Documente Academic
Documente Profesional
Documente Cultură
Product – March
Suite 2019
August 2018
Outlook
Macroeconomic Outlook
Q3FY19 GDP growth - GDP growth at 6.6%, was lower than expected. Moreover, the government has WPI and CPI trend
guided for a further slowdown in Q4. Consumption (specifically government consumption) mining and
services show weakness, while investment, construction and financial services were resilient. The RBI is
likely to come under pressure for a deep cut in rates and for banks to transmit them.
Inflation inches lower – Headline inflation in Jan’19 fell to 2.0%. The fall, although slight, is significant in
terms of its closeness to the lower limit of the RBI’s target range (4%, +/- 2%). Items causing the drop are
house rent, vegetables and pulses and fuel & light. We expect house rent and vegetable inflation to
continue falling till the end of this financial year, due to the high base. We expect inflation to reverse
direction starting Feb’19.
GST bringing overall receipts under pressure - The fiscal deficit momentum in Apr-Dec’18 has slowed
down due to a surplus in Dec’18. December is usually a month for high direct tax collections, leading to an
overall jump in receipts. The Apr-Dec’18 deficit overshot the FY19 revised estimate by 13%, compared to Trade Balance trend
14% last year. While total expenditure growth was 8%, total revenue grew 4%. Within revenue, both
corporate and income tax receipts were up 14% and 15% respectively.
Foreign trade deficit Low - India’s exports picked up slightly in Jan’19 with the traditional job creating
sectors showing a rise in outward shipments at the beginning of the new calendar year. Imports were
stagnant, helping lower the trade deficit. Exports rose 3.74% to $26.3 bn in Jan’19 while imports were
stagnant with a meagre 0.01% rise to $41.09 bn, leaving a trade deficit of $14.7 bn compared with $15.7
bn in the year-ago period and $13.08 bn in Dec’18.
Equity market cycle – Bull Cycle in the making
Most asset classes including real estate and commodities are cyclical in nature. Equity too as an asset class is a trending asset which goes through bear and bull market
cycles.
• Real Estate in the U.S. - From 2000 -06, the Case-Shiller home price index which measures prices on home sales in U.S. went up by 84% and the over the next 5
years, shrunk by a quarter. Post which it again reversed with an improvement in economic sentiments.
• Crude Oil - Post the financial crisis, the availability of cheap money and the premise that the Chinese economy would continue to guzzle fuel in large amounts
resulted in oil reaching of high of USD 140, post which a correction resulted in prices dropping all the way to USD 30 per barrel.
2,500
Nifty 2081
11 Years - CAGR - 6.4%
2,000
Nifty Value
1,500
1,000 CHART A
500
-
01-Jan-94 01-Jan-95 01-Jan-96 01-Jan-97 01-Jan-98 01-Jan-99 01-Jan-00 01-Jan-01 01-Jan-02 01-Jan-03 01-Jan-04
Year
• Explaining Bull Cycle – Refer Chart B – Nifty moved from 1100 level to 6139 level during the period 2003 – 2007 delivering a return of 41% p.a. despite
small temporary corrections of 5% - 12%. This period of 5 years is called a bull cycle where Nifty returns of 41% were substantially above the long term
average of 14%.
Nifty 6139
7,000
6,000
5 Year CAGR - 41%
5,000
Nifty Level
4,000
3,000
1100 CHART B
2,000
1,000
-
01-Jan-03 01-Jan-04 01-Jan-05 01-Jan-06 01-Jan-07
Year
• Current scenario –
o Moving out of a bear cycle – Refer CHART C. The 11 years i.e. the period 2008 – 2018, have been a period of bear cycle where Nifty delivered only 5%
returns. But, we are moving out a bear cycle in the last 3 years where the returns have been closer to long term average.
Nifty
14000 10888
12000 11 Year CAGR – 5.3%
10000
8000
6000
CHART C
4000
2000
0
Current scenario –
o Entering a Bull cycle - Please refer chart D. Looking at the historical behavioral pattern of Equities, it is clearly evident that we
have entered into a bull cycle after a 10 year period of bear cycle.
Most importantly, as can be seen in below chart D, we are at the beginning of a bull cycle, we have moved from 100 to 182 and a substantial
portion of the return i.e. from 182 to upwards of potentially 500 is yet to come in.
NIFTY
600
589
1994-2007 2008-2017
500
Nifty Rebased to 100 level
300 CHART D
182
200
100
0
Factors that support a bull run
Macro Factors: Huge improvement in macro economic indicators like worlds fastest growing GDP, falling inflation and interest rates, shrinking fiscal
& current a/c deficit as mentioned below will lead to very conducive environment for a sustainable bull market cycle.
Corporate Earnings: Corporate earnings of Nifty 50 companies after ranging in single digit negative earnings growth zone between 2014-16, have
started showing signs of improvement; for FY 17 – 18, the Nifty basket reported an EPS growth of 10% for the full year vis-à-vis the same period a
year back as can be seen in the table below:
For the full financial year 2018-19, we expect the Nifty 50 earnings to grow at close to 7%. The earnings recovery so far has been
broad based with 8 out of 11 sectors reporting positive earnings growth in 9M FY18-19.
Factors that support a bull run
Valuation: On the basis of a 7% EPS growth estimate for FY2018-19 and 14% for FY 2019-20 the Nifty P/E for one year forward earnings is *currently
at 20.4x while the long term forward P/E average is about 17x. Considering earnings are picking up as expected, market valuations are not expensive.
Moreover, a look at the forward P/E levels witnessed in the peak of previous bull cycles, we are far away from the bull cycle P/Es.
Liquidity: : FIIs and DIIs have been 2 key participants in equity markets. The strengthening DII flows over the last 2 years are providing a cushion to
Indian Equities. While FIIs have been net seller in the last 11 months; domestic investors have been investing net around INR 8,500Cr per month in
Indian Equities in the last 11 months. For FY 2018-19, Domestic investors have invested net ~INR 95,000 Cr in Equities.
The ‘TINA’ Factor: Falling and volatile interest rates are making investments in Debt more and more unattractive; restriction on cash have resulted in
Gold losing its attractiveness and Real Estate is under tremendous pressure due to oversupply. This has led to huge interest in Equity markets. In the
last few years, flows in Equity and Equity oriented Mutual Funds have improved as other avenues of investing like Debt, Gold and Real estate are
getting unattractive as can be seen below. Long term sticky flows in form of SIP has been steadily growing and stands at roughly Rs. 8500 Crs per
month.
Net Flows in Equity + Balanced
Year
Mutual Funds(Amt in Rs. Crs)
Jan’ – Dec’16 86,530
Jan’ – Dec’17 2,36,440
Jan’ – Dec’18 1,58,660
FY 23 (EPS) 854
Nifty Value (Mar’ 22) 17082 17937 18791
CAGR 15% 17% 19%
MF Alpha (p.a.) 4% 4% 4%
Conclusion: In our view, it makes sense to invest in Equities NOW and not be worried about the valuations
and short term corrections.
Fixed Income Outlook
Last month 10 year G Sec yields rose by 12 bps to end at 7.41% after the interim budget indicated increase in borrowing by INR360bn for FY19 due to a 10bps marginal
increase in the FY19 fiscal deficit to 3.4%. Although this is slightly negative for bond yields but it should be seen in the context of the ongoing vigorous bond purchases
by the RBI under OMO. Secondly, growth-inflation dynamics are supportive of rate cuts making the valuation attractive and global environment is bond positive.
As mentioned last month, with the last rate cut, the real rate has come down by 0.25% to 4%, still a historic high. We expect another 50bp cut in the repo rate taking the
total to75bps in CY19. This, along with the RBI’s continued guidance of purchasing government securities through OMO, is likely to be positive for the debt market. With
the credit growth rate around 15% and the deposit growth rate around 10%, we reckon there is still excess demand. As long as the deposit growth does not pick up in a
major way, the transmission of this rate cut appears difficult.
Accrual / Credit funds have been consistently generating returns in the similar 7.5% - 8% range without the concern of market timing and interest rate movement by
investing in papers offering high accrual income rather than investing in duration funds which are highly dependant on interest rate movements for returns.
We recommend that one sticks to accrual debt funds where the predictability of returns is better and volatility is lower than that of duration funds. The credit funds over
the last 5 years have displayed that they have the potential to generate an alpha of around 0.8% -1% over the duration fund even after going through credit downgrades.
Moreover, the credit funds have witnessed more upgrades in the portfolios than downgrades.
Thus, we would recommend that investors invest in accrual funds which look at delivering sustainable returns by investing in corporate papers.
Market Corrections in a bull cycle
Market corrections in a bull cycle
Equity, as an asset class, is a trending asset which goes through bear and bull market cycles.
A bull cycle, is a period where equity market returns are substantially above the long term average returns like during 2003 – 07, when Nifty
index delivered 41% p.a. returns, considerably above the long term average of 14%, as depicted in the chart below.
Nifty 6139
7,000
6,000
5 Year CAGR - 41%
5,000
Nifty Level
4,000
3,000
1100
2,000
1,000
Year
However, it is important to note that in a bull cycle, market does not linearly trend upwards and we witness significant corrections, however,
they rebound in a relatively short period of timeas is highlighted in the red in the above chart.So, if we are embarked on a bull run now, this is
likely to happen in the next few years of the bull period as well.
Market corrections in a bull cycle
To understand as to what happened in the last bull run, we have done an analysis to understand the extent of corrections that occurred and the time period it took
to rebound.
As can be seen in the table below between 2003 and 2007:
• There were 9 instances when markets corrected more than 10% from its previous peak.
• Maximum correction witnessed was a fall of 30%.
• Maximum time to rebound was 209 days i.e. 7 months.
As can be seen, there could be deep-rooted corrections in a bull cycle, but they would come back sooner or later.
The corrections could occur due to various reasons which dent sentiments and put market in panic mode- like surprise increase in the policy rate by the RBI in May’
2006 or in Apr’ 2004 when Congress came back to power with outside support from the Left.
However, the following few days post the correction, fundamentals and logic prevailed and markets reversed the correction and got back on its path to bull cycle.
Market corrections in a bull cycle
In the current scenario, last two and half years has seen Nifty deliver almost 15% p.a. return slightly above the long term average.
Presuming that we have entered a bull cycle, let us have a look at the corrections witnessed during this period.
Currently with Nifty at ~11,200 level, we are in a correction phase which normally occur in a bull cycle. Moreover, we expect the
recovery for the recent correction to take similar time period as experienced in last bull cycle.
Conclusion:
We believe, we are in a bull cycle where corrections are an integral part and will happen, thus one should not be fearful of it.
Corrections are unlikely to long-dated and rebound would happen in few months from fall.
Investors should look at market corrections as opportunities to fill in asset allocation gaps in their portfolios.
Real Estate Correction Inevitable
Huge pile of unsold inventory
Below is some data on the build-up of unsold inventory, as per a report by PropEquity:
Table 1
Market Cap in Rs.
Crs
Falling Market Cap Developer Location Fall in
Aug'
Developers have witnessed a fall of more than 70% in their Dec' 2007 Market
18
Cap
Market Cap in the last 8 years. Unitech Ltd. Delhi 79261 889.5 -99%
DS Kulkarni Developers Ltd. Pune 823 35 -96%
Hubtown Ltd. Mumbai 8021 427 -95%
Banks have stopped lending to builders Parsvnath Developers Ltd. Delhi 8332 478 -94%
With bank credit drying up, borrowing cost for builders is at DLF Ltd. Delhi 183065 35409 -81%
Ajmera Realty & Infra India Ltd. Mumbai 4849 766.47 -84%
astonishing levels of 22% - 25%.
Puravankara Ltd. Bengaluru 9739 2120 -78%
Peninsula Land Ltd. Mumbai 4027 387 -90%
Source: Anand Rathi PWM Research, Data Source: Table1: Bloomberg, Ace Equity. Table 2: Mint article dated 5th Sep’ 18 (Source: Prop Equity Research)
Residential Real Estate Correction Inevitable- Overinvestment in Physical Assets
Households have been over-allocating to physical assets like Real Estate and gold, over the last few years.
Household investment in physical assets has gone up by 50% - 70% of the 1990’s level, and is near all-time-high levels.
As it reverts to long term average levels, Real Estate would be under significant pressure.
Raghuram Rajan, the former RBI Governor, last year read out the riot act explaining why Real Estate prices should fall.
• It is only in India that the rental yield on Real Estate is 2% and interest cost is 12%. Only fools still borrow to invest in Real Estate.
Especially when there is zero capital appreciation. This gap is because of black money. They have to converge, and it starts with the cost.
• Real Estate is now a bubble. It has to be burst before many ordinary people get sucked into it. We have to save their hard earned money
from being evaporated.
• Real Estate in India costs as much as in the US or any other developed country. However, the cost of living is not even 1/3 rd. This difference
has to be bridged.
• Housing is a need, not a luxury. And land is a national asset, not to be hoarded or profiteered. State intervention through market forces
and fiscal interventions must exist to make home buying affordable.
• Cash has the same significance to Real Estate as FIIs do, to Equities.
• In most Real Estate deals, the cash component accounts for 10% - 20% in residential Real Estate deals, more than 20% in commercial
Real Estate and can go as high as 50% – 60% in land deals (this also varies geographically with certain cities having a higher cash
component than others).
• Demonetization of high value currency notes has led to evaporation of the cash (i.e. black money) creating a disturbance in the Real
Estate sector.
• As cash dries up, value erosion will be witnessed for the sector at a time when it is already facing challenges in terms of huge inventory
and high debt.
• Going forward too, cash generation in the economy would reduce, leading to lower demand for Real Estate.
Over the last 3 years, Gold has seen a downtrend, with prices rising only 5% p.a. In our view for the next 1 year, we do not foresee a bull market for Gold and expect
volatility in the asset class in the coming months. The various factors having an impact are explained below:
Gradual but improved global growth creating subdued sentiments towards Gold:
While the global growth recovery has been slower than expected, incrementally, the situation is improving rather than deteriorating in most regions. While the
recovery in the US and some of the emerging market economies has been below expectations, the Euro area is showing considerable resilience. Despite remaining
below the trend rate, general buoyancy of growth would not support a bull-run in the Gold market.
Secondly, the US has started to normalize the policy rate with the expectation of 3 more rate hikes in this year and probably next year. This is likely to contain the rise in
Gold prices and in the medium-term, the process is expected to nudge Gold prices below the current level.
Falling domestic demand for Gold: India accounts for around 15% of World Gold consumption, but off lately the demand from one of the largest importing countries,
has been falling, leading to a dent in Gold demand and consequently, its price.
•Government initiatives to impact demand for Gold: Gold initiatives to curb corruption like GST and demonetization has resulted in lower cash dealings thus the
urban demand for Gold has been impacted. Moreover, the gold monetization scheme of the current where they plan to recycle existing private holding of gold, have
impacted India's gold demand and imports substantially. This will impact gold prices even more.
The rural demand has been falling too as rural has been moving away from physical assets to banking system with now access to banks, thanks to the over 27 crs. Jan
Dhan accounts opened in the last 3 years.
•Indian household savings moving away from Gold to Financial Instruments: The demand for Gold is expected to reduce as households are moving away from
physical investment to financial instruments like Fixed Deposits, Bonds, Equity, etc. against the backdrop of improved economic growth and negative returns by Gold in
the last 3 years. The savings in Financial Instruments have increased from roughly 35% to upwards of 40% in the last 2 years.
•Improved outlook for corporate earnings: Visible improvement in domestic demand and lower input prices suggest a strong likelihood of improving corporate
margins, thereby causing acceleration of profit growth well ahead of sales growth. The process bodes well for Equity, but ill for Gold markets.
Globally, economies in deflationary zone: Gold is popularly perceived as a hedge against inflation. But most global economies are in a deflationary mode and the
possibility of reining in inflation in the coming few months is remote. Therefore, the desire to hold Gold is expected to be subdued.
Staggered Investments reduce risk – A Myth
Staggered Investments reduce risk – A Myth
Should one stagger his investments or invest lumpsum is a confusion that most investors have at some point or other. While in the short term it is
difficult to time the market as it is driven by sentiments, a study done on select mutual funds since April’ 2001 on monthly rolling basis suggests that
there has been a high probability of an lumpsum investment outperforming a 1 year systematic investment.
As can be seen above, historically, there has been average 67% probability of a lumpsum investment performing better than a staggered
investment and the average outperformance has been 19%.
Below is a study by taking performance of each of the Nifty companies and comparing it to a basket of largest and well known
*Mutual Funds in the industry across different time periods.
The outcome suggests that only a handful of stocks have outperformed the Mutual Fund portfolio returns. This clearly indicates that selecting
the right stock is a tough job and the probability of outperforming Mutual Funds is low.
Therefore we strongly recommend that you realign your direct equity portfolio to recommended MF.
•9Mutual Funds considered for this analysis include – Canara Robeco Emerging Equities, HDFC Small Cap Fund, Kotak Emerging Equity, SBI Focused Equity
Fund, Kotak Standard Multicap , Mirae Asset India Equity, Reliance Large Cap Fund, L&T Mid Cap, Invesco India Growth Opportunity.Funds considered are
our recommended funds selected basis Anand Rathi Mutual Fund Selection methodology and excludes funds which are on hold.
•Although the analysis uses 50 companies of Nifty as base, there would time periods like 5 yrs and above where a few of the 50 companies of today do not have
history.
Data Source: Morningstar
PMS vs. Mutual Fund
PMS or Mutual Fund – Which is better?
Midcap MF basket includes Canara Robeco Emerging Equity and HDFC Small Cap Fund
# PMS basket Consists of Motilal Oswal NTDOP and ASK IEP
Returns as on 28th Feb ’ 2019
Annexure
Best PMS Avg# -0.67 8.72 17.65 Midcap MF Basket* -8.70 11.22 21.26
Taxed as capital gain or business income depending on the Taxed as a long term capital gain for an individual if the
Taxation time frame for which each of the underlying stocks is held. units are held for more than a year irrespective of the
High churn portfolios bear high tax. holding period of the underlying stocks.
Multiple transactions depending on trades of underlying
Complexity One investment and one transaction for tax filing purpose
securities for tax filing purpose.
Total around 3% from second year onwards. First year 3%
+ entry load
Entry Load – 0% -2%
Fees / Cost Annual Management Fees – 2.5% p.a. Annual Expense – 2% - 2.5%
Custodian Charges - 0.25% p.a.
Depository Charges, Brokerage charges, Service Tax –
Charged on Actual basis
Fund Manager Top fund managers have an average experience of around Top 3 fund managers have experience of more than 20
Experience 15 years and manage assets not more than 2500 Crs. years and manage assets over Rs. 75,000 Crs.
No. Of Analyst Fund management team supported by 6 – 7 analysts Fund management team supported by 8-9 analysts
*Midcap MF basket includes Canara Robeco Emerging Equity and HDFC Small cap Fund.
# PMS basket Consists of Motilal Oswal NTDOP and ASK IEP
• Performance as of 28th February 2019
Equity Mutual Funds
Recommended Equity Mutual Fund Returns
120 110
ABSOLUTE
100 OUTPERFORMANCE OF
38%
80 72
60 52 54
40
28
22 21
20 14
3
0
-4 1 Year 2 Years 3 Years 4 Years 5 Years
-20
Our recommended fund basket outperformance to Nifty in CAGR Terms is at 1.5% p.a. over a 4 year period & 4.5% p.a. over a 5 year period.
Our recommended fund basket has delivered an absolute alpha of 38% over nifty in the last 5 years.
Due to the superior risk management of the fund managers , recommended basket has captured only 86% of the downside and 109% of the
upside of Nifty, over a 5 year period.
Source – Morning Star
Returns as on 28th Feb ’ 2019
Funds in DWM Portfolio are a subset
of the AR recommended Basket
Debt Mutual Funds
Recommended Debt Mutual Fund Returns