Download FIXED INCOME UPDATE – FEB `17

FIXED INCOME UPDATE – FEB ‘17
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Benchmark 10 year bond has seen a sharp rally in recent months
•
Rally driven by a host factors – demonetization led liquidity, fall in CPI, Dec RBI policy
•
Yields rose by 33 bps post Feb policy surprise
•
Also helped by weak global growth/rates
7.84%
8.00
7.50
7.00
6.74%
6.50
6.00
5.50
10 yr G-Sec yield
5.00
Feb-16
May-16
Aug-16
2Source of Data: Bloomberg, Data for the period February 8th ‘16 to Feb 8th, 2017
Nov-16
Feb-17
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RBI Feb ’17 policy update and way forward
•
RBI surprised markets by holding rates unchanged; stance changed from
accommodative to neutral
•
Core inflation has been sticky at just below 5%
•
Demonetization impact seen as transitory both on growth and inflation
Way forward
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•
Neutral stance supports our view that we are approaching the end of the rate
cut cycle
•
Short bonds can potentially outperform long bonds
•
Short end also benefits from abundant liquidity; is relatively insulated from the
risks of global rates and inflationary pressures
•
If inflation is indeed contained to 4% on a sustainable basis, yields can drop
materially over the next couple of years
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Market drivers and its impact on FI Markets
1. Union Budget & Fiscal Policy - Sticking to FRBM has its benefits
2. Monetary Policy & Rates - RBI approaching end of easing cycle
3. Liquidity & Spreads - Abundant system liquidity, aids short term
bonds
4. External & Macro - India’s macro conditions and external position
vastly improved
5. Growth & Consumption - Consumption recovering from
demonetization
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#1. Union Budget & Fiscal Policy
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4
Backdrop to the Budget
•
The center has been sticking to the target, but states stepping out
•
Historically High Debt to GDP Ratio
Centre & State fiscal deficit
(% to GDP)
Public Debt to GDP
100
0.0
90
(1.0)
68%
80
(2.0)
(3.0)
70
(2.7)
(2.8)
(2.9)
(4.0)
(3.1)
60
(3.0)
50
(3.6)
40
(5.0)
30
(6.0)
20
Source:
Axis Capital
6
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
0
FY01
Mar-18E
Mar-17E
Mar-16
State Fiscal Deficit
10
FY00
Center Fiscal Deficit
Mar-15
Mar-14
Mar-13
(% to GDP)
Mar-12
(7.0)
6
Budget ’17: Government continued the path of fiscal consolidation
– stress on macro stability
•
Sticking to the path of deficit reduction, fiscal deficit target for FY 17 set at 3.2%
•
Targets to bring down Debt to GDP ratio to 60% by 2023
In Rs. crores
Net market borrowings
Fiscal Deficit & 10 Year G-sec
7
500,000
(% of GDP)
(%)
13
450,000
400,000
11
350,000
5
300,000
9
250,000
200,000
3
150,000
7
100,000
50,000
Net market borrowings
1
5
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17RE
Mar-18BE
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17RE
Mar-18BE
0
Fiscal Deficit
RE: Revised Estimates; BE: Budget estimates
Source:
Axis Capital, Budget Documents
7
10 Gec (RHS)
7
Controlling Fiscal Deficit has helped in containing inflation
•
Recent softening in inflation at a broad level is linked to Aggregate Demand (in- turn
driven by Government consumption/fiscal borrowing)
Relation between Inflation and Fiscal Deficit
16%
14%
12%
10%
8%
6%
4%
2%
Combined Fiscal Deficit
CPI
0%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Source:
Internal, Acumen – The Importance of Being Prudent
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8
#2. Monetary Policy & Rates
9
9
Near-term inflation to remain within target range
•
Inflation had eased sharply over the past couple of months owing to good monsoon
and demonetization
•
Likely to normalise going forward with core sticky at 5%
10
9
8
7
6
5
4
3
2
1
0
Jun-14
10
Source of Data: Bloomberg.
Inflation ( Core CPI & Food)
Dec-14
Jun-15
Core CPI (less food & fuel)
Dec-15
Jun-16
Food & Beverages
Dec-16
10
RBI approaching end of easing cycle
•
Policy rate of 6.25% provides limited cushion over inflation range (4%+/-2%)
175 bps cut since Jan ‘15
400
8.50
Repo Spread over Inflation
350
8.00%
300
8.00
250
7.50
200
150
7.00
6.25%
100
6.50
50
6.00
Dec-14
Jun-15
11
Source
of Data: Bloomberg.
Dec-15
Jun-16
Dec-16
0
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
12
Inflation if contained below 4% on a sustainable basis, may lead to
more rate cuts in future
Inflation roadmap for RBI
Monetary policy loses
credibility on sustained
12%
double digit inflation
RBI sets glide path for achieving
sustained lower inflation
New Monetary
Policy Framework
10%
Initial Target – 8%
8%
Intermediate Target – 6%
6%
Formal Inflation
Target of
4% +/- 2%
4%
2%
0%
2012-14
Source of Data: Bloomberg
12
2014-17
April 2017 onwards
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#3. Liquidity & Spreads
13
13
Abundant system liquidity here to remain, aids short term bonds
•
Structural liquidity to improve in medium term as cash leakage is lower
Demonetization
led liquidity
System Liquidity (Surplus/Deficit)
800,000
700,000
600,000
500,000
400,000
300,000
200,000
100,000
(100,000)
(200,000)
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
30-day rolling average
Source of Data: Internal
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14
AAA Yields down sharply, incremental opportunities in AA and A
segment
3 Year AAA Corporate Bond
9.00
8.50
8.00
7.50
AAA Yields down sharply
7.00
6.50
6.00
Feb-15
3 Year AAA Coporate Bond
Aug-15
Feb-16
Aug-16
Feb-17
Spread - 3 Year AA over AAA
100
80
60
40
Incremental opportunities in AA
and A segment
20
Spread - 3 Year AA over AAA
0
Feb-15
Aug-15
Source: Bloomberg. Data since Feb ‘15 till date
15
Feb-16
Aug-16
Feb-17
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#4. External & Macro
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India’s macro conditions vastly improved – provide insulation during
global EM risk-off phases
Post Global
recession
(2010)
Taper crisis
(2013)
GDP*
8.5%
5.1%
7.3%
CPI Inflation
9.4%
9.5%
3.6%
FX Reserves ($bn)
297.3
275.5
360.8
Current Account
Deficit
-3.3%
-4.7%
0.6%
Fiscal deficit Target
-6.5%
-4.8%
-3.2%
Crude Oil
(per barrel)
$94
$116
$54.7
Source of data: ACEMF, Bloomberg, RBI, BIS
2010 refers to Dec 31st 2010, 2013 refers to 31st Aug 2013 and current refers to latest data available as on Feb 1 st, 2017
*17
GDP New Series. Figure for July to September 2016
Current
(Jan-17)
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India has been an outlier among EM currencies
Currency performance
Currency v/s US Dollar (3 months)
10%
5%
5%
1%
0%
0% -1%
-1% -2% -2%
-3%
-5%
-5%
-10%
-15%
-20%
Source of data: Bloomberg. Data as on 31st January 2017
Past
18 performance may or may not be sustained in future.
Turkey
Malaysia
Philippines
Indonesia
India
Singapore
Thailand
South Africa
Brazil
Russia
-18%
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External position remains strong, RBI has been proactive in reserve
management
•
India has seen 2nd highest reserve accretion globally
•
Balance of payments has shown steady improvement
•
FCNR redemption went through smoothly
Balance of payments and Current
Account Deficit
Top & Bottom 5 countries
2 Yr Chg in Foreign Ccy Reserves*
Switzerland
India
Hong Kong
Korea
UAE
Singapore
Malaysia
Russia
S Arabia
China
-800
-600
-400
-200
0
200
USD Bn
Source of Data: Credit Suisse
*191-Jan-14 to 30-Jun-16
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#5. Consumption & Growth
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Consumption recovering from demonetization
India base power demand growth (%YoY)
20%
15%
10%
5%
0%
-5%
-10%
Nov-12
Nov-13
Nov-14
Nov-15
Nov-16
India base power demand growth (%YoY)
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Consumption recovering from demonetization (2)
Petrol & Diesel Consumption (3mma)
16%
Commercial vehicle sales (3mma)
30%
14%
12%
20%
10%
10%
8%
0%
6%
-10%
4%
-20%
India petroleum products consumption (YoY 3mma)
Dec-16
Dec-15
Dec-14
-4%
-30%
Dec-13
Dec-16
Jun-16
Dec-15
Jun-15
-2%
Dec-14
0%
Dec-12
2%
CV (3mma)
India High Speed Diesel Consumption (YoY 3mma)
Source of data: Bloomberg, Ambit Capital
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Manufacturing sentiment picking up
India Manufacturing PMI
India Services PMI
56
56
54
54
52
52
50
48
50
46
48
44
46
42
44
40
Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17
Jul-13
India Manufacturing PMI (3 month average)
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Source of data: Ambit Capital
Average
Feb-14 Sep-14 Apr-15 Nov-15 Jun-16 Jan-17
India Services PMI (3 month average)
Average
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Lower deposit rates owing to surge in deposits post demonetization
25%
Credit & Deposit Growth (Y-o-Y)
SBI 3 Year Deposit Rate
20%
9.0%
15%
8.0%
10%
7.0%
5%
6.0%
0%
Nov-11
Nov-12
Nov-13 Nov-14 Nov-15
Non-Food Credit y/y %
Aggregrate Deposits y/y %
Source of data: Bloomberg, Citi
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Nov-16
5.0%
Jan-11
6.5%
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
SBI 3 Year Deposit Rate
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Spread compression in 1-2 yr segment
•
Downward trend in the spreads
•
Easy liquidity
•
Lack of assets
Further compression is expected
10.5
10.0
9.5
Yield
9.0
8.5
8.0
7.5
1yr CD
7.0
2yr AAA PSU
Operative rate
6.5
25
Source
: Bloomberg
Jan-17
Oct-16
Jul-16
Apr-16
Jan-16
Oct-15
Jul-15
Apr-15
Jan-15
Oct-14
Jul-14
Apr-14
Jan-14
Oct-13
6.0
25
Short Term Funds well positioned to benefit from liquidity & spreads
Category
&
Risk Return Tradeoff
Average
CAGR
Returns
(3 yr)
Ann. Average
Standard
Deviation
(3 yr)
Expectation
Outlook
0.2%
Ample liquidity to
aid CD rates
Positive but
limited due to
maturity cap of
91 days
9.8%
1.2%
Ample liquidity to
aid short term
rates
Positive
11.1%
2.3%
Limited room for
rate cuts
Positive but
limited
Liquid
Low Risk;
Low Return
8.3%
Short Term
Medium Risk;
Medium Return
Income
High Risk;
High Return
Source of data: Value research categories. Returns and Standard deviation for Direct Plans for 31 st Jan 2014 to 31st Jan 2017
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Our Recommendations
• Short- end of the curve is strongly recommended (play on liquidity)
• Investor should look to invest in short to medium term funds as a
core portfolio allocation
• Investors looking to take duration exposure can look to do it through
funds having dynamic duration management
• Incremental focus will remain on moving from duration to higher
yielding short term corporate bonds over the next few months
• To be incrementally added across portfolios wherever mandate permits
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Statutory Details and Risk Factors
Disclaimer: Past performance may or may not be sustained in the future. Sector(s) / Stock(s) / Issuer(s) mentioned above are
for the purpose of disclosure of the portfolio of the Scheme(s) and should not be construed as recommendation. The fund
manager(s) may or may not choose to hold the stock mentioned, from time to time. Investors are requested to consult their
financial, tax and other advisors before taking any investment decision(s).
Statutory Details: Axis Mutual Fund has been established as a Trust under the Indian Trusts Act, 1882, sponsored by Axis Bank
Ltd. (liability restricted to Rs. 1 Lakh). Trustee: Axis Mutual Fund Trustee Ltd. Investment Manager: Axis Asset Management Co.
Ltd. (the AMC) Risk Factors: Axis Bank Limited is not liable or responsible for any loss or shortfall resulting from the operation of
the scheme.
This document represents the views of Axis Asset Management Co. Ltd. and must not be taken as the basis for an investment
decision. Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors
or associates shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information
contained herein. No representation or warranty is made as to the accuracy, completeness or fairness of the information and
opinions contained herein. The AMC reserves the right to make modifications and alterations to this statement as may be required
from time to time.
Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
Source of Data: Bloomberg, RBI, ACEMF
Data as on January 31st , 2017 unless specified differently
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