Investment Snapshot

For the Quarter Ended September 2018

Indian Markets:
A long-term opportunity
for growth

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Dear Valued Policyholder,
Fiscal year 2019 is panning out to be an eventful one with several regulatory
reforms causing significant volatility for both Debt and Equity markets. The
reclassification by SEBI of mutual fund schemes, RBI's Feb Circular on NPA
recognition and SEBI's imposition of Additional Solvency Margins affected the
stock markets in the first half of the year. In the quarter gone by, Indian equity
indices scaled fresh life highs at the start of the quarter propped by
encouraging Q1 FY19 corporate earnings results, positive economic
indicators and recovery in monsoon trends. However, this was followed by
correction towards fag end of the quarter, as Indian equities fell on concerns
over depreciating rupee, surging global crude oil prices and escalating global
trade conflicts. While the default by a leading NBFC caused significant
concern in the money markets, quick action from the government and strong
liquidity measures from RBI, helped ease the situation. Besides, the key
solace was the pace of domestic inflows into equity markets, which has
provided support to the headline indices, while their foreign counterparts
have been selling.
There has been a significant divergence in the performance of NIFTY stocks
and the broader markets in the quarter, with NIFTY gaining 2%, while the
broader markets such as Small cap and Midcap indices corrected sharply
during the same period. This was largely due to a few large cap stocks
continuing to rally and higher share of export revenues in the NIFTY stocks
(i.e. IT and Pharma stocks). We thus expect the flows to remain robust going forward, as even the real
interest rates remain positive (2.5% to 3%) , which drives away investments
On the Macro front, despite the global crude prices being on an up move
from physical assets such as real estate and gold.
along with continued rupee depreciation, India's trade deficit narrowed
during the month of August and September from its high in July, aided by From the debt market standpoint, the market is currently providing a great
buoyancy in exports. Besides, strong Q1 FY19 GDP growth at 8.2% has aided opportunity to lock in the current high yield. The current environment is more
the Indian markets from not losing its sheen versus its EM counterparts, as of a perception freezing over reality and we believe this environment shall not
economic recovery of the country is now conspicuous. Both wholesale and go on forever. We reckon that the current high interest rate scenario is only
retail inflation prints have been trending lower amid rising crude and transient and would eventually ease out, as and when the global growth and
depreciating rupee, largely due to benign food inflation. GST revenues have inflation starts fading and the incumbent resultant problem of rising crude
also remained range bound and is slated to pick up in the coming months, wanes out. Such times can only be deemed as a good opportunity to invest.
with the increasing formalization of the economy and economic activity We reminisce, when G-sec yields had touched a high of 9% in 2013, it almost
catching up gears. fell to 6.5% in a span of two years and commensurately during the period the
average return of income funds was upwards of 10%. Hence, we believe it is
On the Debt market front, markets have been volatile with the 10-year
time to build a portfolio of high quality credit papers and wait for atleast ~3
treasury yield touching a high of ~8.25% in September, largely due to rising
years to start reaping the benefits from reversal of interest rate cycle.
US 10 year, sharply depreciating INR and spike in crude oil prices. However, if
the INR depreciation is looked at from a three-year perspective, then the With regard to Equity markets, volatility is an inherent feature of equity
depreciation is ~4% pa, as the rupee did not depreciate in the last two years. markets, especially after a year of good performance. We know that markets
Hence, normalization towards real effective exchange rate is quite natural. come back from every correction and eventually make new highs and the
The government has tried to stem the incumbent concerns over impact of best way to partake in these times is to invest, and stay invested. As long-
rising crude oil and rupee on CAD and fiscal deficit and IL&FS issue, by a term investors, we understand the importance of investing in equities and the
slew of measures such as reducing duties on petrol and diesel, increasing criticality of staying invested through these corrections, as these short term
tariffs on non-essential imports, easing ECB borrowings and abolishing gains come with enticing long-term rewards. Equity is an asset class that has
withholding tax on Masala bonds and inter vening in the IL&FS issue. Besides, historically returned a very healthy premium over inflation - 7% on an
the much needed breather to the yields came in from the open market average over the long term - and remains the best way to increase the
operation (OMO) buyback of Rs.36,000 crore by RBI and the government purchasing power. This premium will continue, and in order to reap this, we
truncating its annual borrowing programme for FY19 by `70,000 crore. need to stay invested in Equity. Going forward, as Indian markets continue to
tide over volatility on domestic and global fronts; we have always strived to
While the near term concerns are well documented, the longer-term outlook
achieve good risk adjusted return for our funds across categories in Life,
for the markets looks very sanguine. India has been in the midst of a
Pension as well as Group funds over the long term. In addition, we have been
structurally high growth phase and remains the fastest growing economy in
declaring good bonuses to our Traditional Policyholders. Insurance being
the world with IMF projecting 7.3% and 7.5% GDP growth rates for FY19 &
long-term investment tool, it is advisable to remain invested and complete
FY20 respectively. As indicators such as credit growth, reducing output gap
the term of the policy to optimize returns.
and private investments pick up & with some revival in the capex cycle albeit
gradually, along with an improving global environment, GDP growth is As Insurance is a vehicle to touch upon the lives of many by means of
expected to improve further. Besides, the benefits of structural reforms such providing protection and savings, we would like to take this opportunity to
as Goods & Services Tax (GST), Insolvency & Bankruptcy Code (IBC), RERA, thank you for entrusting your hard earned savings with us and look forward
and JAM (Jan Dhan, Aadhar, Mobility) will start manifesting in the growth to your unflinching faith and continued support in future. We remain
numbers, by removing inefficiencies and formalizing the economy. Corporate committed towards offering best-in-class products and services to our
earnings have also troughed out after a protracted period of low growth and valued customers.
are expected to grow in healthy double digits for FY19 and FY20. The
earnings growth will be led by rebound in consumption, peaking of credit Regards,
cost for the financials as the resolution happens under NCLT. Post the recent
correction, the valuations have also become reasonable at 17x 1 year
forward earnings, which are a slight premium over long term average
multiple of 16.5x. Furthermore, India could also attract large inflows with its
reasonably sound domestic fundamentals relative to its peers and the various Jyoti Vaswani
initiatives taken by the government to boost investment and reduce the CAD.
Chief Investment Officer
 gold prices fell owing to gains registered by the US dollar in

Global the wake of the financial crisis in Turkey, and on the back of
encouraging US economic indicators and after the US Fed
hiked key interest rates.

Economy Chart 1 - Crude oil versus gold prices

80 1400.00

Global central banks remain in spotlight. 70 1325.00

$ per ounce
$ per barrel
The US economy registered strong growth in the September 60 1250.00
quarter on the back of strong momentum in business
investments and exports. The Federal Open Market 50 1175.00
Committee raised its GDP growth forecast for 2018 to 3.1%
from its April forecast of 2.8%. It has forecast GDP growth of 40 1100.00
2.5% for 2019 and 2% for 2020. The US Federal Reserve

Sep-17

Oct-17

Nov-17

Dec-17

Jan-18

Feb-18

Mar-18

Apr-18

May-18

Jun-18

Jul-18

Aug-18

Sep-18
(Fed) raised its benchmark interest rate by a quarter
percentage point to a range of 2-2.25%, marking its third Crude oil prices ($ per barrel) International Gold Prices ($ per ounce)
increase this year.
Source: NYMEX, LBMA
The International Monetary Fund (IMF) lowered the UK's
growth projection for 2018 from 1.3% to 1.1% on Brexit
uncertainty. The Bank of England raised the interest rate to
0.75% from 0.50% in its August meeting. The European
Central Bank (ECB) left interest rates unchanged, but
reiterated its plan to scale down the size of its bond-buying
Global
programme in October and to end purchases in December.
The ECB cautioned that although the Euro zone economy
continues to expand, Brexit-related uncertainties could
Equity
hamper growth.
The Bank of Japan (BoJ) kept its monetary policy steady by Table 1 - Global benchmark indices returns
maintaining its short-term interest rate target at minus 0.1% 28-returns Quarterly
Table 1 - Global benchmark indices Yearly
and its 10-year government bond yield target at 0%. BoJ Indices
Sep-18 % Change % Change
Governor Haruhiko Kuroda added that the Central Bank is
DJIA (USA) 26458 9.01 18.09
unlikely to raise interest rates for quite some time. The
Chinese Central Bank, meanwhile, cut the reserve Nikkei 225 (Japan) 24120 8.14 18.49
requirement ratio (RRR) by 100 basis points (bps) from 15.5% Hang Seng (Hong Kong) 27789 -4.03 0.85
for large institutions and from 13.5% for smaller banks with FTSE 100 (UK) 7510 -1.66 1.86
effect from October 15 to spur growth amid the trade tussle Shanghai Composite 2821 -0.92 -15.75
with the US. Index (China)
• The US economy grew an upwardly revised 4.2% in Q2 DAX (Germany) 12247 -0.48 -4.54
2018, much higher than 2.2% growth clocked in Q1 2018. iBovespa (Brazil) 79342 9.04 6.80
• The UK's economy expanded at an annualised rate of 1.2% MICEX (Russia) 2475 7.81 19.25
in Q2 2018 compared with 1.1% in Q1 2018. Source: Yahoo Finance, Bloomberg, Moscow Exchange

• The Euro zone's GDP expanded 2.1% annually in Q2 2018

Global equity indices ended mixed.
compared with 2.4% in Q1.
US equities surged by 9% in the quarter on the back of
• Japan's economy grew at an annualised rate of 3% in Q2;
encouraging domestic economic data. Sentiment strengthened
the economy had contracted 0.9% in Q1.
after US Fed Chief Jerome Powell said the US economy is
• China's economy expanded 6.7% annually in Q2, lower than robust enough to handle tighter monetary policy. Japan's
the 6.8% annual pace in Q1. Nikkei advanced 8% tracking upbeat US markets and aided
by weakness in the Yen. China's Shanghai Composite Index
Crude oil prices rose after the US restored sanctions on Iran;
declined 0.92% after being put under pressure owing to the
gold prices fell after the US Fed raised interest rates.
ongoing trade war with the US. Hong Kong's Hang Seng
International crude oil prices rose after US President Donald declined 4% over Chinese economic health concerns.
Trump signed an executive order restoring sanctions on Iran,
rekindling fears of supply constraints. Prices advanced further
after major oil producers refused to raise output. International
 Indian Indian
Economy Equity
India clocked strong economic growth in Q1 FY19. Table 2 - Indian benchmark indices returns

International agencies remained optimistic about the domestic 28-returns Quarterly

Table 1 - Global benchmark indices Yearly
Sector Indices
economy, which expanded strongly in the June quarter on the Sep-18 % Change % Change
back of strong performance in the manufacturing and Nifty 50 10930 2.02 11.67
construction sectors. The Central Bank hiked the repo rate to S&P BSE Sensex 36227 2.27 15.80
6.50% in its August policy announcement, its second
S&P BSE IT 15629 12.28 57.13
consecutive hike after June, noting inflationary concerns. The
Apex Bank, however, surprised markets in its October policy S&P BSE Oil & Gas 14855 8.76 0.09
announcement by opting to maintain interest rates. S&P BSE Healthcare 15025 7.30 11.40
Meanwhile, the government hiked import duty on 19 items to S&P BSE FMCG 11503 2.58 17.70
curb a widening Current Account Deficit (CAD) and support S&P BSE Metal 13279 1.64 -2.10
the rupee.
S&P BSE Power 1929 -0.88 -12.55
Among key reforms, the Cabinet cleared an increase in the S&P BSE CG 17109 -2.17 -0.37
Minimum Support Price (MSP) for kharif crops for the 2018-19
S&P BSE BANKEX 27992 -4.30 3.58
seasons to support farmers. Further, the GST Council
approved a pilot project to give incentives for digital payments S&P BSE CD 19134 -5.31 9.00
and President Ram Nath Kovind gave his assent to the S&P BSE Auto 21477 -9.91 -11.18
Insolvency and Bankruptcy Code (Second Amendment) Act S&P BSE Realty 1703 -17.87 -17.55
2018. Prime Minister Narendra Modi launched the India Post
Source: BSE, NSE
Payments Bank which offers basic banking services and
promotes financial inclusion, and inaugurated the Ayushman Indian equities ended in the green aided by encouraging
Bharat-National Health Protection Mission to provide health earnings announcements.
cover for underprivileged families.
Indian equity benchmarks NIFTY 50 and S&P BSE advanced
• India's Gross Domestic Product (GDP) rose to 8.2% in April- over 2% each in the September quarter aided by encouraging
June of fiscal 2019 compared with 5.6% in the same quarter quarterly earnings announcements by index heavyweights,
last year. cooling in domestic inflation, and reduction in the GST rates
on more than 50 items. Intermittent pur chases by FIIs and DIIs
• The United Nations Conference on Trade and Development provided support to equities.
(UNCTAD) expects the Indian economy to grow at 7% in
calendar year 2018 compared to 6.2% in 2017. Worries that the global trade war between US-China would
hamper global economic growth dented investor confidence
• IMF retains India's FY 2019 growth outlook at 7.3% and says and triggered outflows sporadically. The market also fell after
the country will grow at 7.4% in FY 20. opposition parties tabled a no-confidence motion against the
• India's retail inflation fell to a 11-month low of 3.69% in government in the Lok Sabha; the government won the
August from 4.17% in July. motion. A massive sell-off in financial firms on liquidity
concerns, rising crude oil prices, and nervousness about likely
• India's Current Account Deficit (CAD) as a percentage of GDP foreign investor outflows amid proposed changes in KYC
declined marginally to 2.4% in the April-June quarter of norms for Foreign Portfolio Investments (FPIs) erased some
2018-19 against 2.5% in the year-ago period. gains. Turmoil in global equities amid the US Fed's decision to
raise interest rates in September and rising uncertainty over
Brexit negotiations between the UK and the European Union
also pulled down the local indices. The RBI's interest rate hike
by 25 bps citing inflationary concerns in August, the currency
crisis in Turkey, and a sharp fall in Argentina's Peso after its
Central Bank raised the interest rate to 60% prompted more
selling in domestic equities.
Chart 2 - FII, DII versus Nifty movement Gilts fell on rupee weakness and strengthening crude oil
prices.
FII Net Monthly Investment DII Net Monthly Investment Nifty Index Value
12000 25000 Gilt prices weakened in the September quarter, with yield of
11600
the 10-year benchmark 7.17% 2028 paper closing at 8.02%
15000
on September 28, 2018 vis-a-vis 7.90% on June 29, 2018.

FII/ DII Inv ` Cr

11200
5000 Prices declined because of the following reasons:
Nifty

10800
-5000 • The rupee declined sharply against the US dollar, hitting
10400 record lows, exacerbating fears of foreign investor outflows
10000
-15000 from the domestic financial markets.
9600 -25000 • Global crude oil prices advanced, stoking fears of a widening
Sep-17

Oct-17

Nov-17

Dec-17

Jan-18

Feb-18

Mar-18

Apr-18

May-18

Jun-18

Jul-18

Aug-18

Sep-18
in CAD and that the RBI would accelerate its interest rate
hikes in the future, following the central bank's policy repo
Source: NSE
rate hike to 6.50% in August.
• Heavy supply of dated securities in the form of gilts and state
• S&P BSE information technology advanced at 12.28% in the development bonds put bonds under pressure.
September quarter as the rupee's weakness aided IT exports.
Further losses were prevented by:
Equity Outlook • Cooling in domestic inflation.
While the near term concerns are well documented, the • The RBI's transfer of `50,000 crore as a surplus to the
longer-term outlook for the markets looks very sanguine. government, thereby soothing concerns over the government's
India has been in the midst of a structurally high growth fiscal situation.
phase and remains the fastest growing economy in the world • The RBI's announcement of bond purchase auctions through
with IMF projecting 7.5% GDP growth rates for FY19. open market operations after monitoring systemic liquidity
Besides, the benefits of structural reforms such as GST, IBC, conditions and pledging to hold further OMO purchases
RERA, and JAM will start manifesting in the growth numbers, through October.
by removing inefficiencies and formalizing the economy.
Corporate earnings have also troughed out after a protracted • Reports that the RBI was mulling a special window through
period of low growth and are expected to grow in healthy which oil companies can buy dollars directly from the Central
double digits for FY19 and FY20. The earnings growth will be Bank instead of the spot market.
led by rebound in consumption, peaking of credit cost for the • Expectations that the government may announce a lower
financials as the resolution happens under NCLT. While one borrowing target for the second half of this fiscal also propped
cannot rule out the volatility that may persist amid global and up the prices. As expected, the government announced to
domestic concerns in the near term, Indian equity markets borrow `2.47 lakh crore via bonds in the second half of the
remain an attractive long-term bet for an investor. financial year, cutting the market borrowing by `70,000 crore.
On the regulatory front:
• S&P BSE FMCG index rose to 2.58% aided by the Centre's
• The RBI surprised the market by holding interest rates steady
decision to cut GST rates on more than 50 items.
in its October policy meeting. However, the Central Bank
• S&P BSE Realty declined to 17.87% as realty stocks changed its stance to 'calibrated tightening' from 'neutral'.
witnessed a heavy sell-off after the Supreme Court imposed a
ban on all construction activities in Madhya Pradesh, • Further, the Central Bank proposed a Voluntary Retention
Maharashtra and Uttarakhand over their failure to deal with Route (VRR) under which more flexibility will be accorded to
solid waste. foreign portfolio investors (FPI) in order to attract foreign
investments. The RBI also said it will revise the asset-liability
• S&P BSE Bankex index fell to 4.3% on liquidity concerns guidelines for non-banking financial companies (NBFCs).
among banking and financial counters.
• In addition, the RBI in its October policy review, projected
• FIIs sold Indian Equities worth `6785 crore in the September
GDP growth for 2018-19 at 7.4% with risks broadly balanced,
quarter vis-a-vis net sales of `20,443 crore in the previous quarter.
ranging 7.3-7.4% in H2. GDP growth for Q1 FY20 is
projected marginally lower at 7.4%. The banking regulator
Indian also lowered its retail inflation projection for the second half of
the current fiscal to 3.9-4.5% mainly because of an unusually
benign trend in food prices.

Debt Debt Outlook

The 10 year G-sec yield has been rising amid concerns on
Chart 3 - Domestic yield curve movement rising US 10 year, sharply depreciating INR reflecting both
domestic and global concerns and spike in crude oil prices.
Nonetheless, going forward we expect the Indian bond yields
9.00
to be range bound, given the pickup in indicators such as
8.50 economic and credit growth led by reducing output gap,
8.00 private investments pick up & some revival in the capex cycle
Yield (%)

albeit gradually, benign inflation, and initiatives taken by the

7.50 government to ensure liquidity and solvency in the system
7.00 and contain the widening current account deficit.
6.50
1 yr 2 yr 3 yr 4 yr 5 yr 7 yr 8 yr 9 yr 10 yr 15 yr 20 yr
Maturity (years)
28-Sep-18 29-Jun-18
Source: CRISIL Fixed Income database
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to public and considered reliable. This report does not constitute an invitation or offer to subscribe for or purchase or sale of any security and neither this document nor
anything contained herein shall form the basis of any contract or commitment whatsoever with Future Generali India Life Insurance Company Limited. The past
performance is not an indicator of the future performance.
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INSURANCE COMPANY LIMITED.
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