March 2021 Investment Products - HDFC securities

March 2021

Market

Macroscope

Investment Products

MARKET MACROSCOPE | INVESTMENT PRODUCTS | MARCH 2021

Index

Contents Page No

Equity outlook ……………………………………………….. 1-3

Debt outlook …………………………………………………. 4-8

Deep Dive - Do Thematic NFOs outperform ...…………... 9-11

India ETF Landscape ………………………......…………... 12-16

Dots to Join ……………………..…………………………… 17-18

Index Performance ……….………………………………… 19

Macro economic indicators ………………………………… 20-21

Model Portfolios …………...………………………………… 22-23


Equity Outlook

01

Macroeconomic Review:

The $1.9 trillion US fiscal stimulus moved closer to approval. The stimulus will include a $1,400

cheque for many Americans, an extension of unemployment benefits and aid to state and local

governments. In a recent Wall Street Journal survey economists on average expected US gross

domestic product to expand nearly 4.9% this year, after falling 3.5% last year.

The large fiscal stimulus sparked fears of high inflation down the road. The US 10-year bond yields

increased from 1.07% at the beginning of the month to a high of 1.61% in February. Despite the

above, Federal Reserve Chairman Jerome Powell reaffirmed the central bank’s easy-money policies

in place until the labour market improves much further. It is worth remembering that Federal Reserve

has a target of inflation “averaging” 2% over time. This would suggest that the short term rates would

remain low for a while. It will be interesting to see how much further the 10-year bond yields can rise

given the expectation of a persistently low short term yields.

India’s budget refrained from increasing taxes instead attempting to support the nascent economic

recovery through fiscal spending. The Centre has budgeted an impressive 26.2% rise in capex for

the next fiscal from the revised estimate for FY21. The declining number of Covid infections in the

country also lifted consumer sentiment. Moody’s sharply raised its forecast for India’s GDP growth in

FY22 to 13.7% from 10.8% earlier. Moody’s also revised its estimate of contraction in FY21 to 7%

from 10.6%.

The RBI’s Monetary Policy Committee held rates unchanged in its February meeting with a

commitment to keep an accommodative policy “as long as necessary”. However, the bond markets

reacted negatively to the budgeted fiscal deficit of 6.8% for FY22 and the large borrowing plans of

the central government. India’s 10-year yields rose to 6.21% as the government’s bond auctions

failed to attract any bids at lower yields. Managing long term yields will be RBI’s biggest near-term

challenge and a key risk for equity markets.

Equity markets review:

The markets had corrected before the budget (towards the end of January). The markets anticipated

tax increases and curtailed spending in the budget. However, the budget did not raise taxes and

instead focused on growth. This sparked a sharp rally with the Nifty making a new life time high of

15,432 on 16th Feb 2021. Concerns around rising bond yields globally sparked a minor sell off in the

markets in the last 10 days of February.

Nifty and Bank Nifty increased by 5.2% and 14.6% respectively during the month. Nifty Midcap-150

and Nifty Smallcap 250 indices rose by about 12% during the month indicating a broad based rally in

the equity markets. Among sectoral indices, PSU Bank index (increased by 34%), Metals Index

(increased by 21%) and S&P BSE Power index (increased by 18%) were the best performing

indices. The Nifty FMCG, Pharma and IT indices were the worst performing indices with each

declining by around 4%. Please refer the table at the end of this note for more details.

The best and worst performing stocks within the NSE 500 universe are shown in the table below.

Stocks from the Metals, NBFC and PSU banks universe figured among the best performers while

consumer and pharma stocks were among the worst performers.


Equity Outlook

02

FIIs invested Rs. 25,787 Crores in the Indian equity markets in February 2021 while domestic mutual

funds reported net outflows.

IPO Review:

February 2021 was another strong month for IPO issuances with 4 companies raising Rs. 5,342

crores during the month. Brookfield India REIT was the largest IPO at Rs. 3,800 cr while Nureca

raised Rs. 100 cr. Among the companies that listed in February, Indigo Paints and Nureca were the

best performers opening more than 50% higher than the issue price. Brookfield India REIT was the

worst performer opening close to the issue price.

The table below summarizes the IPOs which either closed or listed during February 2021:

Best Performing Stocks Among NSE 500 in February 2021

Large Cap Mid Cap Small Cap

Stock Name Returns Stock Name Returns Stock Name Returns

Adani Enterprises Ltd. 64.3% Bank of India 65.9% Hindustan Copper Ltd. 149.9%

Adani Transmission 61.8% Indian Overseas Bank 64.0% IIFL Finance Ltd. 89.2%

Hindalco Industries Ltd. 50.5% Sundaram Finance 58.4% Linde India Ltd. 71.3%

Motherson Sumi

Systems 47.7% Tata Chemicals Ltd. 55.4% Dilip Buildcon Ltd. 61.5%

Piramal Enterprises

Ltd.39.6% Aditya Birla Capital 52.9% Bank of Maharashtra. 61.0%

Worst Performing Stocks NSE 500 in February 2021

Large Cap Mid Cap Small Cap

Stock Name Returns Stock Name Returns Stock Name Returns

Larsen & Toubro

Infotech Ltd.-10.0% United Breweries Ltd. -10.8%

IOL Chem and Pharma

Ltd.-18.1%

Eicher Motors Ltd. -9.0% Coromandel International Ltd. -10.0% KRBL Ltd. -16.3%

Alkem Laboratories -8.8%Crompton Greaves Consumer

Electricals -9.7%

Gujarat Ambuja

Exports Ltd.-12.7%

Godrej Consumer

Products Ltd.-8.0% Godrej Agrovet Ltd. -9.3% Shilpa Medicare -12.4%

United Spirits -7.6% NATCO Pharma -8.4% Future Retail -11.9%

Name of the companySize of IPO

(Rs. Cr)

Issue close

Date

IPO price

(Rs. Per

share)

Listing

date open

(Rs. Per

share)

% Inc from

issue price

Overall

Subscripti

on (times)

QIP

Subscripti

on (times)

Indigo Paints Ltd 1,172 22-Jan-21 1,490 2,607.0 75.0% 117.0 189.6

Home First Finance 1,154 25-Jan-21 518 618.0 19.3% 26.6 52.6

Stove Kraft Ltd 413 28-Jan-21 385 467.0 21.3% 18.0 8.0

Brookfield India REIT 3,800 5-Feb-21 275 281.7 2.4% 7.9 4.8

Nureca Ltd 100 17-Feb-21 400 615.0 53.8% 39.9 3.1

Railtel Corporation 818 18-Feb-21 94 109.0 16.0% 42.4 65.1

Heranba Industries 624 25-Feb-21 627 NA NA 83.3 67.4

Source: NSE,BSE

Source: NSE,BSE


Equity Outlook

03

Results and Valuations:

Nifty FY21/FY22/FY23 earnings have been upgraded by 14%/ 8% and 6% respectively. This was the

second successive quarter of earnings upgrades. A part of the earnings surprise was driven by lower

commodity prices. Commodity prices have rallied strongly over the last two months. It will be

interesting to see if the companies can sustain the elevated operating margins reported in this

quarter.

The Indices returns this month were driven by cyclical sectors (metals, banks, NBFCs, realty,

infrastructure) as well as a catch up rally by mid and small cap indices. The markets are now pricing

a strong recovery in these sectors.

Outlook:

Translating macroeconomic outlook into investment decisions is always difficult. Predicting the path

of inflation and its impact on the economy is probably even trickier. The Fed is likely to be reactive

rather than proactive in terms of its response to any rise in inflation. Equity investors would do well to

follow the same strategy. They should focus on earnings growth, valuations and bottom up stock

picking rather than trying to guess the path of inflation.

The table below shows select “buy” and “sell” recommended stocks as rated by HDFC Securities’

Institutional equities team.

Risks:

Expensive market valuations and bond yield movements are near term risks to the market. Longer

term risks include US corporate tax increases and geo-political tensions between the US and China.

Recommended reading for the month:

In a report published on March 4, 2021 Moody’s Analytics studied data from 2008 onwards to assess the impact of

rising US bond yields. Their conclusion - stocks and high-yield performed well during periods of rising bond yields.

HDFC Sec Institutional Equities: Select "Buy" rated stocks

Name Industry Target price CMP % Upside

Galaxy Surfactants Chemicals 2750 2213 24.3%

Maruti Suzuki Auto 9000 6872 31.0%

HCL Technologies IT service 1110 909 22.1%

SBI Life Insurance Financials – Insurance 1170 863 35.6%

Oberoi Realty Real estate 697 545 27.9%

HDFC Sec Institutional Equities: Select "Sell" rated stocks

Name Industry Target price CMP % Downside

New India Assurance General Insurance 106 153 -30.9%

Vinati Organics Chemicals 1015 1398 -27.3%

Shoppers Stop Retail 175 207 -15.5%

Trent Retail 575 809 -29.0%

Source: HDFC Sec IE


Fixed Income Outlook

04

We review the following significant developments in the Fixed income space:

1. US Yields - High volatility expected - Negative

US inflation is at 1.4% for January and has remained at around this level since August. Inflation

expectation, however has gone up-since then – from 1.7% to around 2% now.

Inflation expectation as measured by 5Y5Y swaps

The US 10-year yields, from a low of 0.51 on Aug 2nd, 2020, rose to 1.61 on Feb 25th 2021. This has

led to a spike in bond yields throughout the world.

On the fiscal side, the USD 1.9 trillion dollar package is passing through Senate. Already without it,

the US Government debt is extremely high at $ 27 trillion (128% of US GDP). The reality is that while

the US government is looking to dole out $1400 to each individual, the funding is done by lenders

like China and Japan, each with US treasury holdings of > $ 1 trillion. Even India is not too far behind

with its US Treasury holdings of more than $200 billion.

Back to the yield spike, one gets the feeling that the bond selloff seems to be done for now.

However, we will keep seeing significant volatility in an otherwise long term move upwards.

Source: fred.stlouisfed.org

Source: macrotrends.net

0

1

2

3

4

5

0

5

10

15

20

25

30

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Jul-

16

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

Jul-

20

Jan

-21

U.S

. D

eb

t

U.S. Debt/10 Year U.S. yield

Debt (in $ trillion) US Yields (RHS)



05

2. India inflation – In control but crude a worry – Positive

India has benefitted immensely from the low inflation experienced in the last few years. While the

core inflation has remained steady at around the 5.5 level, the headline CPI reached a peak of

7.61% in Oct-20 and since then has come down. RBI expects CPI to be between 4-6% in the next 12

months. Barring any ugly surprises from crude prices, inflation should not worry the government or

the central bank.

3. Indian Economy – On the mend – Neutral

India’s GDP grew by 0.4% in Q3 FY’21. Overall, the GDP growth for FY’21 is expected at around -

7.5%. For FY’22, the expectation is around 10%. What has been encouraging though are the green

shoots. GST collections have picked up (Rs 1.2 and Rs 1.13 lakh cr for January and February).

Manufacturing PMI has been above 57 and other industry indicators like car sales are doing well.

It has now long been accepted that policy rates will not go down from here. The point remains that

even with any signs of economic recovery, policy rates may not be going up in a hurry simply

because RBI will be wary of the fragility of this economic recovery.

Source: Press Information Bureau – GOI

7.6

6.6

5.9

7.2

6.3 6.2

6.7 6.7

7.37.6

6.9

4.6

4.1

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

Jan

-20

Feb

-20

Mar

-20

Ap

r-2

0

May

-20

Jun

-20

Jul-

20

Au

g-2

0

Sep

-20

Oct

-20

No

v-2

0

Dec

-20

Jan

-21

Source: Ministry of Statistics & Programme Implementation

1.15 1.201.13

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

Jan

-20

Feb

-20

Mar

-20

Ap

r-2

0

May

-20

Jun

-20

Jul-

20

Au

g-2

0

Sep

-20

Oct

-20

No

v-2

0

Dec

-20

Jan

-21

Feb

-21

GST Collection ( Rs. lakh crore)

CPI based Inflation (%)



06

4. RBI and Yield Targeting – Getting tougher – Negative

World’s central banks are divided into two camps. Those who target specific yields (Japan, Australia)

and those who monitor on a dynamic basis (US, Euro). Indian central bank has for all these years

belonged to the second camp. But recently, RBI has been sending the message to the market that it

is comfortable with the 10 year G-sec at 6% levels. Through actions (>Rs 3 lakh cr OMO) and words,

it has attempted to keep the market’s yield expectation in check. However, the sheer size of the

government borrowing (refer to point 5 below), means that things are getting out of hand. The market

does want two things from RBI – (1) A more definitive action plan around OMOs and (2) Managing

the yield curve holistically and not simply look at the 10 year.

5.Demand and Supply – Big supply ahead – Negative

Supply

From an average of Rs 4-7 lakh cr annual borrowing in the past few years, the Indian Central

Government will be borrowing close to Rs 25 lakh cr in the two years of FY 2021, 2022. In terms of

the weekly auction, that amounts to an increase from Rs 12000-15000 cr to Rs 25,000 cr. If one adds

the state government borrowing of around 8 lakh cr each in the two years and the further Rs 1.1 lakh

cr that the central government will be borrowing for states with respect to GST compensation – the

numbers look very intimidating.

There may be a silver lining though. Government’s conservative tax receipt estimates for the rest of

FY’21 and possibility of various departments not being able to spend fully means that there will be a

sizeable net addition to the fiscal balance – anywhere from Rs 1 to 2 lakh cr. However, it is not

entirely certain if it will mean any cancelled auctions. Government may keep it as dry powder for

future expenditures.

Demand

India’s G-secs ultimately has only a few categories of buyers – Banks, Primary Dealers,

MFs/Insurance/Pension funds and FPIs. It is for this reason that RBI is also looking to simplify G-sec

investments for Retail investors.

Banks have to maintain an SLR of 18%. Their actual G-sec exposure has been 25-28% in the last

few quarters. This is primarily because there is not too much credit demand from the industry. Credit

Growth for fortnight ended Feb 12, 2021 was 6.6%. However, if that were to pick up to around 10%

as predicted by Crisil, banks may have an even lower space or appetite for G-secs. Similarly, FIIs

have actually been net sellers of G-secs for some time now.

Source: investing.com

3

4

5

6

7

1 Year 3 Year 5 Year 7 Year 10 Year

G-sec yield curve (%)

Mar-20 Feb-21



07

6.Corporate Bond Spreads – Stable – Neutral

While there is abundant liquidity in the banking system, with repo rate at 4% and daily liquidity being

surplus by more than Rs 6 lakh crore, that has not resulted in corporate spreads coming down

drastically. A credit growth rate of around 6% means that banks are reluctant to lend, especially

beyond AAA. This means that while the AAA corporate spread is reasonable at 0.7%-0.8%, lower

rated companies and NBFCs still have to borrow at rates closer to 10%. However, with return of

confidence and growth, these spreads should come down

Outlook:

While the US yield spikes did spook the global yields, they may have peaked in the near term.

Inflation has remained comfortable for central banks which means that they can prioritize growth and

focus on managing the borrowing plan for the government.

Growth is showing sure signs of recovery, in India as well as globally. But given the uncertainty

around Covid, this recovery is considered fragile. For this reason, central banks the world over,

including RBI, will not be in a hurry to raise the policy rates.

Source: NSDL

-60,000

-50,000

-40,000

-30,000

-20,000

-10,000

0

10,000Fe

b-2

0

Mar

-20

Ap

r-2

0

May

-20

Jun

-20

Jul-

20

Au

g-2

0

Sep

-20

Oct

-20

No

v-2

0

Dec

-20

Jan

-21

Feb

-21

FII Debt Flows (Rs. in cr)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Jan

-19

Feb

-19

Mar

-19

Ap

r-1

9

May

-19

Jun

-19

Jul-

19

Au

g-1

9

Sep

-19

Oct

-19

No

v-1

9

Dec

-19

Jan

-20

Feb

-20

Mar

-20

Ap

r-2

0

May

-20

Jun

-20

Jul-

20

Au

g-2

0

Sep

-20

Oct

-20

No

v-2

0

Dec

-20

Jan

-21

Feb

-21

Mar

-21

Corporate bond spreads (10 year tenor)

BBB over G-sec AAA over G-sec

s

Lower rated papersspreads widening in themiddle of pandemic. Incontrast AAA spreadsreduce on higher liquidity

s

sSteeper reductionin lower ratedpapers comparedto AAA ratedpapers



08

Supply, thus becomes the biggest determinant of the bond prices and there the news is not good.

Supply and demand equation look loaded against the central bank’s resolve to maintain low yields. It

will require unprecedented amounts of OMOs and other possible new tools to keep the yields in

check. Even considering all of that, long term yields are likely to go up. Short term yields are more

anchored to the policy rates and the abundant liquidity and should go up lesser. Corporate spreads

have been stable and should improve marginally from these levels.

Fixed income investors thus should avoid the long end of the yield curve. They can look to invest in

2-3 year Hold to Maturity strategies to lock in the yield and bide their time for the interest rate cycle to

turn. Alternately, for investors willing to take slightly higher risk, 4-5 year maturity MFs/bonds can be

looked with a 1-2 year horizon. The steepness in the yield curve will allow absorption of potential

MTM.

MARKET MACROSCOPE | INVESTMENT PRODUCTS | MARCH 2021 09

The latest Theme – Should you invest

While diversified funds have always offered a great way to participate in the market, there is no dearth

of Thematic/Sector focussed funds. Every now and then, an AMC comes up with a new thematic idea

which is backed by robust and undeniable data and logic. Investors can’t help but get convinced that it

is indeed the right time to invest in the particular theme.

In this Deep Dive section, we have attempted to study thematic funds and understand how they fare

compared to diversified funds. While these thematic funds are offered through various platforms (MFs,

PMSs, AIFs etc), we have evaluated data only for thematic MFs since this data is extensively

available.

We present below our observations and findings –

1. 62 schemes across 22 years - We have studied thematic MFs starting from 1998. There have

been years when the Thematic funds were in fashion and years when they weren’t.

2. Schemes spread across 10 sectors

Infrastructure funds were launched in the boom years of 2004-08. For other themes, the spread has been moreeven across the years.

1

5

1 1

8

3 3

6

8

1

2 2 2

1

7

6

4

1

1998 1999 2000 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2015 2018 2019 2020

No. of Thematic NFOs Launched

18

13

10 9

3 3 31 1 1

No. of Thematic Funds

Source: ACE MF

Source: ACE MF

Deep Dive: Do Thematic NFOs outperform the index?

MARKET MACROSCOPE | INVESTMENT PRODUCTS | MARCH 2021 10

3. Question - Were these themes launched only because they did great in the immediate period

before the launch?

Not really. Before each thematic fund was launched, we compared the performance of the underlying

theme index in the preceding 6 months and 1 year with Sensex. E.g for the NFO of a Banking Theme

NFO, we saw the relative performance of the Banking index in the preceding 6 months viz a viz

Sensex. For very old funds, there were no indices available, so we have excluded them. (16 such

schemes)

Result - Out of the 42 schemes where we had the performance of the underlying index for the last 1

year, 23 theme indexes had outperformed Sensex and 21 theme indexes had underperformed. It was

an even mix.

4. The bottom line – Have these thematic funds beaten the diversified index?

For this analysis, we found out the performance of each thematic fund over the next 1 year and 3

years from the NFO launch. We compared this performance with Sensex. Below are the findings

As can be seen, on an overall basis, thematic funds have struggled to outperform the index.

As a further analysis, we also compared the margin of the underperformance and outperformance and

found that both were similar.

5. Question– What did the past relative performance of the underlying Themes (vs Sensex)

prior to the launch mean for the relative performance of these funds after the launch in the

future

For this, we first picked up those funds whose underlying index had outperformed the Sensex in the

last 1 year (before NFO). For 23 such funds, the next 1 year and 3 year relative performance was as

below – (3 year performance is for 22 funds)

27 Funds, 44%

34 Funds, 56%

Fund performance v/s sensex - 1 yrfrom launch

Outperformance Underperformance

19 Funds, 37% 32 Funds,

63%

Fund Performance v/s sensex - 3 yr from launch

Outperformance Underperformance

6 Funds, 26%

17 Funds, 74%

Next 1 year relative performance

Outperformed Sensex Underperformed Sensex

5 Funds, 23%

17 Funds, 77%

Next 3 years relative performance





11

Similarly, we then picked up those funds whose underlying index had underperformed Sensex in the 1

year before NFO. For 21 such funds, the next 1 year and 3 year relative performance was as below

Note – the charts above do not include funds which were launched in last 1 & 3 years respectively

While the past performance may not have been the motive for Funds to launch their NFOs, it does

seem that funds with immediate history of outperformance ended up underperforming vs Sensex in

the coming years.

Conclusions:

Thematic funds have simply not been launched just because a theme was doing great in the recent

past. The intent, thus, has not been shallow to garner AUMs from an outperforming sector/theme

Future performance of Thematic Funds have trailed Sensex and thus the diversified portfolios

Funds whose underlying themes outperformed Sensex before NFO launch, ended underperforming

Sensex after the launch

Funds whose underlying themes underperformed Sensex before NFO launch, ended up performing

at par with Sensex

11 Funds, 55%

9 Funds, 45%

Next 1 year relative performance


6 Funds, 50%

6 Funds, 50%

Next 3 years relative performance



India ETF Landscape

12

Brief on ETFs:

An exchange traded fund (ETF) is a security which in effect is a basket of securities and tracks an

underlying index. ETFs in many ways are similar to mutual funds, however they are listed on

exchanges and can be traded just like ordinary stocks. ETFs are a way of passive investing and have

been gaining popularity over the years.

In primary market, ETF units are created and redeemed in pre specified number by Authorized

participants (Market Makers), which are firms appointed by ETF manager. Market makers play a

crucial role in ensuring liquidity. They also also provide quotes around the NAV of the unit so that the

investor interested can buy or sell.

Like stocks, ETFs are traded in secondary market with bid and offer. The factors that

determine/influence bid offer spreads include:

Market depth (order flow) – higher the order flow, lower the spread

Competition among market makers for a particular ETF – higher the competition, lower the spread

Indian ETF Industry:

Similar to the western world, India also has witnessed a rise in passive investing over the years and

this rise could be attributed to:

Costs involved in managing active funds

Increased regulatory oversight on active funds which restricts them

Diminishing alpha in active funds

ETF AUM Trend In India:

ETF AUMs have grown by 100x in last 11 years, translating to CAGR growth of 52%

-

50,000

1,00,000

1,50,000

2,00,000

2,50,000

3,00,000

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21

Growth in ETF AUMs

Gold ETFs Other ETFs

Overall ETF AUM -100x growth (52% CAGR)Gold ETFs - 10x growth (23% CAGR)Other ETFs - 203x growth (62% CAGR)

Rs. 2,687 cr

Rs 2,71,252 cr

AU

M (

INR

Cr)

Source: AMFI


India ETF Landscape

13

The above period of 11 years could be broken into 2 parts:

1. 2010-14 – Gold ETF investing was in trend, where it accounted for >50% of total ETF assets

2. 2015 onwards – Since 2015, India’s ETF landscape has not only been bigger but also more

diverse. ETF AUMs have grown by 187 x translating to a CAGR growth of 111% and non-gold

ETFs have garnered the larger chunk

The growth in Indian ETF AUMs has been driven by institutional investors. They account for > 90% of

other ETF AUMs and ~53% of gold ETF AUMs. Listed below is the category break up by investor:

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Gold ETFs Dominance: 2010-14


-

50,000

1,00,000

1,50,000

2,00,000

2,50,000

3,00,000

Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21

Other ETF Dominance: 2015 Onwards


Source: AMFI

Source: AMFI

AU

M (

INR

Cr)

AU

M (

INR

Cr)

Investor Category Gold ETF Other ETFs

Corporates 52.9 92.3

Banks/FIs 0.1 1.4

FIIs 0.0 0.0

HNI (>Rs 2 lakhs) 34.7 4.9

Retail 12.3 1.3

Total 100.0 100.0

Source: AMFI, data as of Dec-20


India ETF Landscape

14

ETF AUM Break up:

Tailwinds impacting ETF industry in recent past:

Policy moves in the recent years have provided fillip to the ETF industry. In 2014, GOI announced

to raise money by divesting its share in public sector undertakings via ETFs and the CPSE ETF

was launched. Currently, the ETF has a corpus of Rs.11,879 cr.

In 2015, EPFO (Employee’s provident fund organization) declared that they would be taking equity

exposure only through ETFs and over the years the equity allocation through ETFs has increased

to 15% of the EPFO corpus. Investments have been made across ETFs issued by UTI AMC, SBI

AMC, CPSE ETF & Bharat 22 ETF. As of 31st March 2020 EPFOs investments in ETFs stood at ~

INR 1.03 trillion.

SEBI’s move on fund categorization with precise definitions and benchmarking equity schemes to

total return index (TRI) instead of price index has led to underperformance in active funds,

especially in the large cap space (covered later in the note under diminishing alpha)

Launch of Bharat Bond ETFs in later half of 2019 and 2020 has given NSE a sizeable volume of

money in debt ETFs

379

2,706

2,809

14,479

33,071

41,866

51,760

1,20,606

Factor Based

Other Equity

Global

Gold

Debt

Sectoral/Thematic

Sensex

Nifty

Equity82%

Debt12%

Gold6%

Asset class wise ETF AUM break-up

Category wise ETF AUM break-up

Equity ETFs account for

majority of the AUMs and

these ETFS are predominantly

large cap oriented – Nifty

based ETFs accounts for 70%

of Equity ETF AUMs

Large cap ETFs, Thematic ETFs

(including CPSE ETFs)

cumulatively account for ~80%

of the overall ETF AUMs

Debt ETF AUM are mainly

driven by Bharat Bond ETFs

(96% of the Debt ETF AUM)

Source: ACE MF, data as on 31st Jan 2021


India ETF Landscape

15

ETF Logic (why one should invest in ETFs):

Cost advantage – ETFs have significantly lower expenses (average 0.28%) as compared to active

equity funds (average 2.18%) and over a period of time expenses too compound.

Illustration listed below compares 2 funds with same gross returns – 15% p.a. The first has an

expense of 0.28% and the second has an expense of 2.18%.

Diminishing alpha – ETF investing, particularly in large cap space has been gaining popularity over

the last few years. Defined SEBI mandate along with stock and sector level caps has limited the scope

for active fund management in large cap space. Actively managed large cap funds also have a

relatively higher expense (category average expense – 2.26%) as compared to ETFs (average

expense –0.17%).

Table below compares the returns generated by large cap funds as against that of large cap ETFs:

Source – ACE MF, Note – For large cap ETFs category average, ETFs considered are Nifty 50 based, Sensex bases, S&P BSE 100

Based & Nifty 100 based ETFs . Returns less than 1 year is in absolute terms & greater than 1 year is CAGR

ETF AUMs in the large cap space have surpassed the corpus managed by large cap MFs.

Currently, large cap ETFs have an AUM of Rs.175,070 cr (87% CAGR growth in last 5 years) and

large cap MFs manage a corpus of Rs.166,019 cr (23% CAGR growth in last 5 years).

Pros & Cons of ETF investing:

Advantages:

Liquidity – ETFs offer instant liquidity and can be traded anytime during market hours, unlike a

mutual fund where investment happens on day end NAV and subscription & redemption process

can take 1-3 days

0

5

10

15

20

25

30

35

0 5 10 15 20 25

Inve

stm

ent

valu

e in

Rs

Cr

Years

Expenses matter

Fund 1 Fund 2

Second fund’s corpus exceeds

that of the first fund by:

9% after 5 years

18% after 10 years

28% after 15 years

40% after 20 years

52% after 25 years

Returns as on 02nd March

2021

1

Month

2

Month

3

Months

6

Months

1

Year

2

Years3 Year 5 Year

Large Cap ETF Category Avg 2.7 7.0 14.6 29.9 35.4 17.1 12.9 16.0

Large Cap MF Category Avg 2.3 7.0 14.0 28.3 30.1 17.3 11.2 14.5

Indices

NIFTY 50 - TRI 2.0 6.6 14.0 29.9 35.6 18.5 14.0 16.7


India ETF Landscape

16

Diversification – ETFs invest in a basket of stocks

Low costs – expenses on ETFs are relatively lower as compared to mutual funds

Exit loads – ETF investments are not subjected to exit loads whereas investments in equity mutual

funds typically have an exit load of 1% if redeemed within a year

No cash holdings – all money is put to work whereas MFs can hold cash

Higher transparency – holdings are published on daily basis as compared to periodic disclosure

by mutual funds

Disadvantages:

Limited options – though the ETF offerings have become relatively more diverse in the recent past

but the space has been dominated by large cap ETFs and Gold ETFs with Bharat bond ETFs

gaining market share in last 12 months. There are very limited options available in the mid & small

cap space and debt markets

Not distributor friendly – distributors play a crucial role in selling investment instruments to

investors and earn commissions from the manufacturers. In order to keep the costs down, ETFs do

not pay commissions to the distributor

Liquidity – Unlike the western world where the ETF flows are driven by individual investors,

advisors and institutional players, in India ETF flows are predominantly dominated by institutions.

This one way flows have resulted in liquidity issues. Apart from a few large cap ETFs and gold

ETFs, the liquidity for rest of the ETFs is modest. Turnover volumes on exchanges are relatively

lower as compared to stocks

Lack of market depth – As a result of moderate liquidity there is a modest order flow resulting in

relatively higher impact costs (bid offer spreads)


Dots to Join

17

Proforma NPAs: Supreme Court in its order in Aug-20 barred banks from declaring fresh NPAs.

Thus, gross NPA nos do not include fresh slippages, Banks, in their prudence also declared NPA nos

without taking SC dispensation. These are proforma NPA nos. The proforma NPA nos are lower than

street expectations resulting in a sharp up move in the shares of many banks/ NBFCS.

Dot Com Part 2? – Today, 29 big companies trade at a forward P/E multiple of 75 or higher compared

to 1 (Tesla) at the beginning of 2020. The trailing 12 months P/E of the tech heavy Nasdaq 100

reached almost 40 times, a level not reached since dotcom days.

Bitcoin Rally – The chart below compares the move in Bitcoin with asset "bubbles".The appreciation

in Bitcoin dwarfs these asset bubbles by a huge margin. The 18.7 mn bitcoins mined so far have a

market value of USD 877 bn.

(Source: The Hindu- Business line)

Source – Bloomberg

Source – Financial Times, BofA Global Investment Strategy, Bloomberg


Dots to Join

18

USA High Yield Index – The ICE BofA US High Yield Index, which tracks the yield of the USD

denominated below-investment grade rated corporate debt publicly issued, fell to the lowest in at least

a decade at 4%. The reduction could be because of the excess liquidity or alternatively that bond

investors are getting more confident in the economic recovery.

Investments (as % of GDP) – As a share of India’s GDP, new investments are expected to fall to

24% this fiscal;a 20-year low. The investment rate had peaked at 36% of GDP in 2007-08. Lack of

financing has emerged as the big bottleneck.

Source: Federal Reserve Bank of St. Louis

Source: Livemint


Index Performance

19

Data as on 28th Feb. Returns less than 1 year are in absolute terms and greater than 1 year are CAGR

Source: ACE MF

Index Performance (28-Feb-21)

Scheme Name 1 M 3 M 6 M 1 Y 2 Y 3 Y 5 Y 10 Y

NIFTY 50 5.2 12.0 24.7 29.7 16.1 11.5 15.6 10.5

NIFTY 500 6.5 13.6 26.3 31.9 16.6 9.6 15.8 11.1

NIFTY AUTO 0.6 14.4 25.4 47.3 10.3 -3.0 7.2 11.5

NIFTY BANK 14.6 17.5 41.9 19.4 14.0 11.5 20.3 12.8

Nifty Financial Services 10.2 12.5 37.2 18.6 19.7 15.5 22.7 14.6

NIFTY FMCG -3.5 2.3 3.8 10.7 5.3 7.0 12.1 14.0

NIFTY INFRA 9.8 20.0 26.3 36.5 18.7 6.0 12.2 3.9

NIFTY IT -4.0 11.7 34.1 59.7 24.3 23.8 18.3 13.8

NIFTY MEDIA -2.6 8.1 -2.7 -2.7 -18.8 -21.1 -5.8 2.0

NIFTY METAL 21.8 30.7 51.7 70.2 15.4 -1.5 18.6 -0.7

Nifty Midcap 150 – TRI 11.7 18.4 33.8 41.8 22.5 9.9 19.6 16.1

NIFTY NEXT 50 5.3 12.8 22.2 29.2 13.6 5.2 14.9 12.6

NIFTY PHARMA -3.8 0.7 2.6 57.4 15.9 10.0 1.3 10.7

NIFTY PRIVATE BANK 12.1 12.6 37.4 16.3 10.2 9.3

NIFTY PSU BANK 34.1 53.5 49.4 23.0 -6.9 -8.1 3.4 -5.3

NIFTY REALTY 15.0 33.9 50.1 24.7 23.3 2.3 21.8 2.9

Nifty Smallcap 250 – TRI 12.1 23.2 36.8 44.3 19.9 1.7 15.1 12.1

S&P BSE Consumer Durables 4.6 17.4 35.2 21.4 21.8 14.5 23.0 18.9

S&P BSE MidSmallCap - TRI 10.9 19.0 33.5 43.9 21.2 5.9 17.2 13.4

S&P BSE OIL & GAS Index 10.9 17.3 16.4 23.2 6.1 0.1 13.2 5.1

S&P BSE Power Index 18.9 21.0 39.4 40.9 15.0 2.9 8.6 -0.4

S&P BSE SENSEX 4.7 11.2 24.4 28.2 17.0 12.8 16.2 10.7

S&P BSE Telecom 0.7 20.6 11.9 18.2 19.0 -0.9 3.0 2.1


Macro Economic Indicators

20

GDP Growth (%): Inflation:

Industrial Production Growth: India Composite PMI:

Domestic Yield Movement: 10 Year US Treasury Yield Movement:

Feb-20 May-20 Aug-20 Nov-20 Feb-21

US Yields 1.16 0.65 0.63 0.84 1.40


Repo 5.15 4.00 4.00 4.00 4.00

1 Yr CD 6.37 6.01 6.10 5.91 6.23

10 Yr Gsec 5.85 4.15 3.85 3.60 4.13

Jan-20 Mar-20 Jun-20 Sep-20 Dec-20

IIP 2.0 -18.3 -15.7 0.50 1.0

Mar-20 Jun-20 Sep-20 Dec-20 Jan-21

Composite PMI 50.6 37.8 54.6 54.9 55.8

Mar-20 Jun-20 Sep-20 Dec-20 Jan-21

WPI 0.40 -1.80 1.32 1.22 2.03

CPI 5.91 6.23 7.27 4.59 4.06

Source : Ministry of Statistics & Programme Implementation

Source : investing.com, RBI, Bloomberg

Source : investing.com

Source :www.fxempire.comSource : Ministry of Statistics & Programme Implementation

Q2

FY20

Q3

FY20

Q4

FY20

Q1

FY21

Q2

FY21

Q3

FY21

Quaterly

GDP %4.6 3.3 4.0 -24.4 -7.3 0.4

Source : Ministry of Statistics & Programme Implementation

7.1

0.4

-30

-25

-20

-15

-10

-5

0

5

10

Q1

FY1

9

Q2

FY1

9

Q3

FY1

9

Q4

FY1

9

Q1

FY2

0

Q2

FY2

0

Q3

FY2

0

Q4

FY2

0

Q1

FY2

1

Q2

FY2

1

Q3

FY2

1

3.10

2.03

7.59

4.06

-4-202468

10

Jan

-20

Feb

-20

Mar

-20

Ap

r-2

0

May

-20

Jun

-20

Jul-

20

Au

g-2

0

Sep

-20

Oct

-20

No

v-2

0

Dec

-20

Jan

-21

WPI CPI

2.0

1.0

-70-60-50-40-30-20-10

010

Jan

-20

Feb

-20

Mar

-20

Ap

r-2

0

May

-20

Jun

-20

Jul-

20

Au

g-2

0

Sep

-20

Oct

-20

No

v-2

0

Dec

-20

56.3 55.8

0

10

20

30

40

50

60

70

Jan

-20

Feb

-20

Mar

-20

Ap

r-2

0

May

-20

Jun

-20

Jul-

20

Au

g-2

0

Sep

-20

Oct

-20

No

v-2

0

Dec

-20

Jan

-21

1.16

1.40

011111222

Feb

-20

Mar

-20

Ap

r-2

0

May

-20

Jun

-20

Jul-

20

Au

g-2

0

Sep

-20

Oct

-20

No

v-2

0

Dec

-20

Jan

-21

Feb

-21

5.15

4.00

6.37 6.235.85

4.13

3

4

5

6

7

Feb

-20

Mar

-20

Ap

r-2

0

May

-20

Jun

-20

Jul-

20

Au

g-2

0

Sep

-20

Oct

-20

No

v-2

0

Dec

-20

Jan

-21

Feb

-21

Repo Rate 10 Yr G-sec 1 Yr CD Rates


Macro Economic Indicators

21

FII Equity Flows (Rs cr): FII Debt Flows (Rs cr):

USD vs. INR: Gold Price (Rs/10gm):

Brent Crude (USD/Barrel):


Brent

Crude51.70 34.67 46.15 48.10 65.94


$ vs. ₹ 72.52 75.61 73.62 74.05 73.47


Gold Price 42,483 46,819 51,405 48,807 46,151


FII Debt

Flows4,734 -21,935 -548 2,593 -2,124

Source : NSDL

Source :Oilprices.com

Source : India Bullion and Jewellers AssociationSource : Bloomberg


FII Equity

Flows1,820 14,569 47,080 60,358 25.787

Source : NSDL

4,734-2,124

-60,000

-50,000

-40,000

-30,000

-20,000

-10,000

0

10,000

Feb

-20

Ap

r-2

0

Jun

-20

Au

g-2

0

Oct

-20

Dec

-20

Feb

-21

1,820

25,787

(80,000) (60,000) (40,000) (20,000)

- 20,000 40,000 60,000 80,000

Feb

-20

Ap

r-2

0

Jun

-20

Au

g-2

0

Oct

-20

Dec

-20

Feb

-21

72.52

73.47

70

71

72

73

74

75

76

Feb

-20

Mar

-20

Ap

r-2

0

May

-20

Jun

-20

Jul-

20

Au

g-2

0

Sep

-20

Oct

-20

No

v-2

0

Dec

-20

Jan

-21

Feb

-21

42,483

46,151

30,000

35,000

40,000

45,000

50,000

55,000

Feb

-20

Mar

-20

Ap

r-2

0

May

-20

Jun

-20

Jul-

20

Au

g-2

0

Sep

-20

Oct

-20

No

v-2

0

Dec

-20

Jan

-21

Feb

-21

51.70

65.94

-

10

20

30

40

50

60

70

Feb

-20

Mar

-20

Ap

r-2

0

May

-20

Jun

-20

Jul-

20

Au

g-2

0

Sep

-20

Oct

-20

No

v-2

0

Dec

-20

Jan

-21

Feb

-21

PBG Research Model Portfolio - Aggressive

22

Equity CMP Weightage

BFSI

SBI 390 2.8%

Max Financial Services 866 2.2%

Bank BEES 351 11.1%

16.1%

CAP GOODS & ENGINEERING

Voltas 1,017 2.0%

BEL 137 1.4%

L&T 1,442 2.9%

6.3%

CEMENT

Ultratech Cement Ltd 6,115 2.6%

JK Cement Ltd 2,686 3.5%

Birla Corporation Ltd 849 3.0%

9.2%

Oil & Gas

Reliance Ind 2,084 8.8%

Petronet LNG 256 1.9%

Gujarat State Petronet 250 2.5%

13.2%

PHARMA / HEALTHCARE

Thyrocare Technologies 908 2.2%

Apollo Hospitals 3,061 3.8%

Laurus Labs 350 2.51%

8.6%

TECHNOLOGY

TCS 2,896 3.0%

Infosys Ltd 1,252 5.5%

8.6%


AUTO

Mahindra & Mahindra 805 2.3%

Tata Motors 323 1.2%

Exide Industries 203 1.5%

Apollo Tyres 232 1.9%

Bajaj Auto 3,801 2.6%

Minda Industries 565 2.0%

11.4%

FMCG

Jyothy Laboratories 149 1.3%

Radico Khaitan 570 2.1%

Zydus Wellness Ltd 1,911 2.9%

6.3%

RETAIL

Phoenix Mills 811 2.3%

2.3%

POWER

Apar Industries Ltd 461 1.0%

KEC International 430 2.0%

3.0%

FERTILIZER & CHEMICAL

UPL Ltd 561 1.0%

Atul Ltd 6,552 2.2%

3.2%

MEDIA

Entertainment Network India Ltd 159 0.3%

Saregama India 1,057 3.3%

Sun Tv Network 493 1.6%

5.2%

MISCELLANEOUS

Supreme Industries 2,027 3.2%

3.2%

Cash 3.5%

Portfolio

Performance

9.4%

17.7%

36.2%38.1%

10.3%

18.0%20.0%

3.6%

11.2%

27.1%23.5%

12.8%16.2% 16.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

1M 3M 6M 1Y 3 Y 5 Y SinceInception

Model Portfolio - Aggressive Sensex

Inception Date: 01-Oct-02

Returns less than 1 year are absolute, more than 1 year are CAGR


PBG Research Model Portfolio - Conservative

23

Portfolio

Performance


BFSI

SBI 390 4.1%

Power Finance Corp 124 2.1%

Bank BEES 351 15.9%

22.1%

CAP GOODS & ENGINEERING

Voltas 1,017 2.1%

BEL 137 1.5%

L&T 1,442 3.7%

Carborundum Universal 507 3.2%

10.5%

Oil & Gas

Reliance Ind 2,084 11.1%

Petronet LNG 256 2.1%

Gujarat State Petronet 250 2.8%

16.0%

PHARMA / HEALTHCARE

Thyrocare Technologies 908 2.3%

2.3%

FMCG

ITC Ltd 204 3.2%

United Spirits 535 2.1%

Jyothy Laboratories 149 1.1%

Godrej Agrovet 487 1.6%

8.0%

RETAIL

Bata India 1,438 3.4%

3.4%


TECHNOLOGY

TCS 2,896 3.9%

Infosys Ltd 1,252 6.9%

10.8%

CEMENT

Ultratech Cement 6,115 2.6%

2.6%

POWER

NTPC 107 1.9%

KEC International 430 1.5%

3.3%

AUTO

Mahindra & Mahindra 805 3.3%

Tata Motors 323 1.7%

Exide Industries 203 1.6%

Bajaj Auto 3,801 2.9%

9.4%

FERTILIZER & CHEMICAL

UPL Ltd 561 1.2%

1.2%

Media

Sun TV Network 493 2.7%

2.7%

MISCELLANEOUS

Huhtamaki PPL* 288 2.0%

2.0%

6.1%

13.5%

26.5%28.2%

9.1%

15.9%17.3%

3.6%

11.2%

27.1%

23.5%

12.8%

16.2% 16.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

1M 3M 6M 1Y 3 Y 5 Y SinceInception

Model Portfolio - Conservative Sensex

Inception Date: 01-Oct-02

Returns less than 1 year are absolute, more than 1 year are CAGR



Disclaimer

24

Investment in securities market are subject to market risks, read all the related documents carefully beforeinvesting.

This note has been prepared exclusively for the benefit and internal use of the recipient and does not carry anyright of reproduction or disclosure. Neither this note nor any of its contents maybe used for any other purposewithout the prior written consent of HDFC Securities Ltd (HSL)

Information herein is believed to be reliable however HDFC Securities Ltd. does not warrant its completeness oraccuracy. Although HDFC Securities Ltd. tries to ensure that all information and materials in relation to theproducts, services, facilities, offerings or otherwise provided as part of its website or through any other source ofcommunication, is correct at the time of inclusion on the communication, it does not guarantee the accuracy of theinformation.

Use of this presentation /note is at the sole risk of the user / client. The data and information provided on thewebsite or in any presentation / note is not professional advice and should not be relied upon as such. HDFCSecurities Ltd. may at any time edit, alter and or remove any information in whole or in part that may be availableand that it shall not be held responsible for all or any actions that may subsequently result into any loss, damageand or liability. Nothing contained herein is to be construed as a recommendation to use any product or process,and HDFC Securities Ltd. makes no representation or warranty, express or implied that, the use thereof will notinfringe any patent, or otherwise

HDFC Securities Ltd. would have an exclusive discretion to decide the clients who would be entitled to its investingservices. HDFC Securities Ltd. also reserves the right to decide on the criteria based on which clients would bechosen to participate in these services. HDFC Securities Ltd. is incorporated under the regulatory laws of India andhence adheres to the same laws for entering into or executing an agreement with the client

This note does not purport to contain all the information that the recipient may require. Recipients should notconstrue any of the contents herein as advice relating to business, financial, legal, taxation, or investment mattersand are advised to consult their own business, financial, legal, taxation and other advisors concerning the company.

This note does not constitute an offer for sale, or an invitation to subscribe for, or purchase equity shares or otherassets or securities of the company and the information contained herein shall not form the basis of any contract. Itis also not meant to be or to constitute any offer for any transaction.

As a distributor, HDFC Securities Ltd. does not assume any responsibility or liability arising from the sale of anyproduct and the investor's contract for purchase/sale is directly with the product provider. HDFC Securities Ltd.may earn a distribution fee from the product provider on completion of sale of such products. To reiterate, HDFCSecurities Ltd. only acts as a Distributor. There is no element of advisory involved.

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March 2021 Investment Products - HDFC securities