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Contents
Executive Summary 04
Revisiting History 05
India Growth Outlook 06
Corporate Performance Analysis 09
Economic Recovery & Structural Changes 13
Indian Equity Outlook 20
Inflation & Currency Outlook 23
Risks 25
Asset Allocation Strategy 26
Key Investment Themes – Equity Funds 27
Model Portfolio : Equity Funds Performance 28
Information and views provided in this report are general research views and should not be considered as investment advice. Analysis done in the
report is based on historical data and forecasts which have been taken from reliable sources like Bloomberg, RBI, IMF, World Bank, Rating Agencies,
Capitaline, CMIE, CEIC, GoI etc. Projections made in the report are only economic forecasts and do not represent any kind of assurance that such
projections shall come true. Hence, recipients of this report are requested to consult their respective advisors before investing.
4
Index
Executive Summary
A year after formation of new Government at the centre, macro parameters of the economy have
shown consistent improvement, partly aided by lower oil prices. Lot of incremental steps have been
taken by the Government to provide impetus to growth, business and consumer confidence too has
witnessed improvement. While there are some green shoots of growth like improving production of
capital goods, sales of commercial vehicles etc., full scale recovery seems to be few quarters away.
Winding back, one of the main reasons for economic slowdown in India was withdrawal of stimulus
to rein in unsustainable fiscal deficit & inflation, and state of policy paralysis that slowed decision
making, thereby impacting business conditions. The new Government has been addressing the
situation by energizing the bureaucracy, fast tracking decision making and improving procedures to
enhance ease of doing business. The environment is thus becoming “growth conducive”. But these
enablers by themselves may not be able to induce growth materially.
Recognizing the situation and given the fact that other set of stimuli (viz. private capex, monetary
easing, export growth etc.) are not forthcoming, the Government is attempting to provide the much
needed economic ignition by stepping up public spending on infrastructure which shall not only
improve the supply side bottlenecks but also enable utilization of idle capacities in the corporate
sector. That is expected to provide the initial push before modest acceleration catches up.
After many months of euphoria, market participants have come to recognize that for further up move
in equity prices, earnings growth needs to be supportive. Aggregate earnings growth have eluded
consensus expectations in last fiscal. In this issue we analyse this phenomenon closely and conclude
that it is the infra, commodity and energy linked corporates which have been the cause of
disappointment, something which is expected to reverse going forward.
A soft global growth is also proving to be a continuous headwind for the Indian economy. As such
till the time global economy does not fully recover, economic improvement in India may only be
modest. At the same time, a soft global economy is also helping India in form of lower energy and
commodity prices improving macro and corporate profit margins respectively.
On balance, we maintain our view that over next four years, equities are likely to outperform all other
asset classes in India context on the back of improving capacity utilization and margins, preferring
large cap and diversified equity portfolios over mid & small caps. Long term bonds also offer good
value given our view that inflation will structurally fall over a period of time.
Nilesh Mundra
Kunal Parekh
Raunak Bhaiya
Akhil Bilala
Vikas Kumar
Shrigopal Sarda
Gaurav Maheshwari
5
Revisiting History
Investment Outlook – January 2014 Investment Outlook – June 2014
Strong government with right economic policy will drive a
revival in corporate capex, eventually driving job creation.
Inflation & development (which drives job creation) have been
the two foremost election agenda of NDA. Focus towards
manufacturing shall occupy predominant place in policy making.
Equities likely to outperform all asset classes in Indian context,
primarily led by mean reversion in earnings growth across
cyclical & rate sensitive sectors; mid & small caps may
outperform large cap.
Inflation control & improvement in BoP shall help drive interest
rates down over next 2 to 3 yrs.
Real Estate should pick up later during the period led by
improved affordability (owing to better growth) & lower cost of
borrowing.
While the addition to labor force has been going up
substantially, absorption has been coming down. Therefore
investment, which go towards creating jobs (with emphasis on
manufacturing), is the real need as that only can support the
faltering consumption demand and help realize “demographic
dividend”.
Markets may react on extremes depending on who forms the
central government (and that is likely to be the driving force of
equity markets for next few months).
Barring the risk of a very weak central government post general
elections, long term bonds look to be offering decent value
relative to equities from a medium term perspective. We
continue to look for themes or strategies that can generate
absolute return with little influence from election results.
6
India’s growth is highly intertwined with Global growth
Global GDP growth vis. a vis. India External demand not yet supportive of recovery
Lack of Exports growth exerting pressure on Corporate Sales
Global growth expectation have routinely been revised
downwards as the year progresses. Thus, World Bank has
revised down its global growth forecast recently to 2.8% for
2015 from 3% (in January).
Corporate topline growth has shown a very high correlation with
export growth. India’s growth prospects have improved and
look far better than previous four years. However, a full blown
recovery in the economy needs to be supported by stronger
global growth.
-
2
4
6
8
10
-3
-2
-1
-
1
2
3
4
5
Global Growth%
India Growth% - RHS
16 16 15 15 15 15
17 18
21
23
24 24
28
24
26
28 28
27
26
5
7
9
11
13
15
10
14
18
22
26
30
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
India Foreign Trade (Ex Oil & Gold (Imports)) to GDP%
Exports (ex Oil) to GDP% - RHS
-2
2
6
10
14
18
22
26
30
34
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015e
Corporate Sales Growth vs. Exports
Sales Growth %
Export Growth %
7
Macro environment showing improvement…
Net FDI as % of GDP Coal Production (% Growth) Cement Production (% Growth)
Passenger Cars & M&HCV Sales (% Growth) … but rural slowdown is exerting pressure on discretionary consumption
*Scooters are predominantly sold in urban areas
0.5
0.7
0.9
1.1
1.3
1.5
1.7
FY11 FY12 FY13 FY14 FY15
(1)
2
5
7
10
FY11 FY12 FY13 FY14 FY15
3.0
4.3
5.5
6.8
8.0
FY11 FY12 FY13 FY14 FY15
(26)
(11)
4
19
34
FY11 FY12 FY13 FY14 FY15
Passenger Car M&HCV
(36)
(18)
0
18
36
Sep
-1
3
Oct-1
3
No
v-13
Dec-13
Jan
-1
4
Fe
b-14
Mar-14
Ap
r-1
4
May-14
Ju
n-14
Ju
l-1
4
Au
g-14
Sep
-1
4
Oct-1
4
No
v-14
Dec-14
Jan
-1
5
FY
15
Q
4
Tractor Sales (% Growth)
(3)
6
15
24
33
42
FY11 FY12 FY13 FY14 FY15
Motorcycles Scooters *
8
Key reforms measures announced & work in progress…
Areas Actions
Steps to improve
macro-economy
Diesel deregulated to reduce subsidy and improve fiscal health, fuel cess increased to ~ INR 6 to fund roads development
Steps to control inflation such as price stabilisation fund, a strong stand on hoarding, encourage states to delist fruits and
vegetables from APMC Act and lower increase in MSP
Monetary policy framework announced; Public sector capital expenditure increased with thrust on infrastructure (e.g.
investment in roads, urban infrastructure, etc.)
Administrative &
Legal
Simplification of procedure; Reduction in bureaucratic tape; Web based environmental clearance;
Revamping Project Monitoring Group
FDI
Railways: 100% FDI in railway infrastructure; Defence & Insurance: limit raised to 49% from 26%; FDI in construction
Make in India: aggressive campaign to get FDI;
Campaign to promote manufacturing in India, and raise its share to 25% from 18% currently.
Mining Mines & Minerals Act passed for auction-based allocation of mine leases;
Coal Mines bill enacted for transparent allocation of coal blocks thorugh auction; enables pvt cos to mine coal
Corporate Companies (Amendment) Bill to improve ease of doing business passed
Approvals Clearance process (environment and forest) made online. Backlog cleared
Labor reform Steps to increase transparency and ease of compliance (online portals). Draft of new labour bill unveiled;
Apprentices Bill passed. Should help in skilling the work force
Eco-socio
Programs Action
Jan Dhan Financial inclusion program. ~150 mn Jan Dhan accounts opened
Subsidies Direct benefit transfer for LPG has been rolled out. 128.7m beneficiaries enrolled
Swachh Bharat Clean India campaign – envisions a clean India by 2019
Social security
Life insurance: Pradhan Mantri Jeevan Jyoti Bima Yojna (PMJJBY).
Accident insurance: Pradhan Mantri Suraksha Bima Yojna (PMSBY). 101.7m total enrollments in PMJJBY and PMSBY.
Pension Scheme: Atal Pension Yojna (APY).
Housing for all by
2022 Aims to help build 20 mn houses by 2020, by providing central assistance of Rs 0.1 - 0.23 mn per beneficiary.
9
CNX 100 – Sector-wise Financial performance during the last decade (Rs bn)
Sector Parameters Co's FY05 FY08 FY11 FY13 FY14 FY15 % share
Domestic - Non
Cyclicals
Sales
30
995 2,296 3,993 5,400 5,803 6,265 17
CAGR (%) 32 20 16 7 8
Adj. PAT 101 311 387 429 439 551 15
CAGR (%) 46 7 5 2 25
PFCE CAGR (%) 14 15 16 15 11
Financials
Total Income
23
814 1,450 2,598 3,262 3,704 4,227 11
CAGR (%) 21 21 12 14 14
Adj. PAT 171 327 617 866 900 993 28
CAGR (%) 24 24 18 4 10
Offshore / Export
Oriented
Sales
21
714 1,573 3,257 4,998 6,230 7,072 19
CAGR (%) 30 27 24 25 14
Adj. PAT 102 230 435 581 783 859 24
CAGR (%) 31 24 16 35 10
Avg. USD : INR CAGR (%) 4 (4) (8) (10) 0
Sub-Total Sales CAGR (%)
74 28 23 18 15 12
Adj. PAT CAGR (%) 33 18 14 13 13
Domestic Infra*
Sales
12
667 1,623 2,785 3,622 3,734 3,810 10
CAGR (%) 34 20 14 3 2
Adj. PAT 115 227 401 505 449 422 12
CAGR (%) 25 21 12 (11) (6)
Commodity - Metals &
Mining
Sales
6
663 2,530 2,800 3,115 4,128 4,287 12
CAGR (%) 56 3 5 33 4
Adj. PAT 138 232 263 66 208 154 4
CAGR (%) 19 4 (50) 215 (26)
Energy
Sales
8
2,719 4,875 7,487 11,280 12,355 11,204 30
CAGR (%) 21 15 23 10 (9)
Adj. PAT 280 434 597 670 724 616 17
CAGR (%) 16 11 6 8 (15)
Total Sales CAGR (%)
100 30 17 18 14 3
Adj. PAT CAGR (%) 25 15 7 12 3
*Domestic Infra includes companies in Capital Goods, Power & Construction sector
10
Performance of CNX100 companies (Ex – Domestic Infra, Commodity & Energy) …
Sales (CNX 100 Consumption + Fin + Exports) as % of GDP Valuation - P/E
PAT as % of GDP … have witnessed reasonable growth w.r.t. GDP
Consumption (B2C businesses) & Financial (especially in the
private space) sectors coupled with export oriented companies
have witnessed consistent rise in top-line with respect to GDP.
Despite the slowdown of growth in economy, especially after
2008, companies in this space have noticed a steady rise (albeit
at a slower pace) in bottom-line with respect to GDP. Aggregate
bottom-line for these set of companies have increased steeply
from about 1.3% of GDP in FY05 to 1.9% of GDP in FY08. Since
then it has gradually inched upto 2.1% of GDP.
Given consistency of growth, these set of companies have
therefore observed rise in valuation during the last few years.
8
9
10
11
12
13
14
15
16
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
17.4 17.5
15.4
16.7
20.0
20.7
12
15
18
21
FY10 FY11 FY12 FY13 FY14 FY15
1.1
1.3
1.5
1.7
1.9
2.1
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
11
Performance of CNX 100 – All Companies …
Sales as % of GDP Valuation - P/E
PAT as % of GDP … to improve with possible turnaround in infra & energy segemnt
While Sales for CNX100 (all companies) as % of GDP have
largely remained flat since FY08, PAT as % of GDP has
witnessed consistent decline.
Infrastructure, Commodity & Energy linked sectors have
witnessed significant deterioration in financials dragging the
aggregated performance with respect to GDP.
Notwithstanding the recent past, Infrastructure and some
segments in the energy space are likely to witness a turnaround
given Government focus on infra spend. This should aid and
sustain improvement in aggregate performance of CNX100
companies.
20
22
24
26
28
30
32
34
36
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
17.4
16.1
13.8
14.7
18.2
18.9
12
15
18
21
FY10 FY11 FY12 FY13 FY14 FY15
2.8
3.0
3.2
3.4
3.6
3.8
4.0
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
12
Declining utilisation levels & adverse D/E ratio to delay pick up in corporate capex (as spreads remain compressed)
Capacity Utilisation (%) Average spreads (%) between Corporate RoE's & Bond Yield
BSE500 Debt to Equity Environment for pick up in private sector capex remain challenging
Capacity utilization at the aggregate level has trended down since
Q1FY09.
The profitability is far lower as compared to levels seen in 2004
to 2008. Profitability has declined because of delays in
commissioning of projects and also slowdown in demand. In
addition, adverse mix of debt to equity has impacted corporates
propensity to do further investment.
Pick-up in private sector investment cycle is therefore expected
to remain muted for some time.
However, with government push towards infra linked capex &
lower interest rates may enable the turnaround in next few years.
69
72
75
78
81
84
Ju
n-09
Dec-09
Ju
n-10
Dec-10
Ju
n-11
Dec-11
Ju
n-12
Dec-12
Ju
n-13
Dec-13
Ju
n-14
Dec-14
4
8
12
16
Sep
-02
Sep
-03
Sep
-04
Sep
-05
Sep
-06
Sep
-07
Sep
-08
Sep
-09
Sep
-10
Sep
-11
Sep
-12
Sep
-13
Sep
-14
1.1
1.2
1.3
1.4
1.5
FY
02
FY
03
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
13
Recovery in investment cycle to be supported by Public Capex, Private Capex still some time away
Post elections last year, we expected stronger total consumption to
help revive private sector capex by 2015 – 16
With slowdown in rural discretionary spends, push towards Public
capex is a timely and much needed economic ignition
Low
Inflation
Lower
Interest Rates
While repo has been
lowered by 75bps
transmission has been
limited
Improved
consumer
sentiment
due to
strong
government
Revival in Private
Consumption
Urban
Consumption
Rural
Consumption
Improved Capacity
Utilization
Private Corporate
Investment Revival
We
expected
this to
happen
by 2015-
16
We
expected
this to
happen by
2016-17
Public
Capital
Expenditure
Interest rate
transmission
Revival in
Private
Consumption
Urban
Consumption
Rural
Consumption
If further
transmission
were to happen
Improved Capacity
Utilization
Private Corporate
Investment Revival
Expect this
to happen
by 2017-18
Expect
this to
happen
by 2016-
17
In
frastru
ctu
re In
ve
stm
en
t
14
Trigger for FY 2016 – Government capital expenditure to drive growth
Highest capital expenditure to push key infrastructure sectors which have been deprived in last 3 years owing to Fiscal squeeze
Investment in Infrastructure Sector Intended Public & Private
Investment Over 5 Years (INR bn) Target for FY2016
1 Roads 5,000
Revive 16 projects worth Rs 160 billion
32300 km of new rural roads and highways
Increase the pace of road construction to 15 km/from existing 11 km/day
2 Mining 1,270 700 metric tonnes of coal production
3 Railways 8,560
Improve cleanliness, safety, security and surveillance
Remove 3000 unmanned crossings by constructing 917 under/over bridges
4 Smart Cities 480 Shortlist and start redevelopment work in 20 cities
5 Power Generation 1,000
24831 MW of additional power generation
Award 5 ultramega power projects (UMPPs) of 4,000 mw each
6 Power Transmission 4,000 Transmission lines to 3500 villages
7 Irrigation & Rural Infrastructure NA
Bring 3.7 million hectare of land under irrigation
Broadband in 15000 Gram Panchayats
8 Shipping and Inland Waterways 5,000 Parliament nod to convert 101 rivers into waterways
TOTAL 25,310
273 297 354 399 379
856
0
5
10
15
20
25
30
35
-
500
1,000
1,500
2,000
2,500
3,000
3,500
FY11 FY12 FY13 FY14 FY15 FY16e
Yo
Y %
G
ro
wth
Public Sector Infra Spend (INR bn)
Roads Railways Defence Power
3,531
5,272
7,336
2,198
2,205
7,336
10,000
-
2,000
4,000
6,000
8,000
10,000
FY10 FY11 FY12 FY13 FY14 FY15 FY16e
Highway KMs Awarded (NHAI + MoRTH)
15
Structural Change – Goods & Services Tax (Likely to benefit Government and Corporates)
Avg General Government Revenue (% of GDP)
GST implemented in year ‘t’
“It is concluded that not only was the GST highly
successful in raising tax revenues, but it was also
significant in terms of growth effects, price effects,
current account effects, and the effect on the
budget balance.” Tom Bolton and Brian Dollery, An
empirical note on the comparative macroeconomic
effects of the GST in Australia, Canada and New
Zealand (2005)
32 33 36
Australia
t -10
t -5
t + 5
46 46 48
Canada
t -10
t -5
t + 5
Implications of GST
Savings from consolidation Tax Savings
Dismantling of border check posts
No cascading effect
Lowers transportation time
Reduces freight cost
Fewer, larger warehouses
Lower inventory carrying costs
Consolidation of freight operations
using larger trucks
Reduces buffer inventory
The roll out of GST – intended by April 2016 – will lead to substantial reduction in logistics costs for manufacturers of non-bulk goods. Firms
paying central sales tax will directly benefit from its phasing out while those who had set up warehouses to avert such levies shall benefit
through lower logistics cost following consolidation in warehouses. It will eventually also increase the share of organized sector of the economy.
Thus, sales of listed companies (which has been witnessing stagnation relative to GDP) may eventually improve relative to GDP.
Government revenues will get a significant
boost reducing deficits and allowing space for
further infra linked capex
16
Structural Change – Irrigation: Major supply side enabler
“China started off its economic reforms with agriculture, not industry. During 1978-84, China abandoned the commune system and graduated to
household responsibility system in land. China also liberated controls on agriculture pricing to a large extent. As a result, agriculture grew by 7.1% per
annum, while farm incomes increased by 14% p.a. and rural poverty halved in just six years, between 1978 and 1984. It is this ‘firing from the bottom’
that gave political legitimacy to the economic reforms China later embarked on, as it benefitted the largest number of people. This unprecedented rise
in rural incomes also created huge demand for simple industrial products which led to China’s manufacturing revolution. India’s reforms started with
stealth, and started from the top, correcting exchange rates, industrial licensing, etc. It benefitted the better-off ones more. Poverty halved but it took
18 years (1993-2011) – compared to China’s six – as India had to rely on a trickle-down effect” – Ashok Gulati
Government’s initiative on improving Irrigation facilities
Krishonnati Yojana: An umbrella programme at a cost of Rs 58.5 bn
that covers various development schemes in agriculture, crop
insurance, food security and sustainability:
Schemes to improve soil health and fertility, and agriculture
productivity,
Steps initiated to augment rural infrastructure and plug leakages
in agriculture supply chain, improve agriculture marketing and
create a unified national agriculture market,
Policy announced to reduce farmers’ interest burden and farm
income insurance scheme launched to protect their income
against production and price risks.
Pradhan Mantri Krishi Sinchai Yojana (PMKSY):
Plans afoot to expand the capacity and access to irrigation facilities by integrating national employment guarantee scheme (NREGA) with the overall
plan of PMKSY;
Boost to micro irrigation to improve efficiency in water use (i.e. per drop more crop);
Tax free infrastructure bonds for projects in irrigation sector on the anvil;
Comprehensive identification and mapping of water bodies across the country to guide villages about best possible sources of irrigation.
-2
0
2
4
6
8
10
12
14
16
10
15
20
25
30
35
40
45
50
1951-56
1956-61
1961-66
1966-69
1969-74
1974-78
1978-80
1980-85
1985-90
1990-92
1992-97
1997-02
2002-07
2007-12
Gro
wth
in
Irrig
ated
A
rea %
Sh
are o
f Irrig
ated
A
rea %
Share & growth in Irrigated Area
17
Structural Change – Proportion of physical savings to recede…
“The Budget speech for 2016 promised to compress India’s black economy through powerful legislative changes. Within three months of making this
announcement, the government has already passed the Undisclosed Foreign Income and Assets Act. The Benami Transactions Bill has also been
approved by the Cabinet. This explicit compression of the black economy should lower demand for physical savings, thereby reducing the cost of land
and debt capital in the medium term. However, in the short term, this attack on black money is likely to lead to a crack in land and real estate prices…”
Extract from ET Editorial – June 02, 2015
Real Estate is expensive on a blended basis (considering cost of property relative
to income & higher EMI burden)
Rental Yields are one of the lowest in India while relative lending
are the highest
Relative expensiveness of Real Estate has come down since last two years owing
to stagnating prices and relative rise in incomes along with some decline in rates
but still remains expensive relative to income levels and mortgage costs.
1
2
3
4
5
6
7
Mar
05
Mar
06
Mar
07
Mar
08
Mar
09
Mar
10
Mar
11
Mar
12
Mar
13
Mar
14
Mar
15
RE Composite Expensiveness (Times) to 2004 Levels
8
7
5 5
3 3 3
2
Ph
illip
ines
In
do
nesia
Th
ailan
d
Mala
ysia
Sin
gap
ore
Ho
ng
Ko
ng
Ch
ina
In
dia
Rental Yield %
2
5
2
0
3
2
3
8
Ph
illip
ines
In
do
nesia
Th
ailan
d
Mala
ysia
Sin
gap
ore
Ho
ng
Ko
ng
Ch
ina
In
dia
Difference Between Lending Rates & Rental Yields (%)
18
Positive real rates likely to discourage “physical” household savings
Negative real rates encouraged higher physical savings, a trend likely to revere given RBI’s stance of running positive real rates
52%
57%
52%
57%
68%
66%
60%
2001-08
Avg
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
Ph
ysic
al savin
gs t
o
Ho
useh
old
savin
gs
300
400
500
600
700
800
900
1,000
1,100Gold Import (Ton)
19
Financial Savings (FS) set to rise and support Equities in current cycle (2014 – 2019)
FS to increase to 2001-08 average, better than 15 year average Significant scope for Equity AUM to rise in India
Rise in FS and flows to Equity (same % as FY15) can cause MF flows to double by 2019
Superior performance of physical assets and a lacklustre
performance of financial investments coupled with
negative real rates encouraged diversion of savings
towards physical assets during 2009 – 13 period.
Scenario has reversed since 2013 with physical assets
underperforming vis. a. vis. financial investments while
real rates have become positive.
Aided by relative expensiveness of real estate, higher
confidence in Government’s ability to deliver and under
ownership of equities by domestic investors, share of
Financial Savings is likely to mean revert to 2001 – 08
average which shall, in turn, can cause equity flows to
accelerate substantially over next few years.
30%
35%
40%
45%
50%
55%Financial Savings as % Household Savings
-
5
10
15
20
25
30
35
40
US UK China India
Equity AUM as % to Market Cap
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
-200
-
200
400
600
800
1,000
1,200
1,400
1,600
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15E
2018-19E
MF Flows (INR bn)
Equity MF Flows as % of Financial Savings (RHS)
20
Indian equities likely to bounce back in 2016
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD CAGR
China
87.6
Australia
30.3
Korea
57
China
82.9
India
73.4
Japan
-29.2
India
97.4
Korea
26.7
U.S.
1.4
HK
28.3
U.S.
31.8
India
23.9
China
19.1
China
17.8
India
80.3
HK
25
India
37.6
India
51
China
66.2
U.S.
-37.6
Taiwan
79.2
HK
23.2
Australia
-11
India
27
Japan
27.2
U.S.
12.7
HK
16.0
India
15.9
Australia
49.5
Korea
22.1
Japan
25.5
Europe
33.7
HK
41.2
Europe
-46.4
Australia
76.4
Taiwan
21.8
Europe
-11.1
China
22.7
Europe
25.2
Taiwan
9.4
Japan
15.6
HK
13.5
Asia ex-
Japan
46.7
Europe
20.9
Asia ex-
Japan
22.7
Asia ex-
Japan
33.3
Asia ex-
Japan
40.1
Taiwan
-46.4
Asia ex-
Japan
71.6
India
20.9
Korea
-12
Asia ex-
Japan
22.4
HK
11.1
China
8
Europe
9.1
Asia ex-
Japan
12.9
Taiwan
41.9
India
17.4
China
19.8
Australia
30.9
Korea
31.9
Australia
-50.7
Korea
71.3
Asia ex-
Japan
19.6
Japan
-14.3
Australia
22.1
Taiwan
9.1
HK
5.1
Asia ex-
Japan
7.7
Australia
12.1
Europe
38.5
Asia ex-
Japan
17.2
Australia
16
HK
30.4
Australia
28.3
China
-50.8
China
62.3
Japan
15.4
HK
-16
Korea
21.2
Australia
4.2
Asia ex-
Japan
4.8
Taiwan
5.1
Korea
11.2
HK
38.1
Japan
15.9
Europe
9.4
Taiwan
20
Europe
13.9
HK
-51.2
HK
60.2
U.S.
14.8
Asia ex-
Japan
-17.3
Europe
19.1
Korea
3.9
Australia
-3.4
U.S.
4.4
U.S.
9.0
Japan
35.9
U.S.
10.1
HK
8.4
U.S.
14.7
Taiwan
8.4
Asia ex-
Japan
-52.3
Europe
35.8
Australia
14.5
China
-18.4
Taiwan
16.7
China
3.6
Japan
-4
Korea
2.3
Taiwan
8.9
Korea
35
Taiwan
9
Taiwan
6.4
Korea
12.6
U.S.
5.4
Korea
-55.3
U.S.
26.3
China
4.6
Taiwan
-20.9
U.S.
15.3
Asia ex-
Japan
3
Europe
-6.2
India
1.8
Europe
8.8
U.S.
28.4
China
1.9
U.S.
5.1
Japan
6.2
Japan
-4.2
India
-63.7
Japan
6.3
Europe
3.9
India
-37.2
Japan
8.2
India
-4.7
Korea
-11.1
Australia
1.0
Japan
6.8
Returns are total (net) returns based on MSCI indices in U.S. dollar terms. Data from Jan 1, 2003 till Jun 23, 2015 has been used to calculate returns.
21
Market Vulnerability Index (MVI) & Valuations
MVI is sum of
absolute values of:
Inflation (CPI);
Current Account
Deficit (CAD)
Fiscal Deficit
-
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5
7
9
11
13
15
17
19
21
23
25
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016e
MVI Avg P/B BSE 500 - RHS
A better macro environment (with reasonable expectations of growth) has generally been associated with relative higher valuations. Average
valuations remain depressed in last few years owing to lack of growth visibility and poor macro. The situation has since decisively reversed. Hence,
as a base case, valuations are likely to find downside support. Market may thus deliver returns in line with earnings growth.
22
NIFTY – Illustrative Trajectory
Given our base case of pick up in growth, earnings growth should mean revert to long term average (much of it is likely to be witnessed
from FY17 to FY19). Markets are likely to track earnings growth over next four years.
23
Inflation to structurally trend lower over next few years
Inflation - Food & Fuel Weightage makes a difference Weightage of Food Articles in CPI
Overall food inflation has moderated but still remains the most significant driver of inflation in the
country. Indices having a higher weightage to food articles (CPI) have been showing relatively
higher inflation prints as compared to other indices with very little food weightage.
Higher food inflation in India is a result
of lower per capita income. As per
capita income increases over time,
coupled with moderat food inflation,
share of food items in overall Inflation
basket will fall substantially over next
decade. This shall help reduce the
inflation prints by itself.
-2%
0%
2%
4%
6%
8%
10%
12%
14%
Ju
n-12
Sep
-12
Dec-12
Mar-13
Ju
n-13
Sep
-13
Dec-13
Mar-14
Ju
n-14
Sep
-14
Dec-14
Mar-15
Inflation - Food & Fuel Weightage makes a difference
GDP Deflator WPI
CPI Food Inflation
64% 57% 48% 46%
1986
2001
2005
2012
Government’s focus towards containing food inflation through lower hikes in Minimum Support Prices,
timely imports, control on hoarding, abolition of APMCs and supply side responses will eventually help
bring Inflation within RBIs comfort zone
24
INR likely to continue to outperform other EM currencies
Likely to remain stable with lower volatility
Current Account Deficit (CAD) is likely to remain within
comfortable zone (~2%). Lower CAD augurs well for INR,
providing downside support.
RBI likely to continue to buy dollars to improve import
cover and slowly glide the currency to fair value levels.
INR is marginally over valued on Real Effective Exchange
Rate basis. It is likely to remain stable in 63 – 65 range in
near term. A stronger USD, although, may force a
temporary breach. Over medium term, it is likely to
outperform its own historical average (average annual
depreciation ~4%)
-3%
10%
-26%
8%
3 Yr change to Sep 2013
Change since Sep 2013
Nominal Effective Exchange Rate
Real Effective Exchange Rate
17
14
12
13
14
10
11
10
7 7
8
9
6
8
10
12
14
16
18
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
Import Cover (Months)
0
20
40
60
80
100
May-14
Ju
n-14
Ju
l-14
Au
g-14
Sep
-14
Oct-14
No
v-14
Dec-14
Jan
-15
Feb
-15
Mar-15
Ap
r-15
Trailing 12 Month RBI Forex Buying ($ bn)
Spot Forward
25
Risks: Delay in implementation of key reforms and challenges to global growth remain key near term headwinds…
Local factors Global factors
Delay in government spending (especially planned
expenditure as laid out in Union Budget 2015) may
impact pace of domestic recovery.
Consensus to pass key legislation remains elusive,
risking delay in key reforms: Government needs to
build political consensus to pass crucial Bills on
Land and GST (esp. during monsoon session of
parliament) which shall spawn structural reforms.
Deficient monsoon may pull back growth & spike
inflation: While it might be too early to conclude that
progress of rains is better than expectation, a
deficient monsoon can jeopardise any possible
recovery in rural economy and also spike food
prices during near to medium term.
Exports sector growth may disappoint (amidst
lacklustre global growth), if INR continues to
appreciate vis. a vis. other currencies as witnessed
in FY15.
Muted global growth especially in Eurozone, Japan
and China may hinder a full scale domestic
recovery.
Unexpected and disruptive US Fed rate hikes might
potentially have adverse impact on emerging
markets in the form of capital outflows. However,
India appears more prepared to deal with external
shocks, including a rate hike by the Fed with
improvement in import cover and better macros.
Reversal in commodity prices (esp. Crude & Gold)
remain a significant risk towards India sustaining
favourable growth-inflation mix (a period of rising
growth and benign inflation).
Grexit: Greece has been a matter of concern for
global markets for several years and to that extent if
the event materialises markets seem to be better
prepared. Notwithstanding, it is still not fully
understood by markets as to what shall be the spill
over impact.
26
Asset Allocation Positioning
Asset Class Short Term Long Term
- - - 0 + ++ - - - 0 + ++
Equities
Large Cap & Diversified
Mid Cap
Global Equities
Debt
Short & Medium Term
Duration
Gold
Tactical Equity Strategy
Overweight Equal Weight Underweight
Sensex level below 26,500 Sensex level 26,500 – 29,000 Sensex level above 29,000
Legend
++ Strong Overweight
+ Overweight
0 Equal weight
- Underweight
- - Strong Underweight
27
Key Investing Theme – Equity Funds – Relative positioning
ICICI Pru Select Large Cap
UTI Opprtunities
BNP Paribas Eqty
Reliance Eqty Opp
BSL Frontline Eqty
HDFC Eqty Fund
Franklin Prima Plus
HDFC Mid-cap Opp
Franklin Prima Fund
JP Morgan Mid & Small
Cap
ICICI Pru Value Discovery
BSL MNC
UTI MNC
ICICI PruTech
0
200
400
600
800
1,000
1,200
1,400
1,600
14 16 18 20 22 24 26 28 30
Avg
. M
kt C
ap
(R
s b
n)
Portfolio weighted RoE (%)
28
Model Portfolio : Equity Funds Performance
Equity Allocation
Scheme / Index Name Risk Profile Absolute (%) Annualized (%)
6 Mth 1 Yr 2 Yr 3 Yr 5 Yr
80%
Allo
catio
n
Large cap Funds
ICICI Prudential Select Large Cap Fund Balanced 0.44 13.38 28.07 20.41 11.96
UTI Opportunities Fund Balanced 0.98 14.15 26.43 19.64 14.46
BNP Paribas Equity Fund Balanced 8.92 25.21 34.35 25.88 16.32
Diversified Funds
Reliance Equity Opportunities Fund Balanced 2.21 23.62 37.39 26.50 17.58
Birla Sun Life Frontline Equity Fund Balanced 5.74 19.12 31.87 25.83 14.60
HDFC Equity Fund Balanced 1.01 11.34 33.61 22.53 13.15
Franklin India Prima Plus Balanced 8.14 31.47 37.19 27.73 17.04
Thematic Funds
ICICI Prudential Value Discovery Growth 8.96 28.10 51.26 33.81 20.23
Reliance Diversified Power Sector Fund Growth (1.00) (3.24) 30.03 11.97 (2.04)
Birla Sun Life MNC Fund Growth 18.66 57.79 51.02 36.91 24.45
UTI MNC Fund Growth 13.02 48.25 43.10 31.57 22.49
ICICI Prudential Technology Fund Growth 1.33 20.15 41.60 29.19 20.44
Aggressive Hybrid Funds
ICICI Prudential Balanced Advantage Fund Balanced 5.35 15.88 24.31 20.34 14.71
20%
Allo
catio
n
Mid cap Funds
HDFC Mid cap Opportunities Fund Growth 6.92 30.32 48.38 33.22 21.48
Franklin India Prima Fund Growth 7.90 35.33 47.02 36.57 20.49
JP Morgan India Small & Mid Cap Growth 10.79 37.42 52.54 37.67 21.08
Equity Indices
NIFTY 2.28 10.30 22.30 17.56 9.46
SENSEX 1.92 9.31 22.29 17.78 9.36
BSE 200 3.60 12.74 24.94 18.82 9.26
CNX Midcap 5.90 19.79 34.86 22.03 9.83
Crisil Balancex 3.05 10.92 17.39 14.71 9.26
(Data as on 24 June 2015)
29
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