India Insights Monthly update on Indian markets January 2018 Summary The Modi government will present the last budget of its current five year tenure on February 1 December CPI inflation rose to 5.2% in December, a 17-month high, driven by unfavorable base effects and a rise in core inflation Manufacturing PMI in December 2017 was its highest level since June 2012 as output and new orders rose strongly Indian equity indices scaled new highs in January helped by sustained inflows from domestic and foreign investors amidst strong earnings growth reported by a few key bluechip companies in the December quarter However, shares in public sector banks, which are one of the biggest investors in government securities, fell as the sharp increase in bond yields weighed on their books Budget 2018: What to expect when you re expecting (an election)? The budget announcement will be scrutinised as it is being viewed as the last year for the BJP-led government to sell the people of India on its reform agenda before the 2019 general elections The Modi government will present the last budget of its current five year tenure on February 1. The budget announcement will be scrutinised as it is being viewed as the last year for the BJP-led government to sell the people of India on its reform agenda before the 2019 general elections and a slew of state elections preceding that While in most parts of the world a budget is just a statement of accounts of the government, in India, over decades, it has become an opportunity for government to embark on new polices and reforms, and tinker with direct and indirect tax rates This budget announcement is expected to be an especially tricky one as the government seeks to control a widening fiscal deficit amid falling tax revenues, while still looking to increase spending in key areas such as the rural sector in a bid to revive economic growth momentum In recent media interviews Prime Minister Narendra Modi has indicated that his government will refrain from resorting to populism in their final budget announcement in the current tenure His comments come amidst expectations that the budget will contain policies and measures aimed at appeasing voters, particularly in rural areas who have been reeling under agrarian distress for several quarters now This commentary provides a high level overview of the recent economic environment, and is for information purposes only. It is a marketing communication and does not constitute investment advice or a recommendation to any reader of this content to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. The performance figures displayed in the document relate to the past and past performance should not be seen as an indication of future returns. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target.
Budget 2018: What to expect when you re expecting (an election)? contd Predicting election outcomes and making portfolio decisions on back of that is not an ideal strategy as proven by the results of the Gujarat election Budget announcement usually creates some amount of noise in short term and provides good medium term policy direction for the economy In the current financial year ended March 2018, the Indian economy is expected to grow at its slowest pace since the Modi government came to power in 2014. According to the Statistics Ministry, gross domestic product will grow 6.5% in FY18, weighed down by a number of factors including the rollout of a nation wide tax regime in mid-2017 Gross value added, a key input of GDP, is forecast to grow 6.1%, slower than the central bank s 6.7% projection and 6.6% in 2016-17. The deceleration is led by manufacturing and agriculture At the same time with inflation shooting past the central bank s target in recent months, there seems to be little room to cut interest rates. This potentially means higher government spending to boost economic growth, which in turn could cast a shadow over the Modi government s well-publicised path to fiscal consolidation Fiscal deficit will be in focus during the budget announcement as a deviation from the consolidation path would dent the credibility of the government s commitment to fiscal prudence and discipline The previous union budget as well as the Fiscal Responsibility and Budget Management (FRBM) review committee report had indicated a fiscal deficit target of 3 % of GDP for FY19. However, ratings agency ICRA has forecast fiscal deficit in FY19 will likely range between 3.2-3.5% of GDP, similar to the revised estimates for FY18 which is led by higher-than-budgeted expansion in expenditure, amid a contraction in non-tax revenues. The rise in international oil prices will be another key factor impacting the management of trade and fiscal deficits In addition to farm/rural relief policies, there are expectations for some supportive measures around the make in India initiative to boost domestic manufacturing, increased investment in infrastructure projects and social spending on education and healthcare, reduction in corporate and income tax and change in the tenure of short term capital gains on securities by over 2 years from 1 year currently On the indirect taxes front, the government has already made several changes to the goods and service tax (GST) launched in July 2017, amidst disruptions to businesses and supply chains, complaints about steep increases in some prices and reported difficulties in the electronic filing of returns. Most recently, in January, the government slashed tax rates on 29 goods and 53 services in an attempt to rationalise the GST regime and ease the pain for businesses hit by its roll-out six months ago. Separately, GST revenue projections in the budget will also be closely watched The Indian union budget announcement usually creates some amount of noise in short term and provides good medium term policy direction for the economy. Occasionally the budget can serve up a few bumps and jolts, but over the medium term, across different governments, there is a thread of continuity connecting many key economic policies in the budget In our investment process, we prefer to take comfort in these threads of continuity and treat the stumbles as short term noise, seldom reacting to them Source: HSBC Global Asset Management as of January 2018 Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only and does not constitute any investment recommendation in the above mentioned asset classes, indices or currencies.
Equity market Indian equity indices scaled new highs in January helped by sustained inflows from domestic and foreign investors amidst strong earnings growth reported by a few key bluechip companies in the December quarter We expect earnings growth to remain strong through the second half of FY18 and well into the next financial year 2017 was a year of significant flows from both domestic mutual funds and FIIs (foreign institutional investors). DIIs (domestic institutional investors) driven by mutual funds saw the highest ever calendar year net inflows at $14 billion. The FIIs contributed $7.7 billion in net inflows into Indian equities, which compares favourably with $2.9 billion and $3.3 billion in net inflows in the preceding two years. If we reflect on the market performance in 2017, strong institutional flows was one of the key factors that helped indices to close at record high levels While earnings growth has lagged in the last few years, we are now seeing signs of earnings stabilising. We expect earnings growth to remain strong through the second half of FY18 and well into the next financial year. However valuations remain higher than historical range vis-à-vis earnings Looking ahead, market volatility will likely be driven by political and geopolitical events as and when they occur during the year but we do not think fundamentals to deteriorate very significantly. Irrespective of the macro noise, historically, earnings per share in the Indian equity markets has directionally moved only up (see chart below) India s equity market rising despite noise Sensex price & earnings movement Source: Bloomberg, as of 31 December 2017. Note: Investment involves risks. Past performance is not indicative of future performance. Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only and does not constitute any investment recommendation in the above mentioned asset classes, indices or currencies.
Sector Views Sector Consumer Discretionary Materials Financials Industrials Utilities Real Estate Information Technology Telecom Health Care Consumer Staples Energy Weighting Neutral Neutral Neutral Source: HSBC Global Asset Management as of end-december 2017 Sector focus Shares in public sector banks, which are one of the biggest investors in government securities, fell as the sharp increase in bond yields weighed on their books. Indian bonds yields have risen by more than 100 basis points to 7.3% since mid-2017 on concerns the government may overshoot its fiscal deficit target In January, rating agency Moody's warned the recent increase in bond yields will have a negative effect on the credit ratings of banks. Moody's added that banks it had rated generated 41% of their operating profits for the quarter ended September 2017 from gains made by selling bonds. Another rating agency, ICRA, has said that the surge in yields may result in $2.4 billion of mark-to-market losses on the available-for-sale portion of the banks investment portfolios in the December quarter Although banks are required to hold only 19.5% of their deposits in government bonds, many public sector banks have substantially higher holdings, investing their surplus funds in bonds as they struggled with low credit growth in previous years Earlier in January, the Reserve Bank of India warned banks they should manage their own rate risk and not depend on regulatory help. This caused a further sell-off in the sovereign bond market and a correction in the rupee Chart in focus Household savings structure: Shift to financial assets Distribution of household savings FY2017 44% 56% FY2016 41% 59% FY2015 36% 64% FY2014 36% 64% FY2013 33% 67% FY2012 31% 69% Financial savings Physical savings FY = fiscal year from 1 April to 31 March. FY2017 physical savings are based on estimates. Source: Reserve Bank of India, HSBC Global Asset Management, December 2017 Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only and does not constitute any investment recommendation in the above mentioned asset classes, indices or currencies.
Fixed income From a strategy standpoint, we maintain a neutral to marginal overweight duration in INR government bonds given a balanced inflation outlook and some fiscal uncertainty Currency December CPI inflation rose 5.2% y-o-y from 4.9% in November, partly due to unfavorable base effects from last year as well as an uptick in core inflation. Food inflation came in at 4.9% y-o-y (vs. 4.4% in November), the highest in sixteen months. Core inflation (excluding food and fuel) rose further to 5.2% y-oy, from 4.9% previously. The high inflation print also reflects full statistical impact of ~35bps due to house rent allowance (HRA) implementation November Industrial Production (IP) growth surprised the market positively at 8.4% y-o-y, manufacturing grew briskly. Growth in consumer goods, which was performing disappointingly until October, also recovered somewhat, perhaps signaling some abatement of demand disruptions in the economy after GST implementation December inflation ex HRA impact stood at ~4.9% y-o-y, only slightly above the RBI s projected range of 4.3-4.7%. While on one hand it is stoked by unfavorable base effects, on the other, winter disinflation is expected to soften the prices of food items like vegetables, keeping a lid on headline inflation. However, the concerns on core and fuel inflation remain. It is therefore expected that RBI will keep the repo rate on hold at 6% for the foreseeable future Government announced extra borrowing of INR 500bn in late December, which reflected fiscal pressure due to lower indirect tax collection. In January the borrowing was revised down by INR 300bn on revised revenue estimates From a strategy standpoint, we maintain a neutral to marginal overweight duration in INR government bonds given a balanced inflation outlook and some fiscal uncertainty. We continue to hold liquid INR corporate credit names to maintain carry in a stable interest rate environment. We continue to be underweight USD corporate bonds Rupee traded strong during the month (trading at 63.62 as of 19th January 2018), rising on the back of generalized dollar weakness and reasonable foreign portfolio investor flows Inflation within RBI s target range (2-6%) % y-o-y Oil and gold imports kept import growth high over December, more than offsetting the gains in exports. Trade deficit is expected to remain high (~USD 117bn compared to ~USD 78bn in the same period in FY17) and CAD may widen to 1.7% of GDP in FY18 Rupee traded strong during the month (trading at 63.62 as of 19th January 2018), rising on the back of generalized dollar weakness and reasonable foreign portfolio investor flows FX reserves continued to rise and are at USD 413bn which is more than 11 months of import cover and provides a strong external debt cover. Given improving economic fundamentals, narrowing inflation differentials and healthy FX reserves, we expect the INR to be more resilient and to remain range bound going forward Source: CEIC, Bloomberg, data as of 19 January 2018. Investment involves risks. Past performance is not indicative of future performance. Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only and does not constitute any investment recommendation in the above mentioned asset classes, indices or currencies.
Data watch Indicator Latest data Consensus data Previous data Analysis PMI (Composite) - Manufacturing - Services 53.0 (Dec) 54.7 (Dec) 50.9 (Dec) NA 50.3 (Nov) 52.6 (Nov) 48.5 (Nov) December manufacturing PMI was its highest since June 2012. Both output and new orders expanded strongly. The rise in services business activity was mainly from information & communications and finance & insurance industries. Industrial Production (IP) (% YoY) +8.4 (Nov) +4.4% +2.2 (Oct) The acceleration in IP growth was driven by a sharp pick-up in manufacturing growth. The rebound was broadly based across capital, infrastructure and construction, intermediate and consumer goods. Despite the monthly data volatility, the 3-month trailing data continued to show an improving trend, likely indicating fading impact of GST rollout and demonetisation. Local passenger vehicle (PV) sales (units) 239,712 (Dec) (5.2% YoY) NA 275,417 (Nov) (14.3% YoY) PV yoy growth fell despite a lower base of last year due to demonetisation, as wholesales typically slow ahead of the transition to the new model year. SIAM has a positive market outlook for FY19, despite likely firm fuel costs and interest rates bottoming out, given strength in the retail market, recovery in rural demand, and a more stable market conditions after major disruptions (demonetisation/ BS4 transition/ GST) last year. However, the PV industry will have to brace for more stringent emission/safety norms till 2020 and beyond. Exports (USD) (% YoY) Imports (USD) (% YoY) 12.4 (Dec) NA 30.6 (Nov) Export growth in the last few months has been volatile, largely due to the transitory disruptions caused by the implementation of GST. However, the overall trend has improved, reflecting better external demand conditions. 21.1 (Dec) NA 19.6 (Nov) Oil imports rose on a sequential basis, despite their lower yoy growth. Gold imports jumped 71.5% yoy on the low base effect. Non-oil, non-gold imports moderated but continued to grow at double-digit paces, suggesting robust domestic demand. Trade Balance (USD) -14.9bn (Dec) -13.0bn -13.8bn (Nov) The wider trade deficit (a three-year high) was largely due to strong imports. Global oil prices remain a key risk and a recovery in imports/domestic demand may led to a larger trade deficit into FY19 vs. FY18. Inflation (% YoY) -CPI -WPI 5.21 (Dec) 3.58 (Dec) 5.10 4.00 4.88 (Nov) 3.93 (Nov) Headline CPI inflation rose to a 17-month high driven by both food and core prices and on the back of an adverse base effect. Vegetable prices jumped in November due to supply disruptions and the reversal in prices only started in mid-december. Going forward, seasonal moderation in prices of vegetables and fruits as new crops arrive, recent softness in agri-commodity prices and lowering of GST rates in several items may exert some downward pressure on headline CPI. However, the RBI noted upside risks from a rise in household inflation expectations; pass-through onto retail prices from rising input costs (including oil); fiscal slippage; and global factors such as fiscal expansion in the US. Inflation is likely to remain well above 4% in coming months. Repo rate (%) Reverse repo rate (%) Marginal standing facility (MSF) rate (%) 6.00 5.75 6.25 (6 Dec) 6.00 5.75 6.25 6.00 5.75 6.25 (6 Dec) The RBI kept its neutral policy stance. Future policy action remains data dependent, but the RBI s focus on keeping inflation at 4% on a durable basis coupled with an expected more meaningful pickup in economic growth in FY19 suggests rates may be on hold for some time. We think the bar for easing is high given the combination of higher inflation, narrowing of the output gap and tighter US monetary policy/global policy normalisation. Greater clarity on the fiscal policy is also needed. Meanwhile, The RBI raised its H2 FY18 inflation forecast marginally to 4.3%-4.7% vs. 4.2-4.6% previously and retained its FY18 real gross value added (GVA) growth forecast at 6.7% yoy. GDP at market prices (quarterly, % YoY) Gross valueadded (GVA) at basic prices (quarterly, % YoY) 6.3 (Jul- Sep) 6.1 (Jul- Sep) 6.4 6.2 5.7 (Apr- Jun) 5.6(Apr- Jun) The growth rebound suggests the drag from the impact of demonetisation and GST disruptions has gradually faded. The recovery was led by the industrial sector (restocking after GST rollout) and a pickup in investment, helping to offset weaker agricultural output and lower government spending. GDP growth excluding agriculture and public administration picked up to 6.8% yoy in the September-quarter from 5.5% in the June quarter and a low of 3.8% in the March quarter, indicating better private sector demand. The easing GST impacts, ongoing remonetisation, bank recapitalisation and a supportive global environment should continue to support a growth recovery, amid government policy push on infrastructure and consumption-supportive policies. Current Account Balance (CAB) (quarterly, balance in USD and % of GDP) -USD7.2b -1.2 (Jul- Sep) -USD8.3bn -USD14.3b -2.4 (Apr- Jun) The narrowing of CAD was largely driven by a smaller goods trade deficit and an improvement in the invisibles surplus, led by higher services exports and remittances inflows. However, we expect a slight deterioration in the CAD to around -2% of GDP in FY18 (a wider CAD in H2FY18 vs. H1) from -1.5% in FY17, although it is likely to stay within a sustainable level. Funding should not be a constraint, given robust FDI inflows, although the basic balance (CAB plus net FDI inflows) may also turn less favourable in FY18. Source: Bloomberg, HSBC Global Asset Management, as of January 2018 Indicates improved data on month-on-month/quarter-on-quarter/year-on-year basis Indicates worsened data on month-on-month/quarter-on-quarter/year-on-year basis Indicates no change in data on month-on-month/quarter-on-quarter/year-on-year basis Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only and does not constitute any investment recommendation in the above mentioned asset classes, indices or currencies.
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