Market Outlook December 2017 1
Equity Markets 2
Key Events • Sovereign Rating Upgrade: India’s improving growth outlook and structural reforms agenda got a boost with Moody’s upgrading India’s local and foreign currency rating to Baa2, a notch above Baa3 earlier. Moody’s cited reforms such as GST, measures to address the banking system NPL, Aadhaar-enabled direct benefit transfer etc. • The Q2 GDP print came in at 6.3% reversing the decelerating trend. The recovery was led by manufacturing which saw a smart rebound to 7%. In terms of expenditure, both private and govt consumption growth remained weak but investments i.e: GFCF (Gross fixed Capital Formation) growth improved to 4.7%. Net exports were up marginally as well • India’s rank improving by 30 places in World Bank’s Ease of Doing Business Survey supporting the view of transitions being underway in the economy • The Central Cabinet approved an ordinance approving an amendment to the Insolvency and Bankruptcy Code to prevent wilful defaulters from bidding for stressed assets. • FIIs finally turned into large net buyers once again with $2.8bn of buying in November; taking the YTD net buying to $8.6bn . DIIs remained buyers to the tune of $1.4bn in November; which took the DII YTD tally to a staggering ~ $12.8bn . Mutual Funds once again drove the inflows with $1.6bn being poured-in; while Insurers were small net sellers of $220mn. • Capital market activity swelled in Nov-17, with some sizeable IPOs like HDFC Life and block trades like that in Bharti Airtel. 3
Sensex’s And Nifty’s Performance During Nov Month (%) 4 Source: Bloomberg, Kotak Institutional Equities
Moody's Upgrade First change to India's ratings in more than a decade Movements in India’s ratings by three major Rating Agencies Portfolio flows improved in 2003-04 after ratings upgrade 5 Source: Bloomberg, Credit Suisse estimates, MOSL
Moody's Upgrade stalls the unwarranted self-reinforcing bond yield spike that was in progre ss Term premium, or gap between repo and 10yr yield was high High FPI Bond holdings acted as an overhang for INR 6 Source: Bloomberg, NSDL Credit Suisse estimates
Big GST Relief: Tax cut on 178 items, only 50 still in 28% slab 7
GST Collections Worries Lower IGST cause for GST collections down 10% MoM CGST shortfall staying even post IGST settlements IGST collections vs settlement against CGST and SGST 8 Source: CLSA, Ministry of Finance, * IGST number for Oct is derived as shown in Fig 1
Calculation Of Monthly CGST Breakeven Rate Vs Current Collections 9 Source: CLSA, Ministry of Finance, Budget Documents
GST Tax Rate Cuts Raise Questions On The Fiscal Central Government Fiscal Deficit as % of GDP 10 Source: CLSA, Ministry of Finance
Economy Rebounds: GDP growth rate rises to 6.3% in September quarter 11 Source: CGA, Ministry of Statistics & Programme Implementation, Ministry of Commerce & Industry
Growth Normalisation Underway . . . Source: CLSA,CMIE, SEBI, RBI, total credit includes bank credit, corporate bonds and 12 commercial paper
INR Should Remain Stable Against US$ 13 Source: CLSA, Bloomberg
P/E Multiples Have Risen Globally 14 Source: Bloomberg, Credit Suisse estimates
India's P/E No major expansion in PE Premium 2013 onwards 15
High PE, But On Low Profitability Base Source: Bloomberg, CMIE, ACE Equity, MOSPI, CLSA
Domestic Investor Flow: A Key Support DMFs Continue to Buy for 16th Consecutive Month MF Flows in Markets: Inflows Insurance Flows: Turn Sellers (US$ mn) Persists (US$ mn) Domestic Mutual Funds AUM (October): Equity AUM Up MoM Flows in MFs (October): Third-highest Monthly Equity Inflows 17 Source: Morgan Stanley Research, CDSL, BSE, SEBI ,AMFI
Rising populism: Enter election mode 18 Source: CACP, Ministry of Agriculture, Election Commission of India, CLSA
Asset Sales to Reset Corporate Governance Culture? 19
Market Performance 20
Strong Performance By Majority Sectors Over The Last 1 Year Exporters lagging in returns BSE Sectoral Indices 100 90.8 80 60 34.3 40 33.1 31.4 30.3 27.9 25.1 14.4 16.5 20 12.4 8.9 6.3 3.6 1.8 1.2 0.2 0.6 0 (1.2) (0.8) (2.3) (2.0) (3.8) (%) (5.6) (11.1) (20) Realty Bankex Oil & Gas Capital Metals FMCG Auto PSU Power Tech IT Services Healthcare Goods 1m return % 1 yr return % 21 *As on 30 Nov 2017, Source: Axis Capital, Bloomberg
Performance Across Market Cap - Strong Performance Down the Capitalisation Curve 60 47.8 50 40 33.5 In percent 30 24.3 19.6 19.6 17.8 17.1 20 11.7 9.5 10 6.6 6.0 5.9 3.6 1.6 0 (1.1) (10) Nifty Nifty Midcap S&P BSE Smallcap 1m returns 1y returns 3 yr CAGR 5 yr CAGR 10 yr CAGR 22 *As on 30 Nov 2017, Source: Bloomberg
Most Global Markets Had Strong Showing In The Last Year 3.3 HK (HSI) 28.0 3.8 US (Dow Jones) 26.9 (1.9) Korea (Kospi) 24.8 (1.1) India (Nifty) 24.3 3.2 Japan (Nikkei 225) 24.1 (1.6) Germany (DAX) 22.4 0.8 Swiss (SMI) 18.3 1.8 Singapore (Straits) 18.2 (2.4) 17.4 France (CACS 40) (2.8) EURO (Euro Stoxx 50) 17.0 (0.3) China (HSCEI) 16.6 (3.1) Brazil (IBOV) 16.3 (0.9) Indonesia (JCI) 15.6 (2.2) Taiwan (TSWE) 14.3 (2.2) UK (FTSE 100) 8.0 (1.7) Malaysia (KLCI - FTSE) 6.1 1M 1Yr 1.8 Russia (MICEX) (0.2) (10) 0 10 20 30 23 * As on 30 Nov 2017, Source: Bloomberg. Performance data in local currency
Valuations 24
Stock Picking Will Be Critical Sensex sectoral long-term valuation snapshot: Forward PE* 80 70 60 Max 50 Top Quartile 40 30 Current 20 L ower Quartile 10 Min 0 Auto BFSI Engg FMCG IT Metals Oil Pharma Power Telecom Sensex Source: Axis Capital, Bloomberg Note: * Since April-2005 IT and Power at lower end of valuations, other sectors moving towards upper end of valuation zone *As on 30 Nov 2017 25
Focus Themes & Key Sectors Banks, Home Building, Retailing, Auto Unorganised to Organised components Increased Capital goods, rural sector, farm implements, government construction, cement spending Transmission Infrastructure, asset owners, construction, of interest metals, power, utilities rates Clean-Green Gas, capital goods, renewable power India Physical to Insurance, banks, capital market companies financial savings 26
Indian Valuation In A Global Perspective P/E Multiple CY17/FY18 of Indices India (Sensex) 22.7 US (Nasdaq) 21.7 US (Dow Jones) 17.7 Japan (Nikkei 225) 17.1 Thailand (SET) 15.2 Malaysia (KLCI - FTSE) 14.6 Singapore (Straits) 14.3 UK (FTSE 100) 14.0 HK (HSI) 12.1 Brazil (IBOV) 12.1 Korea (Kospi) 9.2 (x) 6 10 14 18 22 26 Source: Internal Estimates , Bloomberg 27 * For India & Japan Fiscal year is FY18 while others it is CY17
Net Cash Market Purchase Category (Rs cr) Nov - Month CY17 CY-16 CY-15 DII 9,243 82,691 37,125 66,816 MF 10,669 108,845 48,005 71,562 Clients 424 (18,459) (336) (9,795) NRI (74) (453) (714) (317) Proprietary 407 2,517 464 1,191 Insurance, Banks & Insurance (1,425) (26,154) (10,880) (4,746) FII 19,784 56,291 18,783 18,356 Strong purchase by FII’s and Mutual Funds in November *Source : NSE, BSE, SEBI, Internal calculation 28 Data updated till Nov 2017
Domestic Flows May Sustain Into Equity Funds In FY 18 • Mature investor base understanding • Low FD Return the benefits of compounding • Uncertain real of equities as Flows to equities estate asset class environment & Lower time limit • SIP as a tool to for LTCG counter volatility 29
Hope In Earnings Recovery For FY-18/19 1,670 1,461 1,351 1,350 1,332 FY15 FY16 FY17 FY18E FY19E 30 Source: Internal Calculation
Markets Consolidating As It Awaits Economy To Take Off Sensex ‘EPS’ Sensex P/E FY93-97 FY05-09 FY98-03 FY10-17 FY18-19e Past performance is not a reliable indicator of expected future performance 25
Key Variables & Their Impact On Equities Key Variables Short - Medium - Remarks term term Economy GST to impact near-term activity especially informal segment Improving operating leverage, falling interest costs and improvement in working capital can accelerate Corporate Earnings earnings, but a bit back-ended. Key is improvement in capacity utilisation India stands out among global asset classes with prospects of strong long term growth. FII Flow DII Flow Focus on improving financial savings of households Higher disinvestment target and repair of leveraged balance sheet to create supply in markets. Supply of paper Interest Rates Fall in interest rates to help revive demand and reduce stress for companies with significant debt. Market Transmission expecting better transmission of rates. GST – landmark reform implemented, can result in Policy/Reform higher tax compliance Initiative 32
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