm TPG. The latest round of funding will help Bigtree Entertainment to fuel its expansion plans. Source: Livemint

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