Budget & Outlook March 2013 Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
ECONOMIC BACKDROP High Fiscal Deficit High Current Account Deficit Moderating Inflation Low Growth
OTHER CONSIDERATIONS Rating downgrade threat Populist Budget Apprehension Incentivising financial savings
CURRENT ACCOUNT DEFICIT (CAD) CONTINUES TO SOAR Source: Bloomberg, Sharekhan Research, RHS Right Hand Side, GDP Gross Domestic Product 4
FISCAL, REVENUE AND PRIMARY DEFICIT Source: Bloomberg, Sharekhan Research TREND (RS IN 00 CRORE) - FD -PD - RD 5
GROWTH HAS REMAINED SLUGGISH Source: CEIC, Macquarie Research, March 2013 6
INFLATION ON A DECELERATING TREND Inflation rate (yoy change in WPI) for major commodity groups (%) 7 Source: Office of the Economic Advisor, Ministry of Commerce & Industry, yoy Year on Year, WPI Wholesale Price Inflation
Union Budget FY 2013-14
POSITIVE SIGNALS BY GOVERNMENT To control Current Account Deficit Household sector attempted to be weaned away from gold through three measures Rajiv Gandhi Equity Savings Scheme (RGESS) Increase in applicability to individuals id -Rs12 Lacs income limit from Rs10 lacs First home loan upto Rs. 25 lacs in FY14 will have additional deduction of interest upto Rs 1 lac (in addition of existing deduction up to Rs 1Lac under section 80C of Income Tax Act 1961) In consultation with RBI, government to launch inflation indexed national savings certificate and bonds Source: India Union Budget FY 2013-14
POSITIVE SIGNALS BY GOVERNMENT To Boost Exports, Ministry of Commerce To announce foreign trade policy changes next month for boosting exports of goods and sector To incentivize investments Investment allowance 15% of investment for minimum capex of Rs 1bn in FY14 and FY15 Micro, Small and Medium enterprises to continue enjoying benefit of preferences for up to 3 years even after they move out of the category Source: India Union Budget FY 2013-14
GOVERNMENT RESISTS POPULISM Compared 2009, Central government s focus on social and rural spend is substantially lower Source: India Budget Estimates, CLSA Asia-Pacific Markets
INCREASED TAXATION TDS of 1% on the value of immovable properties where transfer consideration exceeds INR5mn; agricultural land to be exempted Surcharge for corporate increased from 5% to 10% (companies above Rs100mn revenue) Additional 10% surcharge on individuals with above Rs10mn income Dividend distribution tax surcharge increased from 5% to 10% Customs duty on set-top boxes increased from 5% to 10% Specific excise duty on cigarettes increased by about 18% Excise duty on SUVs increased from 27% to 30% Source: India Union Budget FY 2013-14, TDS Tax deducted at Source, MN - Million
OTHER POSITIVE STEPS INTRODUCED RECENTLY To contain gold imports, import duty on gold from 4% to 6% Fuel Hikes Diesel prices increased by Rs0.5/litre per month (excluding VAT, other charges, diesel prices hiked by Rs0.45/litre effective from January 18) Bulk users of diesel (~18% of consumption) to be charged the market rate for diesel FDI in Retail, Aviation & Broadcasting. Further liberalization in Insurance & Pension Divestment approvals Source: The RBI, Press Information Bureau of India, FDI Foreign Direct Investment.
Equity Market Outlook
KEY FACETS OF EQUITY INVESTMENTS Economics Significantly better, government has taken steps to increase taxation Sentiments Remains unchanged, positive for equities Valuations Post correction, valuations have moved to fair value zone Triggers Crude < US$95/ barrel, Lower CAD, FII selling (Global Risk Off) CAD Current Account Deficit
VALUATIONS Valuations levels of the Sensex based on earnings estimate of Rs.1370 (4 Quarter Forward)
SOME PARTS OF THE MARKET ARE EXPENSIVE, REST ATTRACTIVE Index PE PB CNX FMCG Index 32.51 11.4 CNX Pharma Index 31.45 502 5.02 CNX Bank Index 13.72 2.35 CNX Infra Index 15.74 183 1.83 CNX Nifty 17.66 3.03 Source: www.nseindia.com, Data as on 28 February 2013, PE Price to Earnings, PB Price to Book
RETAIL INVESTORS UNDER-INVESTED IN EQUITIES Source: IIFL
MAINTAINING EQUITY ALLOCATION IS THE KEY Fear has proved to be a chronic liability for both the economy and the stock market since 2008 Contrary to investor fear, Indian equities have paid off in 2012 Significant resurrection of investor confidence is required
MAINTAINING EQUITY ALLOCATION IS THE KEY Retail investors have been majorly under-weight equities during past few years Need for a significant acceleration in flows to equity MFs to maintain proper asset allocation Investing only in Safety in fixed income assets and Real Estate could become the new tail risk ik
Increased Taxation Lower Fiscal Deficit Lower Consumption Lower Inflation Reduction in Interest Rates Investment Cycle Pick up
EQUITY MARKET OUTLOOK Markets will likely remain volatile on account of political (pre-electionelection period) and economic reasons Budget announcements of increased taxation may act as catalysts for reasonable returns from equities in 2013
PRODUCT RECOMMENDATIONS Volatility Lump sum investments in ICICI Prudential Dynamic Plan ICICI Prudential Equity Volatility Advantage Fund Investment in ICICI Prudential Discovery Fund Investments through STP / SIP over next 12-18 months in our equity products. Invest in US Bluechip Equity Fund for diversificationifi None of the aforesaid recommendations are based on any assumptions. These are purely for Reference and the Investors are requested to consult their financial advisors before investing.
KEY RISKS TO OUTLOOK Crude rising high Bad Monsoon Year Populist measures before Elections e.g Loan Waivers Large Subsidy Programmes
Fixed Income Outlook
% RBI REDUCES RATES IN LINE WITH OUR VIEW Source: RBI, CRR - Cash Reserve Ratio
INTEREST RATES OUTLOOK Key Rates Current View Bank Rate 8.75% Repo Rate 7.75% Reverse Repo 6.75% MSF 8.75% CRR 4.00% = SLR 23.00% = SLR Statutory Liquidity Ratio, MSF Marginal Standing Facility; View is short term and medium term.
FIXED INCOME REVIEW Fixed Income markets were initially disappointed by the Budget primarily on account of: Higher than expected gross borrowing number (Around 6,29,008.84 Crs. than Rs. 5,90,000 Crs.)*. Reasonable scope for government borrowing to come down but expect it to happen over a period of time The market was also hopeful that withholding tax for foreign institutional investors will be waived; did not materialize May impact markets in short run Indicated tax revenue numbers in the finance bill look realistic and achievable. The expenditure side also is realistic Source: India Union Budget FY 2013-14. * Rs. 50,000 Crs. is for buyback/switch for better debt management.
FIXED INCOME OUTLOOK Factors that will aid in market remaining supported: No auction supply in March Liquidity remains above RBI s comfort zone Likelihood of the RBI buying bonds via OMOs is high in the coming weeks Expect Rs. 30,000 Crs. of OMO (Open Market Operations) purchase The government has to buyback debt (Rs. 50000 Crs. indicated in Budget) and likely to carry over reasonable amount of cash balances for the next year Government may try to execute the buyback program in the first quarter itself Not enough maturities Doesn t make sense for the government to carry that cash surplus for longer period without earning on it
10 YEAR BENCHMARK YIELD & INFLATION Highly unlikely that the 10 year will sustain at 7.85% - 7.90% Within the next two to three months expect it to drop by 30-3535 bps Expect a 75 bps rate cut over next 6 months 30 Source: Bloomberg
PRODUCT RECOMMENDATIONS We believe that current market scenario is likely to benefit investments t in duration funds / Income Fund with 12-18 months horizon Investors can also seek to benefit from reasonable risk adjusted returns from investments in ICICI Prudential Regular Savings Fund ICICI Prudential Corporate Bond Fund ICICI Prudential Short Term Plan ICICI Prudential Fixed Maturity / Interval Plans None of the aforesaid recommendations are based on any assumptions. These are purely for Reference and the Investors are requested to consult their financial advisors before investing.
CALL FOR ACTION 1. NEED TO INVEST IN EQUITY 2. INVEST IN DURATION
QUOTE OF FM ON BUDGET DAY No reason for gloom or pessimism. Of the large countries of the world only China and Indonesia growing faster than India in 2012-13. In 2013-14, only China projected to grow faster than India. Source: India Union Budget Speech FY 2013-14
DISCLAIMER Mutual Fund investments are subject to market risks, read all scheme related documents carefully. All figures and other data given in this document is as on 28 Feb 2013 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 a abe to the AMC and/or to its affiliates. ates Information ato gathered ed and material a used in this document is believed e ed to be from reliable eabe 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, i i unanticipated i turbulence in interest rates, foreign exchange rates, equityprices i 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 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.
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