The naïve euphoria - Yes Bank
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
The naïve euphoria
The month of March had started on a positive note with the reports on the US and China finalizing a trade deal
as soon as 27th March. In response to President Trump’s tweet regarding postponing additional US tariffs on
Chinese imports which were scheduled for 1st March, China’s stocks posted a turnover of more than RMB 1
trillion, a breakthrough last seen during the country’s stock market bubble in 2015. However, China’s equity
gains also comes amid 1) MSCI Inc. increasing the weight of China’s A-share in global benchmark indices from
5% to 20% in three stage procedure beginning in May, and 2) domestic stimulus through monetary and fiscal
policies. This rally in equities has also been witnessed across US, Asian and European markets as well with the
MSCI World Index posting a gain of 12% YTD. Despite the US-China trade deal nearing finalization, risks
remain for the auto industry across Europe, Japan and China as US continues to consider imposing of tariffs
on imported cars which are seen as a threat to national security. Alongside, US plans to scrap the preferential
trade status granted to India and Turkey under the Generalized System of Preferences (GSP) programme.
While the optimism on trade supported equity market buoyancy but macroeconomics data continued to paint
a somber picture last month. Manufacturing PMIs for South Korea, Japan, China and Eurozone contracted in
February. In addition, US ISM manufacturing weakened to a two year low of 54.2 from 56.6 in the previous
month. In times of increased uncertainty, while the advance estimate of US Q4 GDP came in stronger than
expected at 2.6%, momentum turned out to be weaker vis-à-vis Q3 print of 3.4%. Further, the longest US
government shutdown, trade war and waning impact of fiscal stimulus is expected to dent the Q1 2019 US
GDP growth as well.
Alongside, China lowered its economic growth forecast for 2019 in the range of 6.0-6.5% with the lower bound
of the GDP target range being the lowest in nearly three decades. For the global economy also, OECD trimmed
its 2019 growth forecasts to 3.3% from 3.5% set in November. Risks to the global outlook remain from
geopolitics as 1) the Brexit uncertainty lingers, and 2) tensions have resurfaced after US President Trump and
North Korea’s Kim Jong Un failed to reach an agreement on denuclearization at a recent summit in Vietnam.
In the backdrop of moderating global growth momentum and rising geopolitical tensions, the US Federal
Reserve has turned cautious which could have an impact on other central banks’.
Looking at commodities, Brent oil prices have gained 25% in 2019 so far with the rally likely to remain intact
amidst deeper production cuts by OPEC+ countries. Alongside, a trade deal between US-China is likely to add
to demand side pressure on prices. Gold prices, on the other hand, have weakened coming in below the USD
1,300 per ounce level starting March as appetite for riskier assets have increased amidst trade optimism and a
cautious Federal Reserve.
Vineet Dhar
Shubhada M. Rao Group President and Head,
Chief Economist Wealth & Channel Management
March 2019 Page 1 of 6Global Macro Developments
US Fed Chairman, Jerome Powell said that the Fed is not in any hurry to change interest rates amid global
risks. Powell further added that the rates are currently “appropriate” and “roughly neutral”, meaning it is
neither curbing nor stimulating the economy.
According to the US FOMC meeting minutes, policymakers expressed their willingness to end balance sheet
unwinding program later this year and keep rate steady amid expectations for a slower pace of US economic
growth.
UK’s MPs have voted by 413-202 to seek delay to EU departure, implying that the UK may now not leave on
29 March as previously planned. PM May said that Brexit could be delayed by 3 months (Jun 30) if MPs back
her deal in a vote next week.
China's banking and insurance regulators urged banks to continue increasing lending to small firms and
further cut their financing costs, as policymakers work to avert an economic slowdown.
BoJ kept rates on hold and offered a bleak assessment of exports and output citing overseas risks that could
threaten to derail a fragile economic recovery.
OECD trimmed its global growth forecast for 2019 and 2020. For 2019, global growth forecast is revised to
3.3% from 3.5% set in November. The downward revision is due to Brexit uncertainty and trade tensions.
The November forecast itself was revised lower from 3.7% earlier.
According to a WTO statement the United Kingdom won approval to remain within the WTO's Government
Procurement Agreement (GPA) post Brexit, which governs $1.7 trillion worth of annual public procurement
opportunities.
Events and Data Calendar
Region Date Event/Data Period Forecast Actual Prior Change
UK 12-Mar-2019 Industrial Production YoY Jan -0.01 -0.01 -0.01
28-Feb-2019 GDP Annualized QoQ 4Q A 2.20% 2.60% 3.40%
US 8-Mar-2019 Unemployment Rate Feb 3.90% 3.80% 4.00%
12-Mar-2019 CPI YoY Feb 1.60% 1.50% 1.60%
28-Feb-2019 Manufacturing PMI Feb 49.50 49.20 49.50
China
9-Mar-2019 CPI YoY Feb 1.50% 1.50% 1.70%
Japan 28-Feb-2019 Industrial Production YoY Jan P 0.01 0.00% -1.90%
P* – Provisional Estimates F* - Final Estimates A* - Advanced Estimates T*- Third Estimates
COMMODITY
Gold prices increased by 2.1% MoM in February vs. an increase of 3.4% MoM in January due to a stronger
dollar in Feb-19 vis-à-vis Jan-19.
Brent prices increased by 8.13% MoM in February vs. an increase of 5.48% MoM in January due to OPEC+
led supply cuts and US sanctions on Venezuela and Iran.
March 2019 Page 2 of 6Domestic Market Macro Economics
%YoY Weights(%) Oct-18 Nov-18 Dec-18 Jan-19
Contribution to WPI inflation (%YoY)
IIP 100 8.4 0.3 2.6 1.7
6 Primary Fuel Mfg WPI
Sectoral Classification
5 Mining 14.4 7.3 2.7 -1.0 3.9
Manufacturing 77.6 8.2 -0.6 3.0 1.3
4 Electricity 8.0 10.8 5.1 4.4 0.8
3 Use Based Classification
Primary goods 125.2 6.1 3.2 -1.2 1.4
2 Capital goods 123.1 16.9 -3.1 4.9 -3.2
Intermediate goods 130.1 2.4 -4.9 -0.8 -3.0
1
Infrastructure/constructi
0 on goods 134.1 9.0 5.0 10.0 7.9
Consumer durables 129.0 17.4 -2.1 3.9 1.8
May-18
Feb-18
Mar-18
Apr-18
Jan-19
Feb-19
Aug-18
Sep-18
Dec-18
Oct-18
Nov-18
Jun-18
Jul-18
-1 Consumer non-durables 125.9 8.6 -0.6 5.9 3.8
India February WPI January IIP
Owing to uptick in both manufacturing and service sector activity, the composite PMI rose to 53.8 in Feb-
19 from 53.6 in Jan-19.
Core sector growth moderated to a 19 month low of 1.7% YoY in Jan-19 vs. 2.6% YoY in the previous month
due to contraction in sub-sectors of crude oil, electricity and refinery products.
GST collection moderated to Rs 972 bn in Feb-19 from Rs 1.02 tn in Jan partly reflecting the impact of rate
rationalization effective from Jan-19. GST collection average run rate for FYTD19 stands at Rs 973 bn.
Non-food credit growth posted a slight moderation coming in at 14.3% YoY as of February 15, 2019
compared to 14.6% as of January 18, 2019. For Jan-19, moderation was seen in agricultural credit growth
while industry, services and housing sector loan growth remained robust.
India's industrial production moderated to 1.7% YoY in Jan-19 vis-à-vis an upwardly revised growth of 2.6%
in Dec-18 (earlier: 2.4%). On sequential basis, the headline index inched up by 0.4% MoM, which is weaker
than the usual monthly momentum of 0.6% seen in the month of Jan (5 year average). Manufacturing and
electricity sector acted as a drag while mining maintained strong momentum.
India’s retail inflation inched up from its 19-month low of 1.97% YoY in Jan-19 (revised lower from 2.05%
earlier) to 2.57% in Feb-19. Despite higher than expected print, inflation continues to remain well below
RBI’s medium term target of 4% for the seventh successive month. On sequential basis, the CPI increased
by 0.21% MoM in Feb-19, in contrast to the contraction of 0.37% seen in Feb-18.
%YoY Oct-18 Dec-18 Jan-19 6 F&B Housing Fuel
Misc Others Headline (%YoY)
Overall 4.7 2.6 1.7 5
Coal 11.3 0.9 1.7 ppt contribution
4
Crude Oil -5.0 -4.2 -4.4
3
Natural Gas -1.0 4.3 6.2
2
Refinery Products 1.3 -4.9 -2.6
Fertilizers -11.6 -2.4 10.5 1
Steel 2.6 13.3 8.3 0
Cement 18.5 11.6 11.0 -1
Oct-18
Mar-18
Apr-18
Feb-18
May-18
Aug-18
Dec-18
Jan-19
Feb-19
Sep-18
Nov-18
Jun-18
Jul-18
Electricity 10.8 4.0 -0.3
CORE Sector – Muted Performance India Feb CPI - A subtle shift in underlying drivers
We expect:
We have revised lower our GDP growth estimate from 7.2% to 7.0% (in line with CSO’s estimate) for FY19.
The H2 FY19 GDP is expected to reflect uncertainty on global trade prospects, nascent slowdown in
manufacturing, and deceleration in non-core sectors of agriculture & government services and a slowdown
in NBFC lending.
On inflation front, we expect the inflation trajectory to remain benign with average annual CPI inflation
estimate for FY19 revised lower to 3.5% from 3.7% earlier vs. 3.6% in FY18 due to benign food inflation and
decelerating fuel inflation.
March 2019 Page 3 of 6Equity Market Insights
Tremors of the Pulwama terror attack were felt on Dalal Street as Nifty marked a low of 10,586 post the
escalation of geo-political tension between India and Pakistan. Selling pressure was more evident in broader
markets as Nifty Midcap 100 index came close to October 2018 lows.
Within Emerging Markets space (EMs), Shanghai index made a comeback in 2019. Meanwhile, India
underperformed its Asian and global peers amid rising Indo-Pak tensions. We believe that a reversal in trend
is seen within EM basket as China has rallied by 19% and Nifty has been consolidating after 2018’s relative
outperformance.
In last week, Energy stocks have outperformed led by RIL, which is witnessing a re-rating driven by 1) plans
to deleverage its balance sheet through divestment of stakes in Jio’s fibre and tower assets and 2) further
strengthening of its retail business through plans of online entry. Gain in OMCs is on the back of healthy
marketing margins despite election season.
Market Performance 1 Month 1 Year
30%
22.8%
20%
14.8%
10.4%
10% 5.9% 6.7%
2.6% 4.0%
0.4% 1.6% 2.6% 1.2% 2.9% 0.5%
0%
-0.8% 0.0%
-0.8%
-1.0%
-10%
-15.5%
-20%
-25.6% -25.1%
-30% -28.1%
-29.6%
-40%
Realty Metal Media Auto INFRA Pharma Nifty 50 Energy Bank Nifty FMCG IT
Outlook & Expectations
Recent quarter’s revenue growth was the highest seen in five quarters and while margins were under pressure,
we expect relief in coming quarters. Importantly, PSUs did well and public sector banks reduced their loss.
Looking at results of ICICI and Axis, we also get the feeling that NPA cycle will see a turnaround. Political
equations for upcoming General election are getting clearer and the market is getting receptive to the same.
Global equity markets will scale higher, with a rub-off effect expected on Emerging Markets. Central banks
are re-aligning monetary policy stance, quite a divergent scenario when compared with the narrative of policy
normalization a year back. Stressed global financial conditions recede after Fed's policy reset. ECB's policy
stance has also turned dovish. Dividend yield of global equities is better than US treasury yield. This places
riskier assets like equities in a relatively better spot.
We prefer a bottom-up approach to stock selection. Many sectors and themes are looking attractive at this
juncture. We like construction, discretionary consumption space, private banks (both retail and corporate
funding ones), and capital goods as a contra play.
Our assessment is that the next 3-4 years belong to financial assets and not physical assets. After the deep
correction in 2018, the time is ripe to allocate more money to equities. If you have a higher risk appetite and
are willing to stay invested for three years, then do add midcap flavor to your portfolio.
March 2019 Page 4 of 6Debt Market Insights
The average systemic liquidity maintained a deficit in February of INR 661 bn from a deficit of INR 301 bn in
January.
The average 10yr G-sec bond yield during February moderated to 7.36% from 7.37% in January because of
dovish US monetary policy, lower CPI inflation prints and RBI repo rate cut by 25 bps to 6.25% in Feb-19 policy
meeting. Risks of fiscal slippage, higher market borrowing pared further gains.
The comfort on CPI inflation and moderating economic growth will once again tilt the MPC balance in favor
of a 25 bps rate cut in Apr-19 policy review. We expect a pause thereafter with any monetary easing beyond
Apr-19 dependent upon data and contingent upon the balance of caution stemming from the recent sharp
acceleration in wage inflation, monsoon performance in 2019, unfolding of fiscal led consumption stimulus,
and geopolitics driven uncertainty on oil price outlook.
10 Yr G-Sec Vs. Repo Rate
8.50
10 Yr G-Sec Yield Repo Rate
8.00
7.50
7.00
6.50
6.00
5.50
Outlook and Expectations
After providing primary liquidity worth INR 2,985 bn via Open Market Operation (OMO) purchases in FY19
so far, the RBI has now decided to augment banking system liquidity by introducing a new instrument to its
toolkit. The central bank announced that it will inject rupee liquidity via dollar buy/sell swap of USD 5 bn for
a tenor of 3-years.
From bond perspective, we continue to hold on to our 10Y G-sec yield view of 7.35% for end Mar-19. If such
swap based liquidity intervention gets more readily utilized in FY20, then it would tend to crowd out OMO
purchases. As per the market based consensus, there is a likelihood of INR 1,700 bn OMO purchases in FY20.
Part of this expectation could potentially get adjusted lower if RBI decides to use a mix of tools for liquidity
infusion. This could have a marginal negative impact on long dated bonds. Meanwhile, short dated bonds
could see buying interest (through the recently announced Voluntary Retention Route schemes for FPIs or
otherwise) as RBI continues to depict readiness for liquidity infusion, there is an expectation of incremental
monetary easing in the coming months (while we expect one rate cut in Apr-19 and a pause thereafter, the
market is pricing in two rate cuts by Mar-20), and post the usage of FX swap, the hedging cost would get lower.
Overall, the yield curve is set for steepness.
March 2019 Page 5 of 6Glossary:
Consumer Price Index (CPI): A measure that examines the weighted average of prices of a basket of
consumer goods and services, such as transportation, food and medical care.
Wholesale Price Index (WPI): An index that measures and tracks the changes in price of goods in the stages
before the retail level.
Open Market Operations (OMO’s): is the buying and selling of government securities in the open market
in order to expand or contract the amount of money in the banking system. Purchases inject money into
the banking system and stimulate growth while sales of securities do the opposite.
Cash Management Bills (CMB): A short-term security sold by RBI to meet any temporary shortfalls.
Purchasing Managers Index (PMI) is based on surveys on private sector service /manufacturing
companies. An index level of 50 denotes no change since the previous month, while a level above 50 signals
an increase or improvement and below 50 indicates a decrease or deterioration.
Net Demand and Time Liabilities (NDTL): It is the sum of demand and time liabilities (deposits) of banks
with public and other banks wherein assets with other banks is subtracted to get net liability of other banks.
Current Account Deficit (CAD): A measurement of a country’s trade in which the value of goods and
services it imports exceeds the value of goods and services it exports. A current account deficit represents
negative net sales abroad. A country can reduce its current account deficit by increasing the value of its
exports relative to the value of imports.
West Texas Intermediate (WTI): also known as Texas light sweet, is a grade of crude oil used as
a benchmark in oil pricing. This grade is described as light because of its relatively low density,
and sweet because of its low sulfur content.
For Further Information on Model Portfolios, Kindly contact your Relationship Manager.
YES BANK Limited
Regd. & Corporate Office: Nehru Centre, 9th Floor, Discovery of India, Worli, Mumbai 400018.| Tel: + 91 22 6669 9000 Fax: + 91 22 6669 9018
Northern Regional Corporate Office: 48 Nyaya Marg, Chanakyapuri, New Delhi 110 021.|Tel: + 91 11 5556 9000 Fax: +91 11 5168 0144
Contact Details
Radhika Piplani and Sanjana Shah Shubhada M. Rao Vineet Dhar
Economist Chief Economist Group President and Head
radhika.piplani@yesbank.in shubhada.rao@yesbank.in Wealth & Channel Management
sanjana.shah@yesbank.in vineet.dhar@yesbank.in
About YES BANK
YES BANK, India’s new age private sector Bank, is the outcome of the professional & entrepreneurial commitment of its Founder, Rana Kapoor and its top management team, to establish a
high quality, customer centric, service driven, private Indian Bank catering to the future businesses of India. YES BANK has adopted international best practices, the highest standards of
service quality and operational excellence, and offers comprehensive banking and financial solutions to all its valued customers.
YES BANK has a knowledge driven approach to banking, and a superior customer experience for its retail, corporate and emerging corporate banking clients. YES BANK is steadily evolving
as the Professionals Bank of India with the long term mission of “Building the Best Quality Bank of the World in India”.
Disclaimer
In the preparation of the material contained in this document, Yes Bank Limited has used information that is publicly available, including information developed in-house. Information
gathered & material used in this document is believed to be from reliable sources. Yes Bank Limited however does not warrant the accuracy, reasonableness and/or completeness of any
information. For data reference to any third party in this material no such party will assume any liability for the same. Yes Bank Limited does not in any way through this material solicit any
offer for purchase, sale or any financial transaction/commodities/products of any financial instrument dealt in this material. All recipients of this material should before dealing and or
transacting in any of the products referred to in this material make their own investigation, seek appropriate professional advice.
We have included statements/opinions/recommendations in this document which contain words or phrases such as "will”, “expect", "should" and similar expressions or variations of such
expressions, that are "forward looking statements". Actual results may differ materially from those suggested by the forward looking statements due to risks or uncertainties associated with
our expectations with respect to, but not limited to, exposure to market risks, general economic and political conditions in India and other countries globally, which have an impact on our
services and / or investments, the monetary and interest policies of India, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or
prices, the performance of the financial markets in India and globally, changes in domestic and foreign laws ,regulations and taxes and changes in competition in the industry. By their nature,
certain market risk disclosures are only estimates and could be materially different from what actually occurs in the future. As a result, actual future gains or losses could materially differ
from those that have been estimated.
Yes Bank Limited and any of its officers directors, personnel and employees, shall not liable for any loss, damage of any nature, including but not limited to direct, indirect, punitive, special,
exemplary, consequential, as also any loss of profit in any way arising from the use of this material in any manner. The recipient alone shall be fully responsible/ are liable for any decision
taken on the basis of this material. All recipients of this material should before dealing and/or transacting in any of the products referred to in this material make their own investigation, seek
appropriate professional advice. The investments discussed in this material may not be suitable for all investors. Any person subscribing to or investigating in any product/financial
instruments should do so on the basis of and after verifying the terms attached to such product/financial instrument. Financial products and instruments are subject to market risks and yields
may fluctuate depending on various factors affecting capital/debt markets. Please note that past performance of the financial products and instruments does not necessarily indicate the future
prospects and performance thereof. Such past performance may or may not be sustained in future. Yes Bank Limited or its officers, directors, personnel and employees, including persons
involved in the preparation or issuance of this material may; (a) from time to time, have long or short positions in, and buy or sell the securities mentioned herein or (b) be engaged in any
other transaction involving such securities and earn brokerage or other compensation in the financial instruments/products/commodities discussed herein or act as advisor or lender /
borrower in respect of such securities/financial instruments/products/commodities or have other potential conflict of interest with respect to any recommendation and related information
and opinions. The said persons may have acted upon and/or in a manner contradictory with the information contained here. No part of this material may be duplicated in whole or in part in
any form and or redistributed without the prior written consent of Yes Bank Limited. This material is strictly confidential to the recipient and should not be reproduced or disseminated to
anyone else.
The views and opinion specified herein are suggestive in nature and based on in depth market analysis and appreciation of facts considered critical by us. However, this does not mean or
exclude the possibility of any alternate investment strategy. The opinion/views mentioned herein is only one of the strategies which can be adopted by you at your sole discretion for achieving
your financial objectives and all investment decision made by you are at you sole risk and discretion and we shall not be liable for losses if any caused to you. Further past performance of you
investments in accordance with our views may not be presumed as a guarantee for similar performance in future. All views/opinion stated herein shall be subject to the additional conditions,
qualifications and riders if any specified for securities/investment options in the offer documents/Offering memorandum for such securities/investment options and we request you to peruse
the same.
March 2019 Page 6 of 6You can also read
