FinanceBudget2016-CapitalMarkets

CA.NipunMehta

ICAI–WIRC

MulundCPEStudyCircle

Saturday,5thMarch2016

! Domes'cMacroOutlook

! GlobalMacroOutlook

! ImpactofFinanceBudget2016

! MarketDynamics

! WhatShouldInvestorsDo?

AGENDA

CA.NipunMehta

Domes'cMacroOutlook-TheBackdrop

EconomyonStableFooJng DomesJc/GlobalConcerns" Stable,sidewayseconomicgrowth" Infla'onundercontrol" FiscalDeficitUnderControl" Monetarypolicyeasing" CommoditypricessoQening

" 2PoorMonsoons–LowRuralSpending

"  Weakening Currency

" WeakGlobalOutlook

" FIIsexi'ngEmergingMarkets

CorporateEarnings BankNPAs" NoTurninCapexCycle" LowBusinessConfidence" NoMajorProjectsAnnounced" FallingRevenueGrowth" ImprovingMargins

" HugePSUBankProvising" RateTransmissionNotHappening" RBIReview

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! SevereGlobalSlowdown–Europe,China,Japan

! Nega'veInterestRates–Japan,Switzerland,Germany,Denmark, Austria,Netherlands,Sweden

! SeveralRoundsofQEs/BondBuyingGlobally! ChinaSlowdown&CurrencyDevalua'on! CrudePricesatMul'-YearLows

! GlobalBearMarketsinEqui'es

! GlobalBearMarketinCommodi'es

GlobalMacroOutlook

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! 637: Rate cuts since Bear Stearns imploded in March 2008 !  $12.3 trillion: Asset purchases through global QE programs !  $8.3 trillion: Global debt yielding zero percent or less. !  489 million: Population of countries with official policy rates !  of less than zero. ! -0.93 percent: Yield on the two-year Swiss bond, !  the lowest-yielding government debt in the world.

! (Source:BoAMLReport)

GlobalMacroOutlook-IMPACT

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! USFedRate

GlobalMacroOutlook–USInterestRates

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/images/investoralert/_2016/

GlobalMacroOutlook–GlobalInterestRate–HistoricalLows

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GlobalMacroOutlook–HistoricalCrudeOilPrice

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GlobalMacroOutlook–ChinaGrowthRate

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TheBroadBudgetAgenda

AgriculturalGrowth

FiscalPrudence

EaseofDoingBusiness

InfrastructureSpending

FinancialSectorReforms

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! HugeFocusonAgriculture-CropInsuranceScheme-SopstoincreaseRuralSpending–MNREGA,SocialSchemes

! SharplyHigherInfrastructureSpending–onRoads,Ports,Railways! FiscalPrudence–MaintainFiscalDeficitat3.5%! BankRecapitalisa'on–Rs.25,000Cr.,BankruptcyCode–IsItEnough?! TaxingTheRich

-DDT–DividendIncome>Rs.10L–Individual,HUFs,Firms–Impacton Wipro,RIL,TCSetc-HigherSurchargeforIncome>Rs.1Cr.-1%-4%CessonHighPricedCars>Rs.10L

! TotalServiceTax(IncludingCess)–15%! IncreaseinSTTonOp'ons–0.0172%to0.05%-Impact

Whathasthebudgetdelivered?-

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EquityMarketDynamics

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MarketDynamics–FII/DIIFlows

" HugeFIIOuklowsfromIndia/EmergingMarketssinceAugust2015" DIIshaveturnedNetBuyersandAreWitnessingAcceleratedFlows

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MarketDynamics–DIIHoldingsRising

" DIIsHoldingsinIndianMarketsAreatAMul'YearHigh

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Valuations – factoring positives

•  Midcapvalua'onshavebeenata10-yearhighagainstthefrontlinemarket•  Fromnowonperformancewouldtrackearningsdelivery•  Mid capswould Con'nue to benefit from - improvingmacro, declining input andinterestcostandfavorableeco-system

•  LargeCapsHavingGlobalExposurecouldsuffer

CA.NipunMehta

Domestic investor underinvested in equity assets

Share of Equity Investments in Total Financial Asset at Cost 13%

11%

9% 7%

5%

3%

1%

-1%

F197

1

F197

3

F197

5

F197

7

F197

9

F198

1

F198

3

F198

5

F198

7

F198

9

F199

1

F199

3

F199

5

F199

7

F199

9

F200

1

F200

3

F200

5

F200

7

F200

9

F201

1

F201

3

•  Last cycle savings attracted by physical assets

•  Financial Assets as % of savings are just

45% - Only 4% of these are in equities

•  Equity flows would track the equity returns and the excess returns of Equity over Gold have turned positive

•  Improved attractiveness and Interest of domestic investor in Equities provides for a long term bull case in Indian Equities.

over Gold Excess 5-year CAGR Equity Returns

Excess Equity Savings over gold (RS)

1.0%

0.5%

0.0%

-0.5%

-1.0%

-1.5%

-2.0%

-2.5%

-3.0%

40%

30%

20%

10%

0%

-10%

-20%

-30% 199

2

2014

1996

1998

2002

2004

2008

2010

2000

2006

1994

2012

Source:SEBI,BSE,NSE,Bloomberg,MorganStanley CA.NipunMehta

WhatShouldInvestorsDo?

CA.NipunMehta

BeneficiarySectors•  Infrastructure/RoadSectorfocusedcompanies:Alloca'ontoRoadsup125%•  RailwaysandRuralConsump'on•  LowCostHousing-HousingFinanceCompanies•  Cement

Sectorsdisadvantaged•  TobaccoSector:Excisehitcon'nues•  TaxonAutomobiles–4Wheelers

Equity – Which sectors will benefit?

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Equity Market outlook and Portfolio Positioning

Eventbehindus,whatnext..?

Marketswouldnavigate•  Corporateearnings•  GlobaleventsandresultantFIIflows•  On-the-ground ‘action’ - Reforms

OurStance&Focus•  Backtobasics–withmoreemphasisonbomomupstockpicking•  MidCapswouldprovidemoreopportuni'es•  Remainbiasedtowards

-CompanieswithMoats-Disrup'veBusinesses-CompanieswithCash-CompanieswithAccesstoBankCapital–DeleveragedBalanceSheets-RuralConsump'on

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Key Overweight

•  IT

•  Pharma

•  Rural Consumption – White Goods, 2 Wheelers

•  Cement

•  Consumer discretionary – 7th Pay Commission Spending

•  Private Sector Banks, HFCs

Neutral

•  Public Sector Banks

•  Capital Goods

Underweight

•  Oil and Gas

•  Industrial metals

•  Telecom

Portfolio overweight and underweight sectors

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Thank you

CA.NipunMehta