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HDFC MF Yearbook 2019

Contents
1. Global Economy and markets
2. Key Future trends
3. Indian economy
4. Equity markets
5. Fixed Income markets
Global Economy and Markets

“There are two kinds of forecasters: those who don’t know, and those who
don’t know they don’t know”
--- Economist John Kenneth Galbraith
Range bound global growth continues

• Global growth
% Real Global GDP Growth (YoY, %)
– In 2018, it was supported by robust US (fastest growing 5.0
G10 economy) and stable Emerging Markets (EMs) 4.5
growth
4.0
– Normalisation of accommodative monetary policies poses 3.5 3.8
3.7 3.6
risk going forward 3.0 3.5

2.5
2.0
• United States (US)
1.5
– Impact of rate hikes and tapering of bond purchase
1.0
program was offset by fiscal stimulus /tax cuts 2013 2014 2015 2016 2017 2018 (E) 2019 (E) 2020 (E)

– Effect of rising rates and unwinding of monetary stimulus


needs to be monitored

Growth in GDP (%) 2012-16 2017 2018E 2019E 2020E


• Euro Area G10 1.7 2.2 2.2 1.9 1.6
United States 2.2 2.2 2.9 2.3 1.9
– Growth slowed down in major economies in 2018 Euro Area 0.9 2.5 1.9 1.6 1.5
– As QE has ended in 2018, its impact needs to be United Kingdom 2.1 1.7 1.2 1.3 1.6
monitored Japan 1.2 1.7 0.8 1.3 0.6

Emerging Markets 4.8 4.8 4.8 4.7 4.8


Brazil (0.3) 1.0 1.3 2.3 2.5
• China Russia 0.7 1.5 1.6 1.5 1.6
– Economy is maturing after rapid growth over last 20 India 6.7 6.2 7.7 7.6 7.5
years, hence growth rates are moderating China 7.3 6.9 6.6 6.3 6.1
South Africa 1.7 1.3 0.7 2.0 1.5
– Deleveraging efforts moderated economic growth in 2018

– Trade war, monetary easing and tax breaks are key


Source: Morgan Stanley estimates 3
events to watch out for in 2019
10.0
12.0

2.0
4.0
6.0
8.0
%

10.0
11.0
12.0
13.0

6.0
7.0
8.0
9.0
Dec-10
Dec-10
May-11
May-11
Oct-11
Oct-11
Mar-12
Mar-12
Aug-12
Aug-12
Jan-13
Jan-13
Jun-13
Jun-13
Nov-13
Nov-13
Apr-14
Apr-14
Sep-14
Sep-14
Feb-15
Feb-15
Jul-15
Jul-15
Dec-15
Dec-15
May-16
US Unemployment Rate

May-16
Oct-16
Oct-16
Mar-17
Mar-17

Euro Area Unemployment Rate


Aug-17
Falling unemployment rates

Aug-17
Jan-18
Jan-18
Jun-18
Jun-18
Nov-18
Nov-18
%

3.4
3.6
3.8
4.0
4.2
4.4
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
%

Mar-11 Dec-10
Sep-11 May-11
Oct-11
Mar-12
Mar-12

Source: Bloomberg; Data updated till Nov’18 for US, Euro Area and Japan. Data for China available till Sep’18
Sep-12
Aug-12
Mar-13 Jan-13
Sep-13 Jun-13
Nov-13
Mar-14
Apr-14
Sep-14 Sep-14
Mar-15 Feb-15
Jul-15
Sep-15
Dec-15
Mar-16
May-16
Japan Unemployment Rate

Sep-16 Oct-16
Mar-17 Mar-17
China Unemployment Rate (Quartely)

Aug-17
Sep-17
Jan-18
4

Mar-18 Jun-18
Sep-18 Nov-18
Global Liquidity – Background of Quantitative Easing

US Federal Reserve (US Fed) European Central Bank (ECB) Bank of Japan (BoJ)
• Post Global Financial Crisis • ECB embarked on asset • Commenced asset purchase
(GFC) in 2008, US Fed purchase program in program in 2012
embarked on Quantitative Easing March 2015
(QE) to support economic growth

• Over 2010-15, US Fed Balance • ECB purchased bonds • BoJ is estimated to have bought
sheet grew by ~USD 3.0 trillion worth ~EUR 2.6 trillion bonds worth USD 3 trillion

• With US economy strengthening, • Though bond purchases • Likely to continue this program in
US Fed began unwinding its have ended in 2018, 2019, though pace might reduce
Balance sheet in 2017 and is rollover of bonds on
likely to continue in 2019 maturity is likely

Since 2010, combined balance sheet of these 3 Central banks increased by ~USD 8 trillion,
which supported global growth. This phase is now ending and may impact growth
5
Global liquidity – Likely to tighten in 2019; Policy rates might go up
USD bn Net injection of liquidity* by Global central banks
• US Fed to continue unwinding and shrinking its balance sheet 3,000
Fed ECB BoJ Total liquidity injection

• EU stopped QE in Dec’18, though likely to roll over bonds on maturity 2,000

• Japan expected to continue QE, albeit at slower pace 1,000

• Combined balance sheets of these central banks likely to shrink in 2019 0

(1,000)
• This may impact interest rates, capital flows and global growth 2011 2012 2013 2014 2015 2016 2017 2018E 2019E

*change in assets
Source: Kotak Economics Research estimates

%
Central Bank Policy Rates and Inflation

7.0
US
6.0 Euro Area
5.0 US CPI

4.0 Euro Area CPI

3.0

2.0

1.0

0.0 GFC,
-1.0
Strong global growth, Sharp Low interest rates and expanding Balance Normalization of
Rise in Yields rate sheets of Central Banks liquidity and rising
-2.0 cuts yields
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Source: Bloomberg, Data beyond Sep 18 is Morgan Stanley estimate 6


Yields across major economies declined in 2018, except US

% US 10 Year Yield % Japan 10 Year Yield


3.50 0.20
3.25
0.15
3.00
2.75 0.10
2.50
0.05
2.25
2.00 0.00
Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18

US 10Y yield increased on the back of increase in fed rate, steady growth, Japan’s 10Y Yield remained range bound with benign inflation

historically low unemployment and unwinding of asset purchase program outlook. BoJ adjusted QE to allow yields movement within wider
range

% %
China 10 Year Yield
German 10 Year Yield
4.25
0.85
4.00
0.70
3.75
0.55
0.40 3.50

0.25 3.25
0.10 3.00
Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18
Growth and Inflation in Europe remained muted. Uncertainty over Brexit and Escalation of trade war & slow down in domestic growth resulted in
concerns in Italy led to fall in yields PBoC easing monetary policy with Reserve Ratio Requirement cut
7
Source: Bloomberg. Data updated till 31st December 2018
Real Yields for major economies near two decade lows

%
US Real Yield Japan Real Yield
%
7.0 5.0
6.0 4.0
5.0 3.0
4.0
2.0
3.0
1.0
2.0
0.0
1.0
-1.0
0.0
-1.0 -2.0
-2.0 -3.0
-3.0 -4.0
Jan/98 Aug/00 Mar/03 Oct/05 May/08 Dec/10 Jul/13 Feb/16 Sep/18 Jan/98 Aug/00 Mar/03 Oct/05 May/08 Dec/10 Jul/13 Feb/16 Sep/18

% German Real Yield China Real Yield


%
5.0 6.0

4.0 4.0
3.0
2.0
2.0
1.0 0.0

0.0 -2.0
-1.0
-4.0
-2.0
-3.0 -6.0
Jan/98 Aug/00 Mar/03 Oct/05 May/08 Dec/10 Jul/13 Feb/16 Sep/18 Jan/06 Aug/07 Mar/09 Oct/10 May/12 Dec/13 Jul/15 Feb/17 Sep/18

Low real yields create uncertainty for future interest rates


8
Real Yields = Month-end 10Y GSec Yield and CPI; Source: Bloomberg. Data updated till 30th Nov’18
Global Equity Markets deliver negative returns in 2018

Major equity markets delivered negative returns

• Impact of high base given the strong returns of past 2 years

• Escalation of Trade war between China and US

• Emerging markets faced capital outflows on strong USD and unwinding of QE

Global market Cap to GDP Ratio


Developed Markets^ %
Emerging Markets^ corrected sharply in 2018*
110.0
SSE Composite (China) -24.7 World Market Cap to
DAX (Germany) -18.3 GDP Ratio
100.0
Kospi (South Korea) -17.3
LTA
FTSE (UK) -12.4
HangSeng (Hong Kong) -13.5 90.0
Nikkei (Japan) -12.1
Taiwan Weighted (Taiwan) -8.6
80.0
CAC 40 Index (France) -12.0 KLSE (Malaysia) -5.9
70.0
Jakarta Composite Index
Strait Times (Singapore) -9.8 -2.5
(Indonesia)
60.0
Nifty 50 (India) 3.1
S&P 500 (US) -7.1
Ibovespa Sao Paulo Index
15.0 50.0
% -25.0 -20.0 -15.0 -10.0 -5.0 (Brazil)
% 2003 2006 2009 2012 2015 2018E
-40.0 -25.0 -10.0 5.0 20.0

India’s equity market (Nifty 50) significantly outperformed despite delivering low returns

* Global Market Cap to GDP ratio is calculated using world market cap from bloomberg and GDP from world bank. For 2018, current market cap is divided by world bank’s estimated global GDP.
^Returns for Calendar year 2018; Returns as on 31st Dec 2018. All returns are calculated in local currency. Source: Bloomberg, World Bank, MFI;; LTA – Long term average 9
US Marketcap/GDP & Profits/GDP are above long term average

• US market cap to GDP remains higher than the long term average; though corporate profits to GDP is also high

% %
180 US Market Cap to GDP Ratio* 7.0 US Corporate Profits

160 US Market Cap to GDP Corporate Earnings as a % of GDP


LTA 6.0 (US)
140

120 5.0

100
4.0
80

60 3.0

40
2.0
20

0 1.0
Dec-03 Dec-06 Dec-09 Dec-12 Dec-15 Dec-18 FY 92 93 94 95 97 98 99 00 02 03 04 05 07 08 09 10 12 13 14 15 17

Recent correction in US equity markets should be viewed in the context of US Market Cap to
GDP ratio being above long term average and bottoming out of yields in US

Source: Bloomberg, Morgan Stanley. * Data updated till 31st December 2018 10
Global commodity prices softened in 2018

CRY Index*
220 USD / bbl
Brent Crude Oil
85
210
80
200 75
70
190 65
60
180
55
170 50
45
160 40
Jan-17 Apr-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Jan-17 Apr-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18

* CRY index i.e. Thomson Reuters/CoreCommodity CRB Commodity Index acts


measures the aggregated price direction of various commodity sectors.

FAO Index# JOC-ECRI Industrial Price Index^


120
180
115
175
110

170 105

100
165
95
160 90
Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18 Nov-18 Jan-17 Apr-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18

# UN Food and Agriculture World Food price index – Tracks the change in prices ^ index indicating weighted price movement of industrial
consumers pay for food at the retail level
materials like cotton, burlap, steel, aluminum, zinc etc.

Softening in global commodities is positive for net commodity importers like India

Source: Bloomberg. CRY Index, Brent Crude oil prices and JOC-ECRI Industrial Price index updated till 31 st Dec 2018. FAO Index is updated till 30 th Nov 2018. 11
USD strengthened against most currencies in 2018

Most currencies depreciated vs the USD in CY18


2.7 Japanese Yen
Movement of Major currencies vs USD Mexico
0.0
• USD appreciation is due to: -4.1 South Korean Won
-4.5 Euro
• Rising interest rates in the US -5.6 Pound
Chinese Yuan
• Strong US economic growth -5.7
-6.2 Indonesian Rupiah
Canada
• Repatriation of USD 570 bn in 9MCY18 & -8.5
Indian Rupee
-9.2
-9.7 AUD
more expected in 2019 under Tax Cuts and South African Rand
-15.9
-17.2 Brazilian Real
Jobs Act of 2017 Russian Ruble
-20.2
-39.3 Turkish Lira
-45.0 -40.0 -35.0 -30.0 -25.0 -20.0 -15.0 -10.0 -5.0 0.0 5.0

INR and EM Index movement Vs USD


Dec/17 Mar/18 Jun/18 Sep/18 Dec/18
60 80

75

• INR fall has largely been in line with other EM 65 70

Index
INR

65
currencies
70 60
USD INR (Inverted Scale,LHS)
JP Morgan EM Currency Index (RHS) 55

75 50

Source: Bloomberg, Data updated till 31st Dec, 2018 12


Key Future Trends

1. Electric Vehicles
2. Solar energy
3. Changing supply dynamics of Oil

13
Electric Vehicles (EVs), fully charged

• EV growth drivers:

USD / KWH
• Policy push led by environmental concerns Declining battery price outlook

• Declining battery prices

Source: © UBS 2019


• ICE costs are expected to move up due to tightening environment norms

• Global EV sales are projected to grow at a CAGR of 40% between % of new car sales 2015 2020E 2025E
2016-2025 with sales crossing 17.5 million vehicles in 2025 (Source: ©
China 1.0% 6.7% 27.4%
UBS 2019) Source: © UBS 2019
US 0.7% 2.5% 5.3%

• China is taking the lead, penetration (in PVs) to reach 9% in next 3 years Europe 1.0% 4.1% 28.5%
(Source: © UBS 2019) World 0.6% 3.4% 16.6%

Electrification is one of the key pillars of the Group’s Strategy, By 2025, BMW
Group will have 12 all-electric models BMW CEO Harald Krüger^
China taking the lead in EVs

Company will help electric cars go mainstream using its new MEB platform, Source: © UBS 2019
which is developed for the mass market. Volkswagen‘s CEO Herbert Dies*

Toyota envisions to sell 5.5 million traditional hybrids, EVs and hydrogen fuel
vehicles by 2030. Toyota EVP Shigeki Terashi +

Success of EVs is positive for India. Net oil Imports in India are 4% of GDP and CAD is 2%. As EV penetration increases in India, oil imports
should moderate in long term

Global growth in EVs should also keep pressure on oil prices, benefitting India
14
PV – Passenger vehicle, ICE - Internal combustion engine, ^dated Nov 07, 2018, *dated Oct 10, 2018, + dated Dec 25, 2017
Solar energy is emerging as a key power source

Global solar capacity installed (cumulative) , GW

• Global solar capacity has been growing at 50% CAGR since 2000
Source: Goldman Sachs

• Solar energy installed capacity in India has grown at CAGR of


~70% between FY14 and FY18. Target to reach ~97 GW by 2022 100 97
Total Installed Solar Capacity in India
80
• Share of Solar energy in India 80
62
• Rose from 8% to 33% in renewable energy capacities 60
45

GW
• Stands at ~7% of total power capacity 40
22
20 12
4 7 Source: ICICI Securities,
3
T – Government of India targets
• Key Drivers for the rise in Solar energy 0
FY14 FY15 FY16 FY17 FY18 FY19T FY20T FY21T FY22T
• Fall in the solar panels costs

Minimum Bid (In Rs/kWhr)


Unit FY14 FY15 FY16 FY17 Current 20
Total Capital Costs 18 17.9 Fall In Solar Power Tariffs
per MW Rs lakh 806 691 606 501 391 16
14 12.0
Source: ICICI Securities Source: ICICI Securities
12
• Policy push from Government and tax incentives/subsidy 10 8.4
7.0
8 6.5
6 5.1
• Easy Implementation and higher certainty of power / costs 4
4.3 3.3 2.4 2.5
2.4
2
0
India has an estimated potential of about 750 GW of solar power (Source: MNRE).
To put things in perspective India’s total capacity from all sources is 350 GW

1 GW (Gigawatt) = 1000 MW (Megawatt)


15
Oil – Changing Demand / Supply Dynamics

US becomes largest oil producer Oil demand to peak by 2030 as per BP^
• US, on the back of increase in shale oil production, has become the • Demand has peaked in developed markets like the US, EU and Japan

largest oil producer in world • EV push, slowing demand growth in India / China should lead to global
oil demand peaking by 2030
• US share in world supply has increased from 9% in 2009 to 14% in 2017
Million Barrels United
EU China India World
Per Day States
14 US 1990 17 14 2 1 66
Russian Federation
13 Saudi Arabia 1995 18 14 3 2 70
2000 20 15 5 2 77
million barrels per day

12 2005 21 15 7 3 84
2010 18 14 9 3 87
11 2016 19 13 12 4 94
2020 19 12 14 5 99
10 2025 18 11 16 6 103
2030 18 10 16 8 106
9
2035 16 9 17 9 106
2040 15 8 16 10 105
8
1990-2016
0.3% -0.4% 6.7% 5.2% 1.4%
(CAGR)
7
2016-2040
2009 2010 2011 2012 2013 2014 2015 2016 2017 -0.8% -1.9% 1.0% 3.5% 0.5%
(CAGR)

Source: ^British Petroleum (BP), above chart Includes crude oil, shale oil, oil sands and NGLs (natural gas liquids)

Rising shale oil production, peaking global demand driven by EVs indicate moderate long term
trend for oil prices. Positive for India
16
Indian Macro Economy Outlook
– India remains a long term secular growth story

India set to become world’s third largest economy in 2028 – Bank of America Merrill Lynch*

*Report “India 2028: The last BRIC in the wall” dtd 10th Nov 2017 17
Indian economy –Breaking into top 5 economies

Ranks in terms of size of economy* 2017 GDP USD

United States 19,485 bn

China 12,015 bn

Japan 4873 bn

Germany 3700 bn

India 2602 bn

France 2587 bn

United 2628 bn
Kingdom

India’s rank has jumped from 11th to 5th


largest economy in just 12 years

Source: IMF, *From 2018 onwards figures are IMF estimates.

18
India’s Ease of Doing Business ranking - Target to be in top 50

Key reforms that have made this possible


2016 2017 2018
Parameters
ranking ranking ranking
• Replacement of majority of state and central sales
Overall 130 100 77 taxes with one nationwide Goods & Services Tax
(GST)
Starting a business 155 156 137
Construction permits 185 181 52 • Faster and less expensive to obtain a construction
permit.
Getting electricity 26 29 24
Registering property 138 154 166 • Strengthening legal rights and access to credit by
Getting credit 144 29 22 amending insolvency law
Protecting minority investors 13 4 7
• Reduction in the time and cost to export and
Paying taxes 172 119 121 import
Trading across borders 143 146 80 • Upgradation of port infrastructure
• Electronic submission of documents
Enforcing contracts 172 164 163
Resolving insolvency 136 103 108 • Reduction in procedures / documentations and time
for starting new business

World Bank has recognized India as one of the top improvers for the year 2018

Source: World Bank, Economic times article dtd. 2nd Nov 2018; DIPP Department of Industrial Policy and Promotion 19
Steady economic growth, stable macro economic parameters

Improving macros FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
Real GDP at market price (% YoY) 5.5 6.4 7.5 8 7.1 6.7 7.1 7.2
Centre's fiscal deficit (% GDP) 4.8 4.4 4.1 3.9 3.7 3.5 3.5 3.3
Current Account Deficit (CAD) (% GDP) 4.7 1.7 1.3 1.1 0.7 1.9 2.7 2.6*
Balance of Payment 0.2 0.8 3.0 0.9 0.9 1.7 (0.8) (0.2)
Net FDI (% of GDP) 1.1 1.2 1.5 1.7 1.6 1.2 1.2 1.1
Consumer Price Inflation (CPI) (Average) 9.9 9.4 6.0 4.9 4.5 3.6 3.6 4.1
Foreign Exchange Reserves (USD bn) 292.6 303.7 341.4 359.8 370.0 424.4 393.3^ na
Source: CEIC, Kotak Institutional Equities; Economic Survey, E-Estimates, ^ as of 21st Dec’18. na – not available

* Calculated by assuming crude prices at USD 72.5 per barrel. With oil at USD 60 / barrel, CAD is estimated to be ~2.0% of GDP

Key Reforms / Initiatives taken over past 4 years have created a favourable economic environment

• Introduction of Goods & Services Tax (GST)

• Introduction of Indian Bankruptcy Code (IBC)

• RERA and Housing for all

• Liberalisation of FDI in various sectors including railways, defense, coal mining, construction, aviation, pharma etc.

• Direct Benefit Transfer (DBT), UJJAWALA – LPG for poor households

• Power - Focus on Transmission and Distribution, Target 24*7 electricity, Saubhagya scheme

• Make in India - Focus on domestic manufacturing and design

• Transparent auctioning of natural resources

20
Revival in capex to support growth
%
Signs of capex reviving, consumption stable
20.0
• Consumption expenditure grew faster than capex in FY16 & FY17 Real GDP Growth
Consumption
15.0 Gross Capital Formation

• Capex grew faster than consumption in FY18 10.0

- It should further accelerate in FY19 5.0

- This should be positive for economic growth 0.0

-5.0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 H1FY19
• Infrastructure capex has improved over last few years led by roads etc.

Rising capacity utilisation driving capex


%
• Signs of private capex recovery with capacity utilisation increasing recovery
80

Capacity Utilisation
78
Capacity Utilisation (SA)
• Cement and Steel majors have announced significant capex Long term Average
76

74

72

70
Jun-11 May-12 Apr-13 Mar-14 Feb-15 Jan-16 Dec-16 Nov-17

21
Source: CMIE, RBI, SA: Seasonally Adjusted
Sustained low inflation led by benign food prices
• Over the past 4 years, average inflation has been less than 4.3% as compared to 9.4% in 5 earlier years

– Food inflation has fallen significantly to 3.4% from 9.7%

– Driven by high agriculture growth in India and low global food prices (refer slide 11) , food inflation in India
has been low over past 4 years as compared to previous10 years

• Average non-food inflation over past 4 years has been ~5%, significantly lower than 9% in earlier 5 years

Average inflation for the period


% Sustained Low Inflation
25.0 2000 - 2005 – 2010 – 2015 -
%
Food CPI 2004 2009* 2014 2018
20.0 Headline CPI
Headline CPI 3.9 6.3 9.4 4.3
Average Headline CPI
15.0
Non -Food CPI* 4.8 5.6 9.3 5.0
10.0
Food CPI* 2.6 9.4 9.7 3.4
5.0
Real Agriculture
1.7 3.2 4.1 3.3
0.0 growth

-5.0
*details of 2006 not available. Hence Food and non-food
Nov/09 Nov/12 Nov/15 Nov/18 CPI is calculated using average of 2005, 2007-09.
- CPI-IW is used for the period before 2012

Low food inflation has adversely impacted farmers incomes


22
Source: CMIE, Bloomberg, World Bank
Summary of Indian Economic Outlook

• India remains a secular long term growth story driven by

• Excellent demographics and rich natural resources

• Large availability of skilled, young, English speaking and competitive manpower

• Low penetration of consumer goods and improving affordability

• Large unmet needs of infrastructure and strong reforms momentum

• Spate of reforms in past 4 years (refer slide 20) have created a favourable economic environment for sustained
growth over medium to long term

• Macro economic indicators are stable and healthy

• Infrastructure capex continues to gain momentum; Definite signs of revival in industrial / private capex

• By 2028, India is likely to become the third largest economy in the world*

23
Source: *Bank of America Merrill Lynch Report “India 2028: The last BRIC in the wall” dtd 10th Nov 2017
Equity Markets

“What the wise man does in the beginning, the fool does in the end.”
--- Warren Buffett

24
2018 – An eventful year for Indian Equities
Markets end flat despite volatility

S&P BSE Sensex


40000
Q1 earnings majorly
in line with
39000 expectations IL&FS
Default Volatility due
38000 to weak
NASDAQ reached Oil reached
all time high of global cues,
$86/b, rupee US Fed rate
37000 8109 closed at all
Introduction of hike
time high of
LTCG in Equity US Fed rate 74.4 per $
36000 Hike

35000 Strong Q4FY18 Oil at


Earnings Growth $50/b,
corrected
34000
by ~40%

33000 First correction in


15 months due to
trade war
32000
Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18

Indian equity markets outperformed global markets in 2018 (slide 9)

Source: Bloomberg. Data updated till 31st December 2018 25


Sharply Divergent Performance across sectors and Large / Mid / Small caps

Sectoral Performance % 2018 returns across Large/Mid/Small cap indices


5.0 3.1
1.1
Nifty Realty -32.8
0.0
Nifty Media -25.8
Nifty Auto -23.0 -5.0
Nifty Metal -19.8 -10.0
Nifty PSU Bank -16.5 -15.0
Nifty Infrastructure -12.6 -20.0 -15.3
Nifty Pharma -7.8 -25.0
Nifty India Consumption -2.3 -30.0
Nifty Energy 0.6 -28.9
-35.0
Nifty 50 3.1 Nifty 50 Nifty 100 Nifty Midcap Nifty
Nifty Bank 6.3 100 Smallcap 100
Nifty Private Bank 8.1
Nifty FMCG 13.6 Absolute Returns %
Nifty IT 23.7
As on December 31, 2018 1 year 3 years 5 years
-45.0 -25.0 -5.0 15.0 35.0 Nifty 50 (A) 3.1% 36.7% 72.3%
% Nifty Midcap (B) -15.3% 33.4% 121.5%
Nifty Smallcap (C) -28.9% 14.1% 89.5%

• IT, FMCG and Private banks Outperformed while Auto, • Large caps outperformed mid and small caps;
Metal & PSU Banks underperformed Performance of small and mid caps indices should be
viewed in the context of strong performance over past 3
• IT was the top performing sector driven by weak INR, and 5 years
while Realty was the worst performing sector.

Source: MFI; Returns for Calendar year 2018. Data updated till 31st Dec 2018 26
2018 – A watershed year for Indian Equity markets
The Power of Retail investors

• Strong domestic flows have reduced impact of FII selling and thus volatility
• Since Jan 17, FII were net sellers (greater than USD 2.5 bn on 90 days cumulative basis) on three occasions but unlike in the
past, Indian equity markets held up well on each of these three occasions as seen in table below

90 Days Period FII Outflows Indian Market FII outflows as % Fall in


ending (In USD Bn)* capitalization (USD bn) of Market cap Sensex #

03-Apr-08 -4.5 1,270 0.4% -10.9%


03-Dec-08 -5.7 543 1.1% -43.6%
24-Oct-11 -2.5 1,208 0.2% -13.5% Source: Bloomberg

04-Sep-13 -3.9 917 0.4% -5.7%


* Maximum outflow on a 90 days rolling period and greater
22-Jan-16 -3.1 1,362 0.2% -13.1% than USD 2.5 bn
# 6 months returns till the date
05-Jan-17 -5.1 1,589 0.3% -1.2%
24-Oct-17 -4.2 2,154 0.2% 8.9%
14-Nov-18 -5.6 1,956 0.3% -0.7%

• This was due to sustained domestic flows into equity funds – currently (Rs 10,000-12,000 crs a month)^, of which SIPs flows
itself are Rs 7,000-8,000 crores (25 million SIPs of Rs 3,000 each on an average)

A shift in power in capital markets from offshore players to domestic individual investors !

Source: AMFI; ^considering the average flows in past 6 months ending Nov18 27
Equity Markets – Valuations

India market cap to GDP ratio, calendar year-ends 2005-20E (%)

160 Mcap/GDP (%) NIFTY 12M forward P/E (X) 25


23
140 20
18 19 20
120 149 17
16 17.4
17 16.5
100 16 14 14.2
15 99 15
88 98 13
80 13
92
69 11 72 79
64 81 76 10
60 56 61 71 71
63
40
5
20

0 -
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E

• Market Cap to GDP for 2018E to 2020E are based on current market cap and GDP estimate by Kotak Institutional Equities

• Marketcap to GDP at 63% is attractive, specially at time when NIFTY EPS growth is estimated at 17% CAGR over FY18-21E (slide 29)

• Markets are trading at CY20(E) P/E of ~14x, which is reasonable, especially given improving earnings outlook

Given depressed earnings, Marketcap to GDP is a better valuation parameter

Data Source: Kotak Institutional Equities, updated till 30th Dec, 2018, From 2005-18, NIFTY50 PE is based on 12 month forward estimated EPS. For 2019E, by Kotak Institutional Equities has calculated PE based on EPS
numbers as of Mar-20 end and for 2020E based on EPS of Mar-21 end 28
Strong earnings growth ahead NIFTY EPS growth of 17%
CAGR expected between
FY18 and FY21

Earnings - The worst is behind, strong improvement ahead


NIFTY EPS NIFTY EPS
FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E
CAGR 13-18 CAGR 18-21E

NIFTY EPS 377 410 398 384 439 448 513 629 722
3.5 17.2
Growth % 8.8 -2.9 -3.5 14.4 2.0 14.2 22.7 14.8
Source: Kotak Institutional Equities, E: Estimates

Reasons for weak NIFTY Earnings growth in FY13-18 Earnings growth in FY18-21E should be driven by
Metals & Mining Metals & Mining

Low prices in China and rest of the World • Higher prices led by MIP (Minimum Import Price) in steel and higher global prices
across metals & INR depreciation
Low demand growth & large imports in India
• Growing Infra / Housing spends / improving volume growth
Corporate Banks & Financials

Significant increase in stress in steel, power & infra sectors


Corporate Banks & Financials
Higher provisioning on NPAs impacted profitability sharply
• Recognition phase of NPAs is largely over, GNPA provisioning is at 54% as on Sep 18
Utilities
• With falling slippages and increasing resolution of NPAs provisioning costs are
Change in CERC (Central Electricity Regulatory Commission) expected to fall sharply
regulations
Utilities

• Capacity led growth

Interestingly, most of the sectors that witnessed weak profit growth / declining profits are the ones expected to
witness healthy growth going ahead
29
HDFC Mutual Fund/AMC is not guaranteeing any returns
Convergence of Largecap and Midcap Indices and valuations

Revenue growth 5 year CAGR 10 year CAGR


• No material difference in revenue growth of largecaps and
NIFTY Midcap 4.7 11.6
midcaps
NIFTY 50 5.6 9.7

600
• Large caps underperformed midcaps in last few years due to NSE Midcap

weak NIFTY EPS growth (refer slide 29) 500 NIFTY 50


400

300

200
• With improving prospects of NIFTY EPS growth and correction in 100
Mid Cap stocks, Largecaps and Midcap indices have now
converged 0
05 07 08 09 10 12 13 14 15 17 18

40
NSE Midcap premium to Nifty 50
20
• After correction in 2018, midcaps valuations have also converged
with largecaps 0

(20)

(40)

(60)

(80)
05 06 07 08 09 10 11 12 13 14 15 16 17 18
Source: CLSA, Bloomberg, Midcap refers to NIFTY Midcap 100 . Largecap refers to NIFTY 50, 30
data updated till Dec 29, 2018
Year Ending BSE S&P Sensex** 1 year absolute returns
Worried about elections ? Mar-79 100
Mar-80 129 29
Mar-81 173 35
Mar-82 218 26
Mar-83 212 -3
Elections and equity returns Mar-84
Mar-85
245
354
16
44
Mar-86 574 62
Spot the pattern* ! Mar-87 510 -11
Mar-88 398 -22
Mar-89 714 79
Mar-90 781 9
Mar-91 1168 50
Mar-92 4285 267
Represents year of elections
Mar-93 2281 -47
Mar-94 3779 66
*As can be noticed there is no pattern in S&P BSE Sensex returns during the Mar-95 3261 -14
year in which elections were held or in years before or after the elections Mar-96 3367 3
Mar-97 3361 0
**The base year of S&P BSE Sensex is 1978-79 and the base value is 100 Mar-98 3893 16
Mar-99 3740 -4
Mar-00 5001 34
Mar-01 3604 -28
Source: Sensex : www.bseindia.com, Election Commission of India for election Mar-02 3469 -4
years, Returns computation internal Mar-03 3049 -12
Mar-04 5591 83
Mar-05 6493 16
Mar-06 11280 74
HDFC Mutual Fund / AMC is not guaranteeing or Mar-07 13072 16
promising or forecasting any returns on investments Mar-08 15644 20
Mar-09 9709 -38
Mar-10 17528 81
Mar-11 19445 11
Above chart is illustrative and for general information. Historical performance Mar-12 17404 -10
Mar-13 18836 8
indications and financial market scenarios are not reliable indicators of
Mar-14 22386 19
current or future performance. HDFC Mutual Fund/AMC is not guaranteeing
Mar-15 27957 25
any returns on investments made. In view of the individual circumstances
Mar-16 25342 -9
and risk profile, each investor is advised to consult his / her professional Mar-17 29621 17
advisor before making a decision to invest Mar-18 32969 11 31
Equity Markets Summary

• Strong outlook for economic growth and earnings growth (NIFTY EPS growth estimated at 17% CAGR over FY18-21E (Slide 29)

• Markets are trading at CY20(E) P/E of ~14x and Marketcap to GDP ratio of 62% CY20E (Slide 28)

• Strong profit growth outlook, steady local flows and reasonable valuations lead to a positive view of markets

• Post correction in 2018, midcaps valuations have converged with largecaps

• Trade wars, rise in oil prices , sharp increase in US rates, sharp deterioration in local / FII flows, setback to NCLT etc are

key risks in near term

32
Fixed Income Markets

“It doesn’t matter how slow you go so long as you do not stop”

33
2018 Fixed Income markets – Flat ending to a volatile year

% 10-Year G-Sec Yield and Repo Rate


7.5
8.4 India 10 Yr G-Sec Repo Rate,RHS 7.3
8.2 7.1
Oil prices continue to rise
1) Reduced H1FY19 FII remains net sellers
borrowing program 6.9
8.0
2) Dovish RBI commentary
6.7
7.8
6.5
7.6 6.3
1) RBI Pause; 6.1
7.4 2) Muted Inflation
3) Larger OMOs Purchases 5.9
4) Sharp correction in oil
7.2 Concern of fiscal slippages
prices 5.7
Rising oil prices and weak INR
FII turns net sellers
7.0 5.5
Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18

• G-Sec yields remained volatile - High sensitivity to INR & Oil, RBI OMO purchases and FII outflows
• RBI hiked policy rates twice by 25 bps each in 2018 and also changed its stance from neutral to calibrated tightening
• US yields remained at elevated level for most part of the year
• Headline CPI remained lower than RBI’s forecast led by benign food prices

Source: Bloomberg 34
Build-up of risks in NBFC Sector; Increased reliance on MFs for funding

• 15% CAGR growth in NBFCs/HFCs asset book over HFC & NBFC's ex PFC/REC (Borrowing) Mar-14 Mar-16 Mar-18 Aug-18
past 3 years. NBFCs’ share in total credit increased to Bank Funding (Rs bn) 4,333 5,504 7,197 7,602
21% in FY18 from 18% in FY14 MF Funding (Rs bn) 939 1,792 3,938 4,678
Insurance/Pension/Deposit (Rs bn) 2,073 3,243 4,101 4,226
Total 7,345 10,539 15,236 16,506

Bank Funding % 59 52 47 46
• Banks exposure to NBFCs/HFCs has also increased
MF Funding % 13 17 26 28
to 13.8% in FY18 from 11.7% in FY14
Insurance/Pension/Deposit (%) 28 31 27 26

• MF’s exposure to NBFCs has increased to 35% in MFs Non Equity AUM 4,542 7,213 11,986 13,443
Aug18 from 21% in Mar14 MF Funding as % of MFs non equity AUM 21 25 33 35

• Sharp increase in share of CPs in the borrowing mix HFC & NBFC's ex PFC/REC Mar-14 Mar-16 Mar-18 Aug-18
of NBFCs and HFCs (ex- PFC and REC) – from 5.3% Commercial Papers (INR bn) 392 830 1,685 2,691
in FY14 to 16.3% in Aug18 leading to Asset Liability
mismatch (ALM) concerns % of total borrowing 5.3 7.9 11.1 16.3

MFs contributed 40% of incremental funding since Mar 14

Source: Nomura , Global Markets Research , Sept 2018 , RBI


PFC- Power Finance Corporation Limited; REC – Rural Electrification corporation Limited
Refer disclaimer on slide 41
35
Liquidity concerns for NBFCs addressed, outlook is mixed

• Liquidity concerns post IL&FS default addressed by


• Timely actions by RBI and Government
• Securitisation / asset sale, unutilised bank lines etc. bps
NBFC Spread rises post IL&FS default*
325

275 Average AAA Spread

• Growth expected to moderate for NBFCs 225 Average AA Spread

• Cost of funds rising with widening of spreads 175

• Risk aversion amongst lenders 125

75
Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18

bps Corporate bond spreads widens^

190

• Corporate bond spreads have also widened during this period


140

90 3 yr AAA Spread
3 yr AA Spread
40
Sep/18 Oct/18 Nov/18 Dec/18

* AAA Average spread is average spread of 10 large AAA rated NBFCs 3 Yr. bond yields over 3 Yr benchmark Gsec. AA Average spread is average spread of 5 large AA rated NBFCs 3
Yr. bond yields over 3 Yr benchmark Gsec
^ AAA spread is spread of 3 Year AAA rated corporate bond yields over 3 Yr benchmark Gsec yields. AA spread is spread of 3 Year AA rated corporate bond yields over 3 Yr benchmark
Gsec yields 36
Source: Daily valuation provided by ICRA/CRISIL; Bloomberg; Data is updated till 31st Dec 2018. Refer disclaimer on slide 41
Interest Rates Outlook – Conflicting Forces at Play

Positives Negatives

• High Real yields in India • Higher Credit growth vs Deposit growth


• Healthy real rates differential between India & US • Capex recovery should boost credit demand
• Soft oil, commodity and food prices (refer slide 11) • Excess SLR securities holding of PSU banks
• Low rural wages growth • Concerns over fiscal slippages
• Expectation of large OMO purchases by RBI • Global liquidity tightening & increase in yields
• Headline CPI outlook remains benign • Core inflation sticky at elevated level

Yields likely to fall at the short end

37
Interest Rates Outlook - Forces favouring lower Interest rates

% India's Real Rates at near historic high % Healthy spread between US and India
6.0 Real Rates
• Real Yields in India at historical high 3.0
1.0
• CPI outlook remains benign -2.0
-4.0
led by food inflation
-9.0 -7.0
• Healthy Differential with US Real yields
-14.0 -12.0
Jan/03 Sep/05 May/08 Jan/11 Sep/13 May/16 Jan/03 Sep/05 May/08 Jan/11 Sep/13 May/16
Real Yields = Month-end 10Y GSec Yield and CPI; Updated till 30th Nov’18. CPI-IW is used to calculate real yields for period
before 2012

• Sharp fall in oil prices eases pressure on CAD


FY16 FY17 FY18 H1FY19
• Fall in oil prices beneficial for CAD and INR
outlook Crude prices (USD /bbl) 50.2 48.8 56.7 75.0
• Every USD 10 per barrel fall in crude prices CAD as % of GDP -1.1 -0.7 -1.9 -2.7
results in CAD falling by ~0.4% of GDP

%
US 10 Year Yield
3.50

• US Federal Governor’s comment that rates are “just


below” neutral rate indicates benign outlook for rise in 3.00
Fed rates
2.50
• US 10Y yields have come off materially from the
high made in Nov’18
2.00
Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18

38
Source: Bloomberg, RBI, Kotak Institutional research.
Interest Rates Outlook - Forces adversely impacting interest rate outlook
16.0% Credit Growth Vs. Deposit Growth
15.1%
• Bank credit growth accelerating 14.0% Deposit growth %
Credit growth %
12.0%
• Outpacing the deposit growth 10.0%

• Recovery in capex cycle likely to accelerate credit 8.0%


8.0%
6.0%
growth further
4.0%

2.0%
Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18

Excess SLR Securities with PSU Banks


33.0% Regulatory Requirement # Adj SLR*
• Excess SLR Investments, especially with PSU banks

• Incremental demand for G-sec could remain muted 28.0%

23.0%

18.0%
Jun/15 Dec/15 Jun/16 Dec/16 Jun/17 Dec/17 Jun/18

USD bn Net FII Debt flows


• Debt FII Flows remain volatile on back of rising USD and 3.0
global liquidity unwinding 2.0 1.3
0.8 0.7
1.0 0.5
0.0
• Net FII Debt Outflows CY18 stood at USD 6.9 bn -
-1.0 -0.0
-2.0 -1.4 -1.5 -1.4 -1.3
-1.6
-3.0
* Adj SLR = Investments in Statutory Liquidity Ratio (SLR) Securities adjusted for securities under LAF
-4.0 -2.9
# Regulatory Requirements = SLR + Liquidity coverage requirement requirements (~15-17% of NDTL) – carve out allowed
Jan18

Feb18

Mar18

Apr18

May18

Jun18

Jul18

Aug18

Sep18

Oct18

Nov18

Dec18
from SLR
39
Source: RBI, Kotak Institutional research, NSDL
Fixed Income Summary

• Some factors support lower yields, while others don’t (refer slide 37)

• Yields likely to fall at the short end (upto 3-5 years)

• Immediate liquidity concerns of NBFCs reduced; ALM mismatch still remains a challenge

• Asset quality of NBFCs needs to be monitored

• Cautious approach on credit and duration recommended

• Key risks to yields


• Sharp rise in global yields & oil prices
• FII flows remain uncertain

Wish you and your family a very Happy New Year


- HDFC Mutual Fund
40
Refer disclaimer on slide 41
Disclaimer & Risk Factors

This presentation dated 2nd January 2019 has been prepared by HDFC Asset Management Company Limited (HDFC
AMC) based on internal data, publicly available information and other sources believed to be reliable. Any calculations
made are approximations, meant as guidelines only, which you must confirm before relying on them. The information
contained in this document is for general purposes only. The document is given in summary form and does not purport to
be complete. The document does not have regard to specific investment objectives, financial situation and the particular
needs of any specific person who may receive this document. The information/ data herein alone are not sufficient and
should not be used for the development or implementation of an investment strategy. The statements contained herein
are based on our current views and involve known and unknown risks and uncertainties that could cause actual results,
performance or events to differ materially from those expressed or implied in such statements. Past performance may or
may not be sustained in future. Stocks/Sectors referred in the presentation are illustrative and should not be construed as
an investment advice or a research report or a recommended by HDFC Mutual Fund / AMC. The Fund may or may not
have any present or future positions in these sectors. HDFC Mutual Fund/AMC is not guaranteeing any returns on
investments made in the Scheme(s). The data/statistics are given to explain general market trends in the securities
market, it should not be construed as any research report/research recommendation. Neither HDFC AMC and HDFC
Mutual Fund nor any person connected with them, accepts any liability arising from the use of this document. The
recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate
professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information
contained herein.

Mutual fund investments are subject to market risks, read all scheme related documents
carefully.

41
Thank You