ICICI_Debt Market Outlook (Dec)_071216 - ICICI Prudential Mutual Fund

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Nov 30, 2016 - Meanwhile, balance in the income account (primary plus secondary) narrowed .... ICICI Prudential Regular
FIXED INCOME

Credit Markets Credit Ratio For the first time in the last 10 semi-annual periods, the debt-weighted credit ratio rose above 1, which shows the count of debt securities upgraded is more than those downgraded, and surged to 2 times in the first half of the fiscal 2017 compared with the 0.2 times in the second half of fiscal 2016. The credit ratio (number of upgrades to downgrades) came in at 1.2 times compared with 0.8 times. Source: CRISIL

Our Outlook A credit ratio in first half of FY17 has improved to 2 times, this is among the highest in last 5 years. This improvement goes on to show that the credit cycle has bottomed out. With the commodity prices being stable, commodity-led businesses and financial companies that were heavily invested in these sectors will witness further improvement. As capacity utilisation is low, we do not expect further investment in capital expenditure, thus, these companies are expected to repay their loans and reduce debt, thereby improving the balance sheet. Credit profile of many corporates has been improving and we have witnessed upgrades in our portfolios of companies engaged in various sectors. Therefore, it reflects that economic recovery cycle is well underway, and that the credit market is gradually improving. Source: CRISIL

Money Markets Liquidity Currency in circulation fell sharply by 8.9%y-o-y in the week ended November 18, 2016 against 13.8% growth a year ago. The Reserve Bank of India’s (RBI’s) liquidity window witnessed net lending of Rs 1.43 lakh crore in November 2016 (as of November 29) against Rs 3,254 crore in the previous month. Source: RBI, CRISIL Fixed Income Database

Inflation Inflation moderated to 4.2%, a one-year low, in October 2016 from 4.3% in September. This was driven by a drop in food inflation to 3.3% (drop of 60 bps) - especially in vegetables, fruits and pulses; core inflation edged up to 5.1%. Fuel and light inflation (including petrol and diesel) gained up 30 bps in October, driven by higher petrol and diesel inflation. Wholesale Price Index (WPI)-based inflation fell to a four-month low of 3.39% in October 2016 from 3.57% in the previous month. Source: Mospi.Nic.in, CRISIL Centre for Economic Research (CCER)

Bank Credit / Deposit Growth Bank credit growth fell to 7.9% y-o-y in the fortnight ended November 11, 2016 compared with 8.9% y-o-y in the fortnight ended October 14, 2016. Non-food bank credit fell to Rs 72.66 lakh crore as on November 11, 2016 compared with outstanding credit of Rs 72.70 lakh crore on October 14, 2016. Time deposits increased 10.9% y-o-y in the fortnight ended November 11, 2016 against 9.7% y-o-y in the fortnight ended October 14, 2016. Demand deposits witnessed 20.3% y-o-y growth in the fortnight ended November 11, 2016 compared with 18.3% y-o-y growth in the fortnight ended October 14, 2016. India’s M3 money supply rose 10.3% y-o-y in the fortnight ended November 11, 2016 compared with 10.9% a year ago. Reserve money fell by 5.2% y-o-y in the week ended November 18, 2016 compared with 13.7% a year ago. Source: CRISIL

Our Outlook Inter-bank call money rates remained below the repo rate for most of the month mainly owing to comfortable liquidity in the system following the government’s demonetisation decision, which resulted in the banking system witnessing large inflows of funds as customers deposited their defunct higher denomination currencies. Call rates were also supported by the sporadic repo auctions conducted by the Reserve Bank of India (RBI) earlier in the month. However, some stress was witnessed on the rates after the RBI conducted a series of reverse repo auctions to suck out excess liquidity resulting from the demonetisation decision. Further, as a one-off measure to drain away high liquidity, the central bank, on November 26, announced an incremental cash reserve ratio (CRR) of 100% on deposits with banks between September 16 and November 11. Liquidity is expected to remain surplus going forward and RBI will have to make efforts to moderate liquidity. We expect money market rates to remain low and in tight range.

Bond Markets Current Account India’s current account deficit (CAD) was a record low of $277 million (0.1% of GDP) in Q1FY17 against $6.1 billion (1.2% of GDP) a year ago. This is the smallest CAD number in the last decade. The sharp fall in CAD was almost entirely because of a shrinking trade deficit (goods + services), which contracted to $8.06 billion in Q1FY17 from $16.2 billion a year ago. Meanwhile, balance in the income account (primary plus secondary) narrowed for the third consecutive quarter, falling $3 billion on-year to $7.8 billion. Continued slowdown in workers’ remittances is a key factor behind this. Remittances fell about 2% on-year, indicating rising economic stress in the Middle East owing to low oil prices. Capital flows needed to finance CAD were $113 million on a net basis in Q1FY17, much lower than $7.2 billion in the same period last year and $160 million in Q4FY16. Therefore, despite a much slimmer CAD, the rupee weakened 5.4% on-year. Foreign direct investment (FDI) dropped on-year and on-quarter. Net FDI was $4.1 billion, down 59% on-year and 53% on-quarter. Other foreign investments such as deposits and trade credit also tanked, but a pick-up in foreign portfolio investor (FPI) inflows provided some buffer. Net FPI inflows rose to $2.1 billion compared with outflows of $50 million a year ago and $1.5 billion a quarter ago. Source: CRISIL

Physical assets Indian gold prices (down 4%) continued its downtrend in November to close at Rs 28,800 per 10 grams on November 30, compared with Rs 30,000 per 10 grams on October 28 on the National Commodity and Derivatives Exchange (NCDEX), amid cash crisis in the domestic market following demonetisation of high value notes by the government coupled with weak global trend. Source: CRISIL

The RBI's policy In the first policy meeting of the Monetary Policy Committee (MPC) chaired by the new RBI Governor Urjit Patel, the repo rate was reduced by 25 bps to 6.25% on October 4, 2016. As a result, the reverse repo rate adjusted to 5.75% and the marginal standing facility rate (MSF) to 6.75% for maintaining a 100 bps band around the policy rate. The decision to cut rates was unanimous, with all the six members of the MPC voting in its favour. The MPC highlighted that the recent drop in inflation reflects a downward shift in food inflation momentum and opens up space for policy action. That said, it emphasised that the implementation of the Seventh Pay Commission recommendations could pose a challenge going ahead. Overall, the central bank has retained its March 2017 inflation target of 5% -- with upside risks that have reduced compared with August. Source: CRISIL

Government Borrowing In the Union Budget, the government has pegged the gross borrowing for FY17 at Rs 6 lakh crore and the net borrowing at Rs 4.25 lakh crore. The government announced it will borrow Rs 2.45 lakh crore in the second half of FY17. Of this, net market borrowing would be Rs 1.77 lakh crore. Auctions of government securities worth Rs 56,000 crore are scheduled for December 2016. Source: CRISIL

Fixed Income Outlook Government bond prices or gilts soared in the month with the yield of the 10-year benchmark – the 6.97%, 2026 paper falling to 6.24% November 30, 2016, compared with 6.79% on October 28, 2016. Gilts surged primarily on the back of the government’s move to take Rs 500 and Rs 1000 denomination notes out of circulation, which resulted in significant improvement in systemic liquidity, translating into an increase in demand for government securities as banks are required to maintain a percentage of their deposits as liquid assets. Growing expectations that the MPC will vote to cut interest rates at its two-day meeting beginning December 6 further increased the appetite for bonds. India’s latest domestic consumer inflation figures for October also aided appetite for debt. Fixed income market has entered an interesting phase after a surprise down move in yields post demonetisation. Significant liquidity infusion post demonetisation and expectations of sharp rate cut by the RBI has led to this sharp fall in yields. Demonetisation move has changed the macro framework and is likely to turn indicators viz. Inflation, Current Account, Fiscal and system liquidity in favour of bond markets. In the near term, inflation numbers are expected to trend lower post demonetization move on backdrop of slower consumption and expectations of better food supply after a good monsoon. We expect RBI to cut rates by 25 to 50 bps in the upcoming policy meet on 7th December, 2016. We expect system liquidity to remain surplus and RBI will need to resort to MSS (Market Stabilization Scheme) to reduce the excess liquidity. RBI will incrementally reduce CRR which was increased as a temporary measure to suck out liquidity. Money market rates are expected to remain low and in tight range. We maintain neutral to downward bias on long bond yields. Overall we remain positive on the fixed income market in the near term and recommend investors to stay invested in long duration funds. However, we believe that opportunity to invest in long duration funds has passed away and investors can now consider investing in short or dynamic duration funds. Accrual funds remain a suitable investment avenue for stable and better risk adjusted returns from hereon.

Debt Valuation As our debt valuation index, investors should invest in moderate duration products now. Debt Valuation Index

Debt Valuation Index considers WPI and CPI over G-Sec Yield, Current Account Balance and Crude Oil Movement for calculation. Equal weights are assigned to each of these parameters for calculating the index.

Our Recommendation We recommend existing investors in long duration funds to stay invested as we expect yields to pare down further from the current levels. For new allocations we recommend short and dynamic duration or accrual based funds. FIXED INCOME RECOMMENDATIONS Aggressive investors with 3 years of investment horizon: ICICI Prudential Long Term Plan

This fund can dynamically change duration strategy based on market conditions

Investors with moderate risk appetite: These funds with short to medium ICICI Prudential Dynamic Bond Fund duration could give better riskICICI Prudential Short Term Plan adjusted returns. Investors seeking to earn from Accrual + Duration: ICICI Prudential Regular Savings Fund ICICI Prudential Corporate Bond Fund ICICI Prudential Regular Income Fund (Income is not assured and is subject to the availability of distributable surplus.)

These funds are better suited for investors looking for accrual strategy.

ICICI Prudential Short Term Plan It is an open-ended income fund. It aims to generate accrual income from the

Why ICICI Prudential Short Term Plan?

interest rates prevailing in the economy. In addition, seeks to derive benefit from any potential mark-to-market returns by tactical, calibrated and opportunistic approach to Government securities.

•The Fund endeavors to generate risk adjusted returns by maintaining a fair balance between duration and yield. •The Funds aims to benefit from capital appreciation through active management of G-Sec and active duration management. •The fund also aims to maintain reasonable yield by investing in high rated corporate bonds.

Investment Approach Focus on accrual income and capital appreciation

Duration in 1.5 to 3.5 years range

3.15 Years

4.17 Years

Modified Duration

Average Maturity

Yield To Maturity

7.12%

Tactical Gsec Call Data as on 30th November, 2016

ICICI Prudential Corporate Bond Fund Our Recomendation The Fund focuses on accrual income by endeavoring to invest into medium- to long-term corporate bonds available at a spread over current market yields.

Why ICICI Prudential Corporate Bond Fund?

The Fund aims to generate higher carry (interest income) along with due emphasis

•The Fund aims to provide benefits of both worlds; ACCRUAL

on credit quality and liquidity.

&DURATION. It aims to maintain reasonable Yield to Maturity (YTM)

The Fund intends to generate reasonable returns by investing predominantly in the

and a moderate duration.

1-7 year maturing corporate bonds.

• It maintains a fair balance between the two and aims to generate returns in both market conditions—rising as well as falling interest rates. •Investors who have moderate-risk appetite and wish to invest in

Investment Approach

corporate bonds with an aim to earn returns predominantly through accruals and partly from potential capital appreciation may consider in this fund.

Hold Till Maturity approach with focus on accruals

Total Return Bias - Accruals plus Capital Gains

Static Duration Management in 2 - 3 years range Data as on 30th November, 2016

2.83 Years

3.85 Years

Modified Duration

Average Maturity

Yield To Maturity

7.95%

ICICI Prudential Dynamic Bond Fund The Fund aims to actively manage duration in the range of 1-5 years and generate potential capital appreciation. The Fund aims to generate total return with emphasis on high credit quality.

Why ICICI Prudential Dynamic Bond Fund? •The Fund intends to minimize liquidity, credit and interest rate risk by investing in liquid and good quality fixed income securities along with active duration management. •It seeks to provide fair blend of accrual income and potential capital appreciation by following total return approach. •The Fund endeavors to limit the modified duration up to 5 years in

Investment Approach

the current market conditions. •Investors who wish to benefit from favorable interest rate movements with limited duration risk may consider investing in this fund.

Active Duration Management in 1 - 5 years range

Invests in a mix of G- Sec and Corporate Bonds

4.87 Years

7.06 Years

Modified Duration

Average Maturity

Yield To Maturity

7.28%

High Credit Quality Data as on 30th November, 2016

Our Recomendation ICICI Prudential Long Term Plan It is an open-ended income fund. It aims to generate accrual income from the interest rates prevailing in the economy.

Why ICICI Prudential Long Term Plan?

In addition, seeks to derive benefit from any potential mark-to-market returns by

•The Fund intends to generate potential capital appreciation by

tactical, calibrated and opportunistic approach to Government securities.

following model based dynamic duration management that will enable the fund manager to systematically manage interest rate risk. •The Fund based on the CAD model will aim to maintain high duration when interest rates are high, and maintain low duration when interest rates are low. This will help in capturing interest rate

Investment Approach

cycles from both sides over a longer period of time. •Investors who wish to benefit from changing interest rate cycles with controlled interest rate risk may consider investing in this fund.

Model Based Duration Calls

6.19 Years Dynamic Duration ranging between 1 - 10 years

High Credit Quality Data as on 30th November, 2016

Modified Duration

10.76 Years Average Maturity

Yield To Maturity

6.94%

ICICI Prudential Regular Income Fund (Income is not assured and is subject to the availability of distributable surplus.)

ICICI Prudential Regular Income Fund (Income is not assured and is subject to the availability of distributable surplus.) is an open-ended income fund that intends to generate regular

income through investments in fixed income securities and capture arbitrage opportunities by investing in equity and equity related instruments.

Why ICICI Prudential Regular Income Fund?

(Income is not assured and is subject to the availability of distributable surplus.)

•The Fund intends to generate reasonable returns across all interest rate cycles and thus can be suitable for investments at any given point of time. •The fund intends to generate stable accrual returns with lower volatility by holding its investments till maturity. •The fund endeavors to invest in relatively high yielding debt

Investment Approach

instruments and intends to deliver tax efficient returns (Indexation benefit after 3 years)* •Investors who have moderate risk appetite and wish to earn stable accrual returns may consider investing in this fund.

Researched Credit Calls

Hold till maturity approach with Focus on Accruals

1.13 Years

1.30 Years

Modified Duration

Average Maturity

Yield To Maturity

8.62%

Around 5% Arbitrage exposure Data of debt component as on 30th November, 2016

ICICI Prudential Regular Savings Fund Our Recomendation Aims to generate returns mainly in the form of accrual income and partly through potential capital appreciation, as it holds papers with moderate duration.

Why ICICI Prudential Regular Savings Fund?

Invests in well researched corporate bonds offering relatively high yield. Also,

•The Fund intends to generate reasonable returns across all interest

intends to take advantage of internal credit research to generate credit alpha

rate cycles and thus can be suitable for investments at any given

(Gains form credit rating upgrade) for the portfolio with limited risks.

point of time. •The fund intends to generate stable accrual returns with lower volatility by holding its investments till maturity. •The fund endeavors to invest in relatively high yielding debt instruments and intends to deliver tax efficient returns (Indexation

Investment Approach

benefit after 3 years). •Investors who have moderate risk appetite and wish to earn stable accrual returns and have 3 years and above investment horizon may consider investing in this fund.

Hold till maturity approach with focus on accruals

1.90 Years Researched credit calls

Static duration management Data as on 30th November, 2016

Modified Duration

2.44 Years Average Maturity

Yield To Maturity

8.85%

IC IC I P ru d en tial S h o rt T erm P lan is su itab le fo r in v e sto rs wh o are se ekin g *: Short term income generation and capital appreciation solution A Debt fund that aims to generate income by investing in a range of debt and money market instruments of various maturities. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them

IC IC I P ru d en tial R eg u lar S av in g s Fu n d is su itab le fo r in v esto rs wh o are seekin g *: Medium term savings solution A Debt fund that aims to deliver consistent performance by investing in a basket of debt and money market instruments with a view to provide reasonable returns while maintaining optimum balance of safety, liquidity & yield. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them IC IC I Pru d en tial C o rp o rate Bo n d Fu n d is su itab le fo r in ve sto rs wh o are seekin g *: Long term savings solution A Debt Fund that invests in debt and money market instruments of various maturities with a view to maximize income while maintaining optimum balance of yield, safety and liquidity. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them IC IC I Pru d en tial L o n g T erm Plan is su itab le fo r in ve sto rs wh o are se e kin g *: Medium Term Savings solution A Debt fund that invests in debt and money market instruments with a view to maximize Income while maintaining optimum balance of yield, safety and liquidity. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them IC IC I Pru d en tial D yn am ic Bo n d Fu n d is su itab le fo r in ve sto rs wh o are see kin g *: Medium term wealth creation solution A Debt Fund that invests in debt and money market instruments with a view to provide regular income and growth of capital. *Investors should consult their financial advisers if in doubt about whether the product is suitable for them IC IC I Pru d en tial R eg u lar In co m e Fu n d (Income is not assured and is subject to the availability of distributable surplus.) is su itab le fo r in vesto rs wh o are see kin g * : Medium term regular income solution A hybrid fund that aims to generate regular income through investments primarily in debt and money market instruments and long term capital appreciation by investing a portion in equity *Investors should consult their financial advisers if in doubt about whether the product is suitable for them

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.