Economy and Equity Market

Outlook - 2015
 ECONOMY OUTLOOK 2015

The table below highlights what we feel was the economic picture for the Indian economy in CY 2014.

The Good The Not So Good The Bad

Remittances Corporate Earnings Fiscal Deficit
FII Flows GDP Growth
Economic Reforms
Currency
CPI Inflation
Current Account Deficit

The table below highlights what we expect the economic picture to look like in CY 2015. We feel a
number of economic concerns will recede and hence the current Indian economic environment will
change for the better in CY 2015.

The Good The Not So Good The Bad

FII Flows Fiscal Deficit
Remittances CPI Inflation
GDP Growth (considering India’s
Corporate Earnings
potential)
Economic Reforms
Current Account Deficit
WPI Inflation
Currency (in comparison with
other emerging markets)
Fall in Oil Prices – Game Changer for Indian Economy
Crude oil prices have corrected by close to 48% since hitting a peak in June 2014, driven by a structural
supply glut and political gridlock. Crude Oil prices are currently at a 5 year low. Unlike in the past, the oil
price drop is not linked to a crash in oil demand or risk-off in global equities. OPEC’s decision to move
away from being the sole manager of the demand-supply gap is unprecedented and could lead to low oil
prices for the next few years.

US $ per barrel Brent Crude Prices

115

105

95

85

75

65

55
Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14
rd
Source: Bloomberg, 23 December, 2014

The current correction in Oil prices is hugely positive for India as highlighted below.

 Every USD 10/bbl. fall in crude oil price improves India's Current Account Deficit by around USD
9 billion or 0.5% of GDP
 Every USD 10/bbl. fall in oil price can boost GDP growth by around 10 bps and reduce fiscal
deficit by 0.10 %
 Every USD 10/bbl. fall in crude oil prices lowers CPI inflation by 20 bps and WPI Inflation by 50
bps

Source: Asia Economic Outlook, Nomura, 24th November, 2014

Current Account Deficit (CAD):
The CAD for the year's first half, April-September 2014, was $ 17.9 billion (1.9 per cent of GDP) as
against $26.9 bn (3.1 per cent of GDP) for April-September 2013. CAD remains within RBI's comfort zone
of 2.5 per cent of GDP. The balance of payments (BoP) was in positive territory.

Current account balance Trade balance

2007 2008 2009 2010 2011 2012 2013 2014
0
(10) (16)
(40) (28)
(38) (32)
(46)
(80) (62)
(78)
(91) (88)
(120)
(120) (118)
(131)
(160) (148)

(200) (190) (196)

Source: CEIC, Kotak Institutional Equities. Trade deficit and CAD, March fiscal year-ends, 2007-2014 (US$ bn)

CAD – India best placed:

Current Account Balance

%of GDP (4-qtr sum)
0
-1
-0.98
-2
-3
-2.8
-4 -3.5
-3.7 -3.7
-5 -4.1

-6 -5.5
-5.9
-7 -6.5
-8 -7.1
India Indonesia South Africa Brazil Turkey
September-13 September-14
Source: Nomura, Asia Research, November 2014
Our View:

In FY14 when crude oil was at $108/bbl., India reported CAD of $ 32.4 billion with the help of restricting
gold import to the tune of 350MT (assuming on the higher side). Taking gold at $1200/oz., the actual
reported CAD would have been $ 46.4 billion.

In FY16, if we take average crude oil price at $80/bbl., the petroleum, crude and other products imports
would be $76 billion against worth $102 billion in FY14. It will results in savings of $ 26 billion. So CAD in
FY16E would only be $ 20 billion, which can be easily funded by capital flows

Fiscal Deficit:

Fiscal deficit
6.2 6.5
5.9 6.0
5.7 5.9

4.9 4.9
4.5 4.6
4.0 4.1
3.9
3.6
3.3
3.0
2.5
FY07
FY01

FY02

FY03

FY04

FY05

FY06

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15E

FY16E

FY17E
st
Source: Bloomberg, 31 July, 2014

The new central government has shown strong commitment towards fiscal consolidation, with fiscal
deficit target of 3% over the next 2 years.
Inflation & RBI Policy Actions:
 India’s WPI Inflation is at a 5 year low of 0%.
 India’s CPI Inflation (the number keenly monitored by RBI) came at 4.38%, which is at lowest
level since the new series of Consumer Price Index was released in January 2012.

Inflation Trend
Rates in %
10 8.79
8.31 8.59 8.28
9 8.03 7.96
7.46 7.73
8
7 6.18 6.46
6
5.55 5.66 5.41 5.52
6 5.11 5.03
5 4.38
3.85
4
3 2.38
1.77
2
1 0
0
Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14

WPI CPI
nd
Source: Bloomberg, 22 December, 2014

There were no rate cuts by RBI in 2014, inspite of sharp fall of close to 450-500 bps in Inflation.
However the 10 year G-Sec yields and 1 year Commercial Paper yields have fallen close to 100 bps in
2014 in anticipation of lower rates in 2015.

9
RBI Rates 8%
8
7%
7

5
4%
4

3
Nov-13

Nov-14
Jul-13

Jul-14
Jun-13

Jun-14
Apr-13

May-13

Apr-14

May-14
Jan-13

Feb-13
Mar-13

Aug-13

Sep-13

Dec-13

Jan-14

Feb-14
Mar-14

Aug-14

Sep-14

Dec-14
Oct-13

Oct-14

Reverse Repo Repo CRR

nd
Source: RBI, 22 December, 2014
Our View:

Inflation contributors under control - We expect inflation trend to be lower than CY’14 due to the
following; lower global commodity prices, lower minimum support prices and other supply side
measures taken by RBI.

Variables affecting inflation in 2015

Recent fall in crude oil prices should help reduce CPI
Crude oil prices
inflation by 60-80 bps.

Fall in MSP increase from 22% to 5% should help

Minimum Support Prices (MSP)
lower CPI inflation by around 2pp over two year period.

Measures to boost supply of fresh food can have

Supply side measures by govt.
considerable impact on CPI inflation in the near term

Marginal direct impact. Limited second round

Other commodity prices
impact on lower input cost for manufactured goods

The RBI has maintained its estimate for real GDP growth in 2014-15 at 5.5% and expects only a gradual
pick-up in growth momentum in 2015-16. RBI has acknowledged the recent deceleration in inflation and
has revised downwards its March 2015 CPI Inflation projection to 6% from 8% and its January 2016
inflation projection has also been kept at 6%. RBI now sees the medium term risks around its January
2016 target of 6% as evenly balanced rather than to the upside, as in the last policy meeting.

RBI`s policy guidance removes uncertainties, despite the decision to keep rates on hold. Governor
Rajan has laid the foundations for future rate cuts. Looking at current low international commodity
prices and improving domestic inflation expectations we expect 50 bps rate cut in 2015.

Falling interest rates will benefit equities as an asset class, as well as improve fundamentals of many
rate sensitive businesses.

We feel global developments due to sharp fall in Oil, movement of Rupee and persistence of FII interest
in India can proved to be key risks to this view.
Gross Domestic Product
India’s GDP grew by 5.7% in Q1FY15, the highest in 10 quarters and by 5.3% in Q2FY15. An uptick in
investment demand and exports is visible.

 Private consumption demand remained sluggish but is expected to improve as indicated by

higher sales of cars, and consumer goods.
 Several small steps announced by the government to improve the ease of doing business, are
lifting investor sentiment - results of business confidence surveys are proof of that.
 Speedier implementation of stalled projects and gradual easing of mining bans will help further.
However, the outcomes of the review of coal block allocations made in the past will be crucial to
decide the fate of mining output.

12 11.4
GDP trend
11
9.8 9.8 9.8 9.6
10 9.5 9.3
9 8.5
8.2
8
7.0
7 7.7
5.8 5.7
6 5.8 5.9 5.2 5.3
5 4.6 4.4
4
3.5
3
Jul-06

Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

Jul-12

Jul-13

Jul-14
Nov-06

Nov-07

Nov-08

Nov-09

Nov-10

Nov-11

Nov-12

Nov-13
Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

th
Source: Bloomberg, 30 September, 2014
India: An Oasis of Growth

8
GDP IN % 7.3
6.9 7
7 6.8
6.5

6 5.65.6
5.4
5.1
5

4
4 3.7

2.9 3
3 2.7 2.7
2.5
2.2 2.2
2 1.7 1.8
1.5 1.4
1.1 1.2 1.2
1 0.8
0.50.6
0.3 0.2
0
Japan Europe U.S U.K Brazil Russia Mexico Indonesia India China

2014 2015 2016

Source: Morgan Stanley, Barclays, Citi, Goldman Sachs

Goldman Sachs feels India's GDP growth will overtake China's and become the fastest-growing emerging
market over 2016-18. They feel the Indian economy was at the beginning a new growth cycle, driven by
reduced macro imbalances, benign global conditions (lower commodity prices) and structural reforms.
Other emerging markets such as Brazil, Russia and South Africa are expected to grow at a much slower
pace on weaker commodity prices.

Our View:

GDP growth will recover slowly as the investment cycle will take time to mend given extant funding and
investment challenges. We believe that India is on way to 6.3%+ growth (+/- 0.3%) in FY15-16.
Stable Currency
The Indian Rupee has performed significantly better than other Emerging Market currencies in spite of
end of QE (in US). This is due to improving current and fiscal deficit (boosted by sharp correction on
crude oil prices).

205 Emerging Market Currencies

185

165

145

125

105

85

Rupiah (Indonesia) Rand (South Africa) Rupee (India)

Real (Brazil) Russia (Ruble)

th
Source: Bloomberg, 15 December, 2014

Goldman Sachs expects the Indian rupee to remain largely stable against the dollar, due to capital flows.
This means that even as the US Federal Reserve begins to increase rates next year, India will not see the
kind of turmoil seen in 2013. However, India's rupee could appreciate against other developed market
currencies such as the Euro and the British pound.

In 2014, the INR lost close to 2% vis-vis the USD but appreciated by 4% and 10% against the British
Pound and Euro respectively.
 EQUITY MARKET OUTLOOK
2014 Revisited
Equities were the best performing asset class in CY 2014.

35 Returns (in %)
30
30
25
20
15
15
9
10
5
5
0
-5 Gold 10 year Treasuries Bank Fixed Deposits Property Equities

-10 -7

th
Source: Bloomberg and Mint, 29 December. Bank FD returns are for average SBI FD rates, returns for property are average
price in seven metros for real estate and returns for Gold are domestic price for Gold.

Indian equities are one of the best performing global equity market this year, barring Shanghai market
which has rallied in recent months.

50% World Equity Market Indices 43.3%

40% 31.2%
30.1%
30%
20%
8.2% 8.7%
10% 3.9%
0.1% 0.4%
0%
-10% -3.6% -2.2% -1.2%

-20%
-30%
-40%
-50% -44.1%
Russia Korea US Brazil Hong France Germany Japan US S&P BSE CNX Shanghai
Kong Sensex Nifty (China)
rd
Source: Bloomberg, 23 December, 2014
 30,000 CNX Nifty 8,800
S&P BSE Indian Equity Market Indices Index Levels
29,000 Sensex Index
Levels 8,300
28,000
27,000
7,800
26,000
25,000 7,300
24,000
6,800
23,000 S&P BSE Sensex
22,000 CNX Nifty
6,300
21,000
20,000 5,800
Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14

rd
Source: Bloomberg, 23 December, 2014

This year has been exceptional as all the sectors delivered positive returns. Amongst the sectors
Consumer durables and Financials delivered highest returns of around 61% and 63% respectively. Realty,
Metal and Energy stocks were at the bottom but delivered positive returns.

70%
Sectorial Performance (in %) 63.8% 63.8%
61.5%
60%
51.4%
49.3%
50% 44.9%
38.0%
40% 34.2%

30%
19.0% 20.7%
20% 16.1%
13.7%

10% 5.7%
1.9%
0%

rd
Source: Bloomberg, 23 December, 2014
 EQUITY OUTLOOK 2015
It will be difficult to predict the movement of indices but we believe 2015 could continue to be a good
year for Indian equities. Some of the factors that make Indian Equity attractive are

1. Earnings & Valuations the Pillars for Equity Market Growth:

FY14-17E: 20%
19% CAGR

22% 2,230

FY08-14:
14%
FY 03-14: 14% CAGR 8.2% CAGR 1,866

1,529
FY01-08: 1,340
21% CAGR 1,123
1,183
1,024
833 820 834
718
523
450
348
216 236 272
FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15E

FY16E

FY17E
Source: MOSL, November 2014

Post 8.2% CAGR earnings growth during FY08-14, there is revival in earnings growth (estimated 19%
CAGR in FY14-17E). The strong earnings growth is expected to drive P/E ratings and markets.
Price Equity Ratio:
32

27 25.58
25.08

22
18.91
18.56
17 17.48
15.46

12

7
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
CNX Nifty CNX Midcap
rd
Source: Bloomberg, 23 December, 2014

The markets still very attractive as the indices are trading close to their 8 year average, but still are way
below their peak.

 CNX Nifty is currently trading at PE of 18.91x, which is at around 33% discount to its peak
 CNX Midcap is trading at PE of 18.56x, which is at around 35% discount to its peak

Price to Book Ratio

7
6.11
6

5
4.03
4
3.02
3 2.92
2 2.23
2.02
1

0
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
CNX Nifty CNX Midcap
rd
Source: Bloomberg, 23 December, 2014

The markets still very attractive as the indices are trading close to their 8 year average, but still are way
below their peak.

 CNX Nifty is currently trading at PB of 2.92x, (compared to peak of 6.11x in 2008)

 CNX Midcap is trading at PE of 2.02x, (compared to peak of 4.03x in 2008)
 2. FII & Domestic Flows will add zing to the markets:
Yearly trend in net FII investments (USD billion)
40
29.3 FII
30 24.5
20.0
17.8 17.6
20
14*
8.1
10

0
-0.5
-10
-12.2
-20
CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 YTD
th
Source: Bloomberg, 29 December, 2014

FII’s continue to be positive on India, with highest flows amongst emerging markets. However FII flows
into equity were modest compared to last couple of years. A key reason could be that FII’s also
purchased 26 billion USD of Indian Fixed Income securities this calendar year. In the past six years (FY10-
FY15E), Indian households will have invested an estimated US $ 40 billion into equities at an average
annual rate of $ 6.7 billion (includes direct equity purchase, purchases through mutual funds and life
insurance). During the same period, FIIs inflows amounted to US $ 106 billion at an average annual rate
of close to $ 18 billion.

Significant jump in flows into domestic equity mutual funds since May‐14

Flows into Domestic Mutual

Funds (in Rs Billion) 428*

77
14

2009 2010 2011 2012 2013 2014

-104
-158 -156
th
Source: Bloomberg, 29 December, 2014 (till November, 2014)

Domestic mutual funds are witnessing robust inflows since May 2014. We expect this to accelerate in
the coming years.
The last time Indian households were bullish on equities was in FY08. In that year, 52% of household
savings went into financial assets (they have since fallen to 35% in FY14) and an estimated 5.0% of total
savings went into equities (they fell to 1.6% in FY14).
6 Share of annual household savings invested in equities (in %)
5 5
5
4.5
3.9
4
3.5
3.3
2.9
3

2
2 1.8
1.6 1.5 1.6
1.1 1.1
0.9
1

0
FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 FY 15E FY 16E FY 17E FY 18E
Source: IIFL India Strategy, 2015

Estimated equity investments by households (US $ billion)

35 32.6

30
25.1
25

20 16.8
15 13.8
10
10 8.6 8.7
6.4 7.3
6.1
3.2 4.1 3.8
5 2.3 2.6

0
FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 FY 15E FY 16E FY 17E FY 18E

Source: IIFL India Strategy, 2015

IIFL estimates that households could invest $ 74 billion over the next three years (FY16-FY18E), at an
average annual rate of nearly $25 billion.

Our View:

Indian Retail Investors have been underweight on equities over the last few years and reversion to
mean will add domestic flows to the markets.
 3. Market Cap to GDP

Market Cap to GDP is a long-term valuation indicator that has become popular in recent years, thanks to
Warren Buffett. Back in 2001 he remarked in a Fortune Magazine interview that "it is probably the best
single measure of where valuations stand at any given moment."

The value of Indian listed companies as a percentage of the country’s economic output is at its highest in
a little over three years, an indication that market valuations are at least fairly valued. The figure is still
off its all-time high in December 2007, when it crossed 100% of GDP. It is also lower compared to global
average of 82%.

India’s Market Cap in the global context

Country M Cap (US$ billon) 2014 GDP (US$ billon) M Cap/GDP %

U.S 23400 17416 134

China 4938 10465 47
Japan 4392 4670 94
Hong Kong 3873 293 1324
U.K 3568 2815 127
Canada 1987 1785 111
France 1930 2868 67
Germany 1846 3775 49
Switzerland 1596 672 238
India 1474 2115 70
South Korea 1175 1434 82
Australia 1164 1464 80
Taiwan 940 503 187
brazil 737 2202 33
Spain 731 1384 53

Source: IIFL Research. Based on 2014 GDP estimates of IMF and market data as on 16‐Dec‐2014
 4. GDP and Earnings Growth
The equity markets generally tend to do well when both the GDP growth and Earnings growth are robust
(a sample period of 2003-2007 bull period shown below). In the long run, one can reasonably expect
average equity returns to at least track the nominal growth of the economy.

Year GDP Growth Earnings Growth Sensex Return

2003 8.10% 20.60% 73%
2004 7.00% 36.50% 13%
2005 9.50% 27.70% 42%
2006 9.60% 25.50% 47%
2007 9.30% 19.00% 47%
rd
Source: Bloomberg, 23 December, 2014

Market Performance and GDP Growth

14,000 CNX Midcap 12

Index Level CNX Nifty
12,000 Index Level
10

10,000
8
8,000
6
6,000
4
4,000

2,000 2

0 0
Jul-01

Jul-02

Jul-03

Jul-04

Jul-05

Jul-06

Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

Jul-12

Jul-13

Jul-14
Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

CNX Midcap CNX Nifty GDP

rd
Source: Bloomberg, 23 December, 2014

As growth starts to look up and earnings outlook will improve, the market can continue to perform
well.
 5. Economic Reforms

We expect the central and progressive state governments to implement more meaningful reforms in
2015. Fiscal reforms are underway with the government focusing on implementation of GST; direct cash
transfer schemes, etc. Introduction of GST and DTC will have a huge impact as it will removes the tax
anomalies and increases GDP by over 1% and help generating better revenues which is the need of hour.
Investment reforms in areas related to labor, land and power reforms may ease the business conditions.

India continues to rank poorly in the World Bank’s Ease of Doing business survey at No. 134 of 180
countries. Government “Make in India” initiative should over time help improve the ranking as it creates
congenial environment which facilitates investments.

Coal sector reforms – Auctioning of 72 coalmines de-allocated by Supreme Court in Sep’14 is expected
to be completed by Mar’15. Auctioning of the balance 140 odd mines would happen in phases. The
government has set a target to raise Coal India’s production from 462MT in FY14 to 925MT in FY20 (12%
CAGR) and India’s total production from 565MT in FY14 to 1200MT in FY20 (12% CAGR). Mine-wise
plans are being drawn. Government is seeking to modify the Coal Nationalization Act to allow third-
party sales by the private sector.

Labour reforms - Stringent labour laws, are a major constraint for the manufacturing sector. The
government has initiated labour reforms process

Manufacturing Reforms
 Increase manufacturing sector growth to 12-14%p.a. over the medium term.
 Increase the share of manufacturing from 16% of GDP to 25% by 2022.
 To create 100 million additional jobs by 2022 in manufacturing sector.
 Enhance the global competitiveness of the Indian manufacturing sector.
Source: www.makeinindia.com

The concerns at this point would be more related to execution, i.e., political risk as lot is driven by one-
man. Also, the government’s ability to implement reforms may be constrained by its minority status in
the upper house of parliament and its limited influence over states.
INVESTMENT STRATEGY:

Overall, we believe that 2015 will be another good year for Indian equities. With transformation in
macros driven by stable government, and low commodity prices, India is a multi-year theme – in this
context, we believe that investors should take a long term view while investing in equities. In the short
term (only 2015), there could be possibility of moderation in returns after significant re-rating in 2014,
and thus sector/stock selection is crucial. Possible strong reforms in various sectors will drive the market
hereon.

Introduction of GST and DTC will have a huge impact as it will removes the tax anomalies and increases
GDP by over 1% and help generating better revenues which is the need of hour. We believe the
historical verdict paves the way for strong growth over the next few years. Potential improvement in the
growth outlook will be dependent on the Government’s ability to bring in reforms. Aside from the sector
specific reforms, the potential macro reforms which mentioned above - like simplifying project approval
and land acquisition processes, labor reforms, federal reforms, tax reforms and lowering of subsidies.

We are running a fairly balance portfolio skewed towards growth oriented quality companies. We are
positive on both domestic themes as well as export oriented businesses like Pharma. Within domestic
sectors, we like businesses which will benefit from the likely reduction in interest rates, margin
expansion owing to fall in commodity prices, and reforms like GST, etc. Among the key overweight
position in our portfolios are Private sector banks, Consumer discretionary (like Autos, Auto ancillaries,
Building materials, etc.), and businesses which will benefit from the revival in the Manufacturing sector.
ANNEXURE - HISTORY OF BULL MARKETS- WHERE ARE WE?

BSE Sensex – History of Bull and Bear phases

BSE Sensex returns in Bull and Bear periods

The BSE Sensex has risen by 67% since its bottom in June 2012, versus 611% in the biggest bull-run of
Apr’03-Jan’08, and between 100-300% in other previous bull runs

In the last three bull runs, which ended in Feb’00, Jan’08 and Nov’10, the BSE Sensex peaked at trailing
PE of 24-28x, versus its current trailing PE of 18x. That leaves enough upside through a combination of
higher earnings growth and further expansion in PEx.

Source for all 3 graphs above: IIFL India Strategy, 2015

Disclaimer:

Certain information contained in this document is compiled from third party sources. Whilst Mirae Asset
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shall have no responsibility or liability whatsoever for the accuracy of such information or any use or
reliance thereof. This document shall not be deemed to constitute any offer to sell the schemes of Mirae
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Mirae Asset Mutual Fund/ its Directors or employees accepts no liability for any loss or damage of any
kind resulting out of the unauthorized use of this document. References to particular sectors, securities
or companies are for general information only and are not recommendations to buy or sell a security, or
an indication of the author’s holdings/ portfolios of the schemes of Mirae Asset Mutual Fund at any one
time.

The data mentioned are as on 29th December, 2014.

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