Outlook 2016 Moving from Macro to Micro
2015 Recap Equity Markets 30000.00 S&P BSE Sensex Movement and Key Events Sensex crosses 30,000 points on RBI s second surprise 25 bps rate cut 29000.00 RBI s surprise 25 bps rate cut RBI cuts repo rate by 25 bps Monsoon session washout 28000.00 27000.00 Concern of Greece exiting Eurozone 26000.00 25000.00 Union Budget below market expectations Minimum Alternate Tax issues surface Fears of inclusion of China A shares in MSCI Index Concern on Greece continue Worries over slowdown in Chinese economy RBI cuts repo rate by 50 bps China devalues its currency NDA defeated in Bihar elections US Fed raises rate by 25 bps 24000.00 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Data Source: Bloomberg. Past Performance may or may not be sustained in the future. RBI Reserve Bank of India. National Democratic Alliance
2015 Recap Fixed Income Markets 8 7.9 10 Year G-Sec Yield Movement and Key Events Greece debt crisis Rupee depreciates as China devalues yuan 7.8 7.7 7.6 RBI s surprise repo rate cut of 25 bps Fall in crude oil prices RBI s 2 nd surprise repo rate cut of 25 bps RBI cuts repo rate cut by 25 bps Hope that RBI may set FIIs gilt investment limit in rupee terms. RBI cuts repo rate by 50 bps NDA defeated in Bihar elections US Fed rate hike fears US Fed hikes rate 7.5 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Data Source: Bloomberg. Past Performance may or may not be sustained in the future. RBI Reserve Bank of India. National Democratic Alliance
2015 Recap Equity - What we said in 2015? The equity markets will consolidate due to subdued earnings growth We had recommended investing in Dynamic asset allocation funds that aim to benefit from volatility What Happened? Life remained @ 26000 Sensex amid extreme volatility Debt - What we said in 2015? Macro indicators will improve further Rate cuts imminent and can be sharper than expected Duration funds can be a better play What Happened? Sharp 125-bps rate cuts by the RBI Debt funds gave better returns, but long duration funds gave up some gains towards end of the year amid Fed rate hike. Data Source: Value Research. Past Performance may or may not be sustained in the future.
Year 2016 Equities: May remain volatile in near term and are likely to stabilise once crude prices bottom. Year for Dynamic Asset Allocation Funds and investing systematically in equity funds. Fixed Income: Rate cut cycle to continue. Short to medium duration funds may give better risk adjusted return.
Macro adjustment largely complete Micro should start reviving too
Macro Adjustment Largely Complete FY-13 FY-14 FY-15 Dec 2015 Fiscal Deficit as % of GDP Current Account Deficit as % of GDP CPI Inflation % (March end figures) 10 Year G-Sec % (March end figures) 4.9 4.4 4.1 3.9 (BE) 4.7 1.7 1.3 1.60 10.4 9.5 6.0 5.4 7.96 8.80 7.75 7.75 USD/INR 54.3 59.9 62.5 66.1 Brent Crude Prices US$/bbl RBI Policy Rate % (March end figures) 109 107 63.4 36.4 7.5 8 7.75 6.75 Data Source: Bloomberg. (BE) Government budgeted Estimates
Micro Indicators Slow Recovery Underway Consumer durable goods production growth has started recovering Auto Sales have started to pick up 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% Autos Demand Growth 2W 4W M&HCV FY15 4Q15 1Q16 2Q16 Sep-Nov'15 Data Source: CEIC and Bloomberg. 2W-2 wheeler, 4W 4 wheeler, M&HCV Medium & Heavy Commercial Vehicles. YOY Year on Year. 3mma 3 month moving average
Micro Indicators Slow Recovery Underway Spending on National Highways in FY16e 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 INR tn 2008 2009 2010 2011 2012 2013 2014 2015 2016E Investment in National Highways by Government spending is higher in Road sector Government Private Sector 25 20 15 10 5 New project investment started to pick up in power and transport sectors 0 2001 2003 2005 Metals Other Mfg. 2007 Power 2009 Transport 2011 2013 Constr. & RE 2015 Others Data Source: CMIE, Bloomberg Contsr. & RE Construction and Real Estate; e - estimate
Government Reforms To Continue The Government may focus more on 'executive decisions' to push reforms without getting stuck in the legislative dilemma. List of Prospective Reforms Legislative Goods & Service Tax Land Acquisition Bill Monetary Policy Committee APMC Changes Labor Reforms Executive Railways and Roads projects Power Sector Reforms Industrial Corridors Clearing Stalled Projects Smart Cities Digital India Skill Development FCI Restructuring Data Source: Internal Research. APMC Agricultural Produce Marketing Corporation. FCI Food Corporation of India. SEB State Electricity Boards
Government Actuating The Recovery Real YoY% growth deflated by WPI 35% 30% 25% 20% 15% 10% 5% 0% Capital Expenditure Revenue Expenditure 6.5% 4.3% 3.8% 1.2% 32.7% 5.9% Government policy focus is on reviving economy by increasing capital expenditure Combined with reform measures to improve ease of doing business -5% -2.1% -2.9% F2013 F2014 F2015 FYTDF2016 Source: CEIC, Morgan Stanley Research. YOY Year on Year. FYTD Financial Year till date; WPI Wholesale price index
Foreign Flows 60 50 40 30 20 10 0 Oct-06 Gross FDI Inflows Oct-07 FDI inflows have grown Oct-08 Oct-09 Oct-10 12M trailing sum (US$ bn), LS 12M trailing sum % of GDP, RS Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 3.2% 2.8% 2.4% 2.0% 1.6% 1.2% 0.8% 0.4% 0.0% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% India remains attractive compared to peers FDI as % of GDP Brazil China India Russia 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 FDI inflows may continue, however, FPI flows may have its own volatility Data Source: CEIC, Morgan Stanley Research. FDI Foreign Direct Investment, GDP Gross Domestic Product, Foreign Portfolio Investment
Oil Prices May Stabilise By End Of 2016 Oil currently is over supplied Non-OPEC supply may start declining owing to lower CAPEX Supply minus demand may turn negative in mid 2016 Demand has remained strong and may further increase if prices remain low Current prices are too low for the industry and OPEC to be sustainable in the long term Data Source: Bernstein Analysis. OPEC Organisation of Petroleum Exporting Countries. CAPEX Capital Expenditure. Jan 16 onwards are estimated figures.
Risks of low Crude Oil Prices Decline in oil exports has led to a decline in the current account balances of Gulf Nations Gulf nations accounted for 50% of India s total USD 70 bn remittances Low growth in Gulf Nations may reduce remittances and impact Current Account Saudi Arabia has seen a YTD15 (to Oct) decline of 11.5% in its forex reserves Inward remittances have been a major source of current account receipts Gulf Nations may see moderate growth in the coming years Flows from sovereign wealth funds linked to commodity producers may be impacted Data Source: CLSA Research. YTD Year Till Date
Equity Market Outlook
Operating Leverage to Drive Earnings MANUFACTURING SECTOR CAPACITY UTILISATION Capacity utilization is at multi-year low CAPACITY UTILISATION 81% 78% 75% 72% Capacity Utilisation, 71.5% Earnings can improve owing to strong operating leverage Earnings growth may be visible over next 3-4 quarters 69% JUN-09 DEC-09 JUN-10 DEC-10 JUN-11 DEC-11 JUN-12 DEC-12 JUN-13 DEC-13 JUN-14 DEC-14 JUN-15 Over the past five years companies have built in considerable operating leverage Source: RBI, Morgan Stanley Research
Factors That Favor Earnings Growth The investment rate is going up, led by public investments, especially in infrastructure 29% 24% 19% 14% 9% Real Broad Market Revenue Growth Accelerating Broad Market Rev Growth (ex-energy, YoY%), deflated by WPI ex. Primary Food Real growth is ticking higher; industrial growth is now at a five-year high 4% -1% -6% Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Households are also leveraging balance sheets, which is promising for consumption Terms of trade, which affect the current account, are probably better than at any point over the past decade Earnings will run into a favorable base effect in the second half of FY2016, and FY2017 Source: Capital line, Morgan Stanley Research. WPI Wholesale Price Index
India Growth Story: India to continue to grow better than the rest of the world 12% India's real growth vs World 10% 8% 6% 4% 2% 0% -2% 2001 2003 2005 2007 2009 2011 2013 2015e Global GDP Growth India Real GDP Growth Data Source: Bloomberg. e - estimated
Global Growth Important for India Utilities 3% Telecom 1% Industrials 1% 53% of S&P BSE 100 revenues are in foreign currency This makes it all the more important for rest of the world to do well for a secular growth in earnings Cons. Disc. 13% Materials 20% Health 4% Energy 43% IT 15% Split of foreign S&P BSE100 Revenues Data Source: CS Research
Valuations are reasonable - Invest Systematically in Equities 160 140 120 100 Book Profits/ Stay Invested Invest Systematically Invest in Equities 80 60 Aggressively Invest in Equities 40 Post recent price correction, valuations have come off from their peak One may consider investing systematically in 2016 Equity valuation Index calculated by assigning equal weights to PE, PB, G-Sec over PE, Market Cap to GDP
Core Investment Idea For 2016 Invest In Dynamic Asset Allocation Funds and Invest Systematically In Pure Equity Funds Crude Oil prices likely to bottom in 2016 Global Markets likely to remain unstable until crude bottoms This may keep Indian Equity Market volatile in the near term 2016 can be the year of Dynamic Asset Allocation Funds They also have ability to capitalize on opportunities in fixed income market in a tax-efficient way.
Potential Triggers in 2016 Signs of Earnings Growth Improvement in Bank NPAs Good Monsoon Triggers for 2016 Speedy implementation of Reforms NPA Non Performing Assets
To Sum up.. Equity Market Outlook for 2016 Macro-economic adjustment largely over; micro-economic indicators have started improving Long-term India Growth Story remains intact; India will continue to grow faster than peers Earnings can improve owing to operating leverage Commodity prices likely to bottom in 2016; till then markets may remain volatile 2016 will be the year for investing in Dynamic Asset Allocation Funds and investing systematically in pure equity funds.
Risks in 2016 Crude prices remaining at current lows China Economy Slowdown US High Yield Bond Market Risks
Fixed Income Market Outlook
Global Bond Yield Movements in 2015 Country Dec-15 Dec-14 Yearly Change in bps Brazil 16.4 12.48 392 South Africa 9.46 7.84 162 Indonesia 8.77 7.91 86 Spain 1.83 1.67 16 UK 1.9 1.85 5 Germany 0.61 0.6 1 US 2.25 2.27-2 Japan 0.28 0.34-6 Australia 2.85 2.91-6 Greece 8.39 8.53-14 Portugal 2.57 2.71-14 India 7.75 7.92-17 India was amongst one of the best performing markets in 2015 Italy 1.66 1.93-27 China 2.89 3.72-83 Russia 9.96 13.19-323 Source: Bloomberg. Data as on 23 rd Dec 2015
Bond Yields Have Not Priced-in Rate Cuts Yet Spreads near highest levels during any rate cut cycle 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00-0.50-1.00-1.50 10.00 9.00 8.00 7.00 6.00 5.00 4.00 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Spread between Repo and 10 yr G-Sec (LHS) Repo-Rate (RHS) Such high spreads are hardly seen during easing cycles Source: Bloomberg.
Spreads May Reduce With positive real rates Inflation expectation will be lower Increase in savings and lower CAD Spreads between repo and 10 years G-Sec may reduce Stable Economy CAD Current Account Deficit
Macros Remain Conducive 40 20 0 Current Account (trailing 4-quarter) Widening CAD between 2011-2013 3% 2% 1% 0% 6.5% 6.0% 5.5% Fiscal deficit as % of GDP (12M trailing sum) -20-40 -60-80 -100 Mar-02 US$ bn, LS % of GDP, RS Pre Credit Crisis Mar-04 Mar-06 Mar-08 Immediat ely post crisis Mar-10 Mar-12 Mar-14 Steady reduction in current account deficit Mar-16E -1% -2% -3% -4% -5% -6% -7% 5.0% 4.5% 4.0% 3.5% 3.0% Jun-12 Sep-12 Dec-12 Mar-13 Target Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 3.9% 3.3% Sep-15 Current Account and Fiscal Balance remain conducive for further rate cuts Inflation too is under control and likely to remain at lower levels Source: CEIC, Morgan Stanley Research. E- Morgan Stanley Estimates
Triggers For Further Rate Cuts Benign Global Commodity Prices Property Prices Decelerating This may provide Reserve Bank of India room for further 50 bps of rate cuts in 2016 Early Resolution of Bank NPAs
Credit Markets Improving 2.5x 2.0x CRISIL Credit Ratio Has Improved 2.3x 2.2x 2.1x Credit Rating Upgrades continues to outpace downgrades 1.5x 1.5x 1.6x 1.7x This shows improvement in Credit environment 1.0x 0.5x 0.0x 0.9x 0.7x 0.6x 0.9x 0.8x 1HFY11 1HFY12 1HFY13 1HFY14 1HFY15 1HFY16 With government and the RBI constantly working towards improving Bank NPA situation, Credit environment will further improve Source: CRISIL. RBI- Reserve Bank of India NPA Non performing assets; 1HFY - 1st Half of Financial Year
Debt Valuation: Remains Attractive Debt Valuation Index 8.00 6.00 4.00 2.00 0.00-2.00 Aggressively in High Duration Funds High Duration Funds Moderate Duration Funds low duration funds -4.00 Ultra Low Duration Funds -6.00 Feb-00 Jul-00 Dec-00 May-01 Oct-01 Mar-02 Aug-02 Jan-03 Jun-03 Nov-03 Apr-04 Sep-04 Feb-05 Jul-05 Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 Debt Valuation Index We have been maintaining the Debt valuation model which provides good estimates of interest rate cycles. Currently the index lies in the attractive territory and indicates that one needs to be invested in duration funds. Debt Valuation Index considers WPI and CPI over G-Sec Yield, Current Account Balance and Crude Oil Movement for calculation. Equal weights are assigned to each of these parameters for calculating the index.
To Sum up Fixed Income Market Outlook Macro-economic indicators remain conducive for lower interest rates Yields have not priced-in earlier rate cuts yet and provides space for fall in yields in the near term Improvement in Bank NPAs and fall in property prices to trigger further rate cuts of around 50-75 bps Credit markets will improve further and spreads will narrow We recommend incremental investments in short- to medium-term duration funds as they may deliver better risk adjusted returns For conservative investors accrual funds remain a good investment proposition
Risks to our Outlook Sharper-thanexpected rate hikes by US Fed Crude oil price rises above USD 70 US Junk Bond Market Risks
Recommendations For 2016
Dynamic Asset Allocation Funds Invest Lump sum in: ICICI Prudential Dynamic Plan ICICI Prudential Balanced Fund ICICI Prudential Balanced Advantage Fund ICICI Prudential Equity Income Fund Markets may remain volatile until crude and other commodity prices bottom. Hence, dynamic asset allocation funds may be considered for 2016.
Equity Funds Invest systematically over next 6 months in: ICICI Prudential Focused Bluechip Equity Fund ICICI Prudential Value Discovery Fund ICICI Prudential Long Term Equity Fund (Tax Saving) Equity markets may bottom in 2016. Investors may invest systematically in these funds for long-term wealth creation. Aggressive investment ideas for next three years: ICICI Prudential Select Largecap Fund ICICI Prudential Top 100 Fund ICICI Prudential Multicap Fund These funds may be suitable for aggressive investors with a clear five-year and above investment horizon.
Debt Funds Aggressive investors with 3 years of investment horizon: ICICI Prudential Long Term Plan ICICI Prudential Dynamic Bond Fund Funds that can dynamically change duration strategy once interest rates bottom are suitable for a three-year view Investors with moderate risk appetite: ICICI Prudential Banking & PSU Debt Fund ICICI Prudential Short Term Plan ICICI Prudential Income Opportunities Fund Funds with moderate duration are likely to deliver better risk-adjusted returns in 2016. Conservative investors seeking to earn from Accrual + Duration: ICICI Prudential Regular Savings Fund ICICI Prudential Corporate Bond Fund ICICI Prudential Regular Income Fund (Income is not assured and is subject to the availability of distributable surplus) Accrual funds remain allseason investment idea and apt for conservative investors.
Key Events To Track in 2016 1. Budget Session of the Parliament 2. Union Budget 2016-17 3. RBI s monetary policy 4. Monsoon 1. US presidential elections 2. US Federal Reserve s rate hikes 3. China s reforms 4. Commodity prices 5. Geo-political events
ICICI Prudential Balanced Fund is suitable for investors who are seeking*: Long term wealth creation solution A balanced fund aiming for long term capital appreciation and current income by investing in equity as well as fixed income securities. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them ICICI Prudential Dynamic Plan is suitable for investors who are seeking*: Long term wealth creation solution A diversifed equity fund that aims for growth by investing in equity and debt (for defensive considerations) *Investors should consult their financial advisers if in doubt about whether the product is suitable for them ICICI Prudential Balanced Advantage Fund is suitable for investors who are seeking*: Long term wealth creation solution An equity Scheme that aims for growth by investing in equity and derivatives. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them ICICI Prudential Value Discovery Fund is suitable for investors who are seeking*: Long term wealth creation solution A diversified equity fund that aims to generate returns by investing in stocks with attractive valuations *Investors should consult their financial advisers if in doubt about whether the product is suitable for them
ICICI Prudential Multicap Fund is suitable for investors who are seeking*: Long term wealth creation solution A growth oriented equity fund that invests in equity and equity related securities of core sectors and associated feeder industries. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them ICICI Prudential Focused Bluechip Equity Fund is suitable for investors who are seeking*: Long term wealth creation solution A focused large cap equity fund that aims for growth by investing in companies in the large cap category *Investors should consult their financial advisers if in doubt about whether the product is suitable for them ICICI Prudential Long Term Equity Fund (Tax Saving) is suitable for investors who are seeking*: Long term wealth creation solution An Equity Linked Savings Scheme that aims to generate long term capital appreciation by primarily investing in equity and related securities. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them ICICI Prudential Regular Income Fund (Income is not assured and is subject to availability of distributable surplus) is suitable for investors who are seeking*: Medium term regular income solution A hybrid fund that aims to generate regular income through investments primarily in debt and money market instruments and long term capital appreciation by investing a portion in equity. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them 41
ICICI Prudential Top 100 Fund is suitable for investors who are seeking*: Long term wealth creation solution An equity fund that aims to provide long term capital appreciation by predominantly investing in equity and equity related securities *Investors should consult their financial advisers if in doubt about whether the product is suitable for them ICICI Prudential Short Term Plan is suitable for investors who are seeking*: Short term income generation and capital appreciation solution A Debt fund that aims to generate income by investing in a range of debt and money market instruments of various maturities. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them ICICI Prudential Income Opportunities Fund is suitable for investors who are seeking*: Long term savings solution A debt fund that invests in debt and money market instruments of various credit ratings and maturities with a view to maximising income while maintaining optimum balance of yield, safety and liquidity. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them ICICI Prudential Banking & PSU Debt Fund is suitable for investors who are seeking*: Short Term savings solution A debt fund that aims to generate regular income by investing in debt and money market instruments predominantly issued by banks and public sector undertakings. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them ICICI Prudential Select Largecap Fund is suitable for investors who are seeking*: Long term wealth creation solution An equity fund that aims to generate capital appreciation by investing in equity and equity related securities of large market capitalization companies with an option to withdraw investment periodically based on triggers. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them 42
ICICI Prudential Long Term Plan is suitable for investors who are seeking*: Medium term savings solution A Debt Fund that invests in debt and money market instruments with a view to maximise income while maintaining optimum balance of yield, safety and liquidity. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them ICICI Prudential Equity Income Fund is suitable for investors who are seeking*: Long term wealth creation solution An equity scheme that seeks to generate regular income through investments in fixed income securities and using arbitrage and other derivative strategies and also intends to generate long term capital appreciation by investing in equity and equity related instruments. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them ICICI Prudential Corporate Bond Fund is suitable for investors who are seeking*: Long term savings solution A debt fund that invests in debt and money market instruments of various maturities with a view to maximise income while maintaining optimum balance of yield, safety and liquidity. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them ICICI Prudential Regular Savings Fund for investors who are seeking*: Medium term savings solution A debt fund that aims to deliver consistent performance by investing in a basket of debt and money market instruments with a view to provide reasonable returns while maintaining optimum balance of safety, liquidity and yield. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them ICICI Prudential Dynamic Bond Fund for investors who are seeking*: Medium term wealth creation solution A debt fund that invests in debt and money market instruments with a view to provide regular income and growth of capital *Investors should consult their financial advisers if in doubt about whether the product is suitable for them 43
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