Equity Market Outlook May, 2016
Global Economy Update
Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 Global Central Bank Monetary Policies are not in sync ECB Overnight Rates 0.15 BOJ Interest Rate 0.1-0.15-0.2-0.25-0.3-0.35-0.4-0.45-0.4 0.05 0-0.05-0.1-0.15-0.1 Source: Bloomberg, 31 st March,2016 ECB kept its rate on bank overnight deposits at -0.40%. The central bank of Japan also maintained its - 0.1% deposit rate and its 80 trillion yen base money target. 2 Equity Market Outlook 2016
Global Central Bank Monetary Policies are not in sync 0.6 FED Rate Targets 0.5 0.4 0.3 0.2 0.1 0 Source: Bloomberg, 31 st March,2016 Fedreal Funds Target Rate - Upper Bound Fedreal Funds Target Rate - Lower Bound Fed was expected to hike rates 4 times during this calendar year, but market consensus has fallen to 1 or 2 more rate hike, due to divergence in monetary policies across other economies and global growth slowdown. 3 Equity Market Outlook 2016
IMF Outlook - Global Growth expected to be sluggish Latest growth projections Key takeaways: Geographic Area 2016 estimate 2017 estimate World Output 3.2% 3.5% U.S. 2.4% 2.5% Euro area 1.5% 1.6% Japan 0.5% -0.1% United Kingdom 1.9% 2.2% Russia -1.8% 0.8% China 6.5% 6.2% India 7.5% 7.5% Brazil -3.8% 0.0% Sources: IMF, World Economic Outlook, April 2016 Moderate recovery in advanced economies Growth in advanced economies is projected to remain modest at about 2% Emerging and developing economies slowing further Growth rate to increase only modestly 4.1 percent this year and 4.6 percent next year On the positive side, India remains a bright spot, with strong growth and rising real incomes. 4 Equity Market Outlook 2016
Why Indian Economy looks Attractive
% YoY Growth India GDP : An Oasis of Growth 8% 7% 7.3% 7.5% 7.5% 6.9% 6.5% World Growth Projections 6.2% 6% 5% 4% 3% 2.4% 2.4% 2.5% 3.1% 3.2% 3.5% 2% 1.6% 1.5% 1.6% 1% 0% India China US EU World 2015 2016E 2017E Source : IMF, World Economic Outlook, April 2016 India is one of the fastest growing economies in the world. 6 Equity Market Outlook 2016
Core Sector Growth on the rise 7 6 5 (%) Core Sector Trend 5.8 6.4 Some Examples of Growth Improvement Diesel consumption in India, in volume terms, has risen to a five month high of 15.4% YoY in Mar 16. 4 3 2 1 2.3 2.3 4.4 3.1 1.1 3.2 2.6 3.2 0.9 2.9 Cement off-take has surged to a 17-month high of 8.6% YoY in Feb 16, led by higher demand in public infra. Steel consumption has increased to 9.2MT per month in Jan 16 from a low of 7.5MT per month in Jun 15. 0-1 -2-0.7-0.4 Source: Bloomberg, 31 st March,2016-1.3 Electricity production growth has picked up to 6% in Feb 16 after falling to low single digit in mid-2015. LCV growth: While domestic CV sales have been growing in double digits since Sep 15, it was driven by high double digit growth in MHCV sales. However, a surge in LCV sales in the last 2-3 months confirms that the economic recovery is more entrenched (LCVs are used in the final leg of transportation and is no substitute for rail). Core sector expanded to 6.4% in March, a 16-month high Cargo traffic at the domestic & international airports has risen to a 10-month high of 11.3% in Mar 16. 7 Equity Market Outlook 2016
Current-account balance as % of GDP India well positioned - CAD Source: CLSA, IMF Source: CLSA, RBI, CMIE India has seen significant improvement in CAD compared to last year and other emerging markets Import cover has improved by four months since FY13 as forex reserves build up again 8 Equity Market Outlook 2016
Forex Reserve on the Rise 350 340 Forex Reserve Trend (in USD Billion) 341 346 330 320 310 305 304 300 294 293 290 280 279 270 260 250 252 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Source : Motilal Oswal Securities, Government data Even during the period of global volatility India has managed to grow its forex reserve 9 Equity Market Outlook 2016
Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 RBI Monetary Policy 8.5 8 RBI Interest Rates 7.5 7 6.5 6 5.5 5 4.5 Repo Ratio Reverse Repo Ratio Cash Reserve ratio 4 3.5 Source: Bloomberg, 30 th April,2016 RBI has cut the rates by 25 bps on the 5 th of April 2016. RBI lowered the Repo to Reverse Repo and MSF corridor from 100bps to 50bps. RBI has changed its policy on liquidity from keeping the system in deficit to keeping the system in neutral. As result operating rate will move towards the Reverse Repo Rate of 6% rather than the Repo Rate of 6.5%. RBI has maintained its accommodative policy stance forecasting economic growth at 7.6% and CPI inflation at around 5% for this year. 10 Equity Market Outlook 2016
Monsoon and Impact on Inflation 110 105 100 95 Monsoon Prediction: Forecast vs Reality 106 102 101 99 99 98 98 96 96 95 92 93 106 10 8 6 4 2 Inflation Trend 4.83 90 85 80 75 88 86 77 First forecast 2008 2009 2010 2011 2012 2013 2014 2015 2016 0-2 -4-6 WPI CPI -0.85 Source : IMD, April 2016 Source: Bloomberg, 31 st March,2016 Monsoon is expected to above normal in the year of 2016 Inflation has been contained and is in RBI s comfort zone. Good monsoon will surely help in economic revival and help temper Inflation numbers 11 Equity Market Outlook 2016
Market Update 2016
Global Equities Tides are turning! 40% 34.5% 34.1% 30% 20% 1st Jan - 15th Feb 2016 15th Feb - 30th Apr 2016 10% 11.3% 8.7% 7.1% 7.0% 0% -10% -7.5% -7.1% -8.3% -10.0% -5.1% -20% -22.4% -30% Brazil Russia US India Korea China Source: Bloomberg, 30 th April, 2016. Past performance may or may not be sustained in future and is no guarantee of future results. Smart bounce for global equity markets 13 Equity Market Outlook 2016
Sectoral Performance 30% 25% 23% 20% 15% 10% 16% 16% 12% 11% 10% 8% 8% 7% 5% 0% -5% -10% -15% -20% -25% -20% -16% -7% -12% -16% Source: Bloomberg, 30 th April, 2016. Past performance may or may not be sustained in future and is no guarantee of future results. -11% -5% -16% 1st Jan - 15th Feb 2016 15th Feb - 30th Apr 2016 BSE Realty BANKEX BSE Metal BSE Auto BSE Power BSE Oil & Gas -9% -10% 2% BSE IT BSE PSU BSE FMCG BSE Health Care -1% -1% BSE Consumer Durebles Metals, Banks and Real Estate sectors have rallied the most 14 Equity Market Outlook 2016
Recovery in progress NPA will improve 15 14 13 12 Irone Ore Futures Brent Crude Oil 11 10 9 Feb-16 Feb-16 Feb-16 Mar-16 Mar-16 Mar-16 Mar-16 Apr-16 Apr-16 Apr-16 Apr-16 May-16 Bloomberg, 30 th April, 2016 Past Performance may or may not be sustained in future. The index values have been rebased to Rs. 10/- Commodity prices have rebounded which may help in improving the Banking NPA situation 15 Equity Market Outlook 2016
MARKET OUTLOOK
Drivers of Equity Markets Earnings Growth Valuations Reform Process Fund Flows Economic Conditions 17 Equity Market Outlook 2016
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1. Earnings Growth: Key for Equity market 2,000 1,800 S&P BSE-30 Index EPS (Rs) 1,805 1,600 1,501 1,400 1,331 1,318 1,317 1,200 1,000 800 718 833 820 834 1,024 1,125 1,180 600 400 200 236 272 348 450 523 - Source: Kotak Institutional Equities estimates, 30 th April, 2016 We expect revival in earnings growth over FY16-17, which is expected to drive P/E ratings and markets. Economic recovery is well underway and 4QFY16 results quite encouraging so far. 18 Equity Market Outlook 2016
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 2. Valuations are Reasonable 24 Forward Sensex PE FY 16 (x) 4.0 3.5 Forward Sensex PB FY 16 (x) 20 3.0 16 2.5 12 8 P/E (X) Avg P/E (X) 2.0 1.5 1.0 P/B (X) Avg P/B (X) 22 21 ROE (%) 20 19 18 17 16 15 14 RoE (%) Avg RoE (%) Market Valuations are close to LTA (Long Term Averages) and seem reasonable. 13 12 Source: Kotak Institutional Equities estimates, 31 st March, 2016 19 Equity Market Outlook 2016
3. Fund Flows are quite strong 4,000 3,000 Fund Flows (USD Million) 2,000 1,000 - (1,000) FII DII (2,000) (3,000) (4,000) Source: Moneycontrol, 30 th April, 2016 Domestic Flows have helped negate FII Outflows. 20 Equity Market Outlook 2016
4. Progress on Reforms Source: CLSA, December 2015. Blue in circles shows progress. 21 Equity Market Outlook 2016
5. Stalled projects on the rise again The stalled Projects which had started declining since fiscal 2014 have shown an increase since second quarter of fiscal 2016 owing to unfavorable market conditions, increased funding constraints, and inadequate raw-material linkages, according to ICRA Raw Material Issues, 9% Key Reasons Behind Stalled Projects Clearances, 12% Others, 19% Rs. 11.4 Lakh Crore Projects stalled as of March 2016. Rs. 11.7 Lakh Crore Projects were resolved by Project Monitoring Group. Projects worth 8% of GDP stalled as of December 2015 up from 7% in June - 2015 Market Conditions, 16% Promoter Intrest, 11% Land Acquisition, 33% Majority of stalled projects are from the private sector Source : ICRA. As on 31st March 2016 Why the Rise? Unfavorable market conditions, weak commodity prices, funding constrains, raw materials linkages key reasons for stalled projects 22 Equity Market Outlook 2016
Indian Equity outlook is promising Earnings Growth Improving Valuations Positive Economic Conditions Positive Reforms Improving Fund Flows Improving Indian Economy is well placed amongst major developed and emerging markets 23 Equity Market Outlook 2016
Investment Strategy
Investment Strategy Favorable macros driven by stable government, low commodity prices and lower interest rate scenario makes India a multi-year theme. Investors with a long term view should continue investing in equities. We base our positive market view on (1) earning recovery (2) improving macros (in form of lower interest rates, easing inflation, stable currency etc.). After two years of earning disappointment, we expect end of downgrade cycle. Valuations of S&P Sensex are quite reasonable at ~16x FY17 forward PE. We expect Earnings to pick up during the course of current year (FY17) Domestic flows in equities will help support the markets Demand outlook has improved given the expectation of good monsoon & higher real disposable income Equity long term investors can increase their allocation with a 3 year+ perspective. We feel Investing systematically (or stagger in tranches) is the best approach (subject to asset allocation) 25 Equity Market Outlook 2016
Investment Strategy We are positive on both domestic sectors particularly those related to consumption. We like businesses which may benefit from the reduction in interest rates, margin expansion owing to fall in commodity prices, and reforms Significant wage hikes for the Government employees (Central, Defence & State) will help Consumer oriented sectors Among the key overweight position in our portfolios are Consumer discretionary (like Autos, Auto ancillaries, Building materials, Private sector banks etc.,). In addition we are selectively positive on IT and Pharma Fairly balanced portfolio skewed towards growth oriented quality companies 26 Equity Market Outlook 2016
Disclaimers Certain information contained in this document is compiled from third party sources. Whilst Mirae Asset Global Investments (India) Private Limited has to the best of its endeavor ensured that such information is accurate, complete and up-to-date, and has taken care in accurately reproducing the information, it shall have no responsibility or liability whatsoever for the accuracy of such information or any use or reliance thereof. This document shall not be deemed to constitute any offer to sell the schemes of Mirae Asset Mutual Fund. Mirae Asset Global Investments (India) Pvt. Ltd/ Mirae Asset Trustee Co. Pvt. Ltd./ Mirae Asset Mutual Fund/ its Directors or employees accepts no liability for any loss or damage of any kind resulting out of the unauthorized use of this document. References to particular sectors, securities or companies are for general information only and are not recommendations to buy or sell a security, or an indication of the author s holdings/ portfolios of the schemes of Mirae Asset Mutual Fund at any one time. The data mentioned are as on 30 th April, 2016. MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY 27 Equity Market Outlook 2016
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