Principal Monthly Insight-Feb 2017 · • Consumer Price Index (CPI) based inflation in Jan 2017 plunged to the lowest level since Jan 2012 to 3.17%, from 3.41% in Dec 2016 and 5.69%

February 2017

Monthly Insight

Policy Rates Actual PreviousRepo Rate^ 6.25% 6.25%

Reverse Repo^ 5.75% 5.75%

CRR^ 4.00% 4.00%

Key IndicatorsIndex Of Industrial Production (IIP)

Wholesale Price Index Inflation(WPI)

Export (Y-o-Y)

Import (Y-o-Y)

Current Account Deficit ($ Billions)

Fiscal Deficit FYTD (INR Trillion)

Principal Monthly Insight

Economic Releases in February-2017

Previous

5.70%(Nov-16)

3.39%(Dec-16)

5.72%(Dec-16)

0.46%(Dec-16)

-0.3(Jun-16)

5.01(Dec-16)

Source: RBI, Reuters; ^Based on RBI Bi-monthly Monetary Policy Statement on 08-Feb-2017

-0.40%(Dec-16)

5.25%(Jan-17)

4.32% (Jan-17)

10.70 (Jan-17)

-3.4(Sep-16)

5.64(Jan-17)

Period28-Feb-17

28-Feb-17

28-Feb-17

Actual

• India’s gross domestic product (GDP) at constant prices grew7% in the Dec quarter of 2016-17, slower than revised 7.4%rise in the previous quarter but better than 6.9% in thecorresponding period of last year. The government projectedthat the economy will grow 7.1% in FY17, slowing from7.6% in the previous financial year. Despite demonetisation,private final consumption expenditure accelerated to 10.1%YoY in third quarter from 5.1% in the prior quarter. Themanufacturing sector, which was expected to be hit due tofalling consumption demand following demonetisation, alsogrew 8.3% from 6.9% in the previous quarter.

• The Monetary Policy Committee (MPC) kept interest rates onhold in its sixth bi-monthly monetary policy review, contraryto market expectations and changed its policy stance from“accommodative” to “neutral” as it warned about the risks ofhigh inflation. As a result, the repo rate stood unchanged at6.25% and the reverse repo rate at 5.75%. MPC projectedinflation in the range of 4.0% to 4.5% in the first half of thefiscal and in the range of 4.5% to 5.0% in the second half.MPC lowered the Gross Value Added (GVA) growth forecastfor 2016-17 at 6.9% from its earlier estimate of 7.1%. For2017-18, GVA growth is estimated at 7.4%.

• India’s fiscal deficit from Apr 2016 to Jan 2017 stood at Rs.5.64 lakh crore or 105.7% of the budgeted target for FY17.During the similar period last year, fiscal deficit was muchlower at 95.8% of the full year target of FY16.

• India’s trade deficit widened to $9.84 billion in Jan 2017 from$7.67 billion in the corresponding period last year as importsgrew at a faster pace than exports. During the reportedmonth, exports grew 4.32% YoY to $22.12 billion, whileimports increased 10.70% to $31.96 billion.

• The index of Industrial production (IIP) contracted 0.4%YoY in Dec 2016 after rising to a 13-month high at 5.7% inthe prior month. Fall in industrial output was led bycontraction in consumer and capital goods production thatdeclined 6.8% and 3.0%, respectively, during the monthunder review.

• Consumer Price Index (CPI) based inflation in Jan 2017plunged to the lowest level since Jan 2012 to 3.17%, from3.41% in Dec 2016 and 5.69% in the same period of theprevious year. Consumer food price index also came down to0.53% from 1.37% in the previous month.

• Wholesale Price Inflation (WPI) rose to 5.25% in Jan 2017,compared with 3.39% growth in Dec 2016 and a contractionof 1.07% during the same month of the previous year.

Indian Economy

-6.00

-2.00

2.00

6.00

Jan-15 Jul-15 Jan-16 Jul-16 Jan-17

Source: Office of the Economic Adviser, Ministry of Commerce & Industry

Monthly WPI Movement

Gro

wth

( in

%)

-1.70

1.30

4.30

7.30

Jan-16 May-16 Sep-16 Jan-17

WPI CPISource: MOSPI

WPI & CPI Movement over last 1-year

Gro

wth

(In

%)

-15.00

-5.00

5.00

15.00

Dec-14 Jun-15 Dec-15 Jun-16 Dec-16

IIP (%MoM) IIP (%YoY)Source: MOSPI

IIP Movement

Gro

wth

(In

%)

Principal Monthly Insight 1 | P a g e February 2017 ...

Index PE Ratio & Returns*Closing Values# 1 Year 3 Year 5 Year

Nifty 50 8,879.60 27.09 12.25 10.51

Nifty 50 PE 21.31 16.64 15.55 15.76

S&P BSE Sensex 28,743.32 24.96 10.81 10.11

S&P BSE Sensex PE 20.71 16.40 16.28 15.72


Source: NSE, BSE, * Returns less than 1 year are absolute, greater than 1 year are Compounded Annualized , # As on 28-Feb-2017

• The Indian equity market got support in the post-budgetperiod as the finance minister in the Union Budget 2017-18proposed to focus more on rural and infrastructure sectors.Corporate announcements like share buyback and mergersalong with improved quarterly report of some companieshelped gain. But concerns of rate hike by the U.S. FederalReserve (Fed) limited the upside.

• Key benchmark indices, S&P BSE Sensex and Nifty gained3.93% and 3.72% to close at 28743.32 points and 8879.6points, respectively. S&P BSE Mid-Cap and S&P BSE Small-Cap moved up 5.40% and 5.84%, respectively.

• According to data from the National Securities DepositoryLtd, foreign portfolio investors remained net buyer ofdomestic stocks worth Rs. 9,902.18 crore as against net salesof Rs. 1,176.60 crore in Jan 2017. Domestic mutual fundsremained net buyer in the equity segment to the tune of Rs.2,039.70 crore in Feb 2017.

• Initially, investors welcomed the budget proposals by thefinance minister as they did not mention about the long-termcapital gains tax on equities and took measure to furtherliberalise foreign direct investment policy. But uptick couldnot sustain till the Central Bank's policy review, scheduledon Feb 8, and corporate earnings releases. Contraction ofservice sector Purchasing Managers' Index (PMI) in Janfurther weighed on gains as the Nikkei India Services PMIstood at 48.7 in Jan, below the 50 mark indicatingcontraction phase.

• Market got jittery after MPC decided to maintain status-quoand changed the policy stance from ‘accommodative’ to‘neutral’, warning about the risks of high inflation. It alsolowered the GVA growth forecast for FY17 at 6.9% from itsearlier estimate of 7.1%. For FY18, GVA growth is estimatedat 7.4%.

• But markets regained momentum on the back of upbeatperformance of healthcare, financial, and IT stocks. Whilethe financial sector got a push after the Central Bank liftedrestrictions on foreign investors to buy shares in a majorbank; pharma stocks grew owing to certain approvalsreceived from the U.S. health regulator. A drop in retailinflation and improved sales of passenger vehicles alsohelped sentiment. Consumer price index based inflation inJan 2017 plunged to the lowest level since Jan 2012 to 3.17%from 3.41% in Dec 2016. As per data from Society of IndianAutomobile Manufacturers, domestic passenger vehicle salesrose 14.4% YoY in the same period after seeing a drop in theprevious month. These outweighed negative impact ofincrease in WPI in Jan and contraction of IIP in Dec.

Indian Equity Market

-1.48%

1.29%

1.52%1.89%

2.71%

3.72%

3.72%

3.93%

3.97%

4.07%

5.25%

5.40%

5.42%

5.84%

8.00%

8.24%

9.13%

9.15%

-6% 1% 8% 15%

S&P BSE Auto

S&P BSE Power

S&P BSE PSU

S&P BSE Metal

S&P BSE FMCG

S&P BSE CG

Nifty 50

S&P BSE Sensex

S&P BSE HC

S&P BSE-100

S&P BSE Bankex

S&P BSE Midcap

S&P BSE Oil & Gas

S&P BSE Smallcap

S&P BSE Teck

S&P BSE IT

S&P BSE CD

S&P BSE Realty

Source: MFI Explorer

200

1,000

1,800

2,600

Feb-07 Aug-09 Feb-12 Aug-14 Feb-17

S&P BSE Mid cap S&P BSE Sensex S&P BSE Small cap

Growth of Rs 1,000 over Last 10-Yrs

Source : MFI Explorer

InR

s.

Growth of Rs 1,000 over Last 10-Yrs

Source : MFI Explorer

InR

s.

Monthly returns as on February 28,2017

5

30

55

80


P/E

-S&

P BS

E Se

nsex

, N

ifty

50,

Nif

ty M

idca

p 50

Nifty 50 Nifty Midcap 50 S&P BSE Sensex

Domestic Benchmark Indices Trailing P/E

Source : Reuters, NSE



• Market got further boost from global peers and new U.S.President’s promise to unveil a phenomenal tax plan along withconclusion of the meeting between the U.S. President andJapanese Prime Minister that eased trade concerns.

• Stock-specific developments were witnessed after a majorcompany in the IT sector announced to buy back 2.85% of itsequity capital. Buying interest was seen in the telecom sectorfollowing optimism over final talks on merger between twomajor companies.

• Towards the end, market became submissive after the minutesof Fed’s latest policy meeting indicated a near term rate hike.Investors also remained wary on the last trading session aheadof key economic data, scheduled to release after market hours.

• On the BSE sectoral front, all the sectoral indices closed in thegreen barring S&P BSE Auto. S&P BSE Realty stood as the topgainer followed by S&P BSE Consumer Durables and S&P BSEIT. Realty sector continued with the upward trend after thefinance minister proposed affordable housing in the UnionBudget 2017-18 to encourage investment in the segment.

• The Securities and Exchange Board of India (SEBI) has issued a circular revising the exposure of mutual funds in housing financecompanies (HFCs). Accordingly, mutual funds/asset management companies shall ensure that total exposure of debt schemes of mutualfunds in a particular sector (excluding investments in Bank CDs, CBLO, G-Secs, TBills, short term deposits of Scheduled CommercialBanks and AAA rated securities issued by Public Financial Institutions and Public Sector Banks) shall not exceed 25% of the net assets ofthe scheme. Also, an additional exposure to financial services sector (over and above the limit of 25%) not exceeding 15% of the net assetsof the scheme shall be allowed only by way of increase in exposure to HFCs. The additional exposure to such securities issued by HFCs arerated AA and above and these HFCs are registered with National Housing Bank (NHB) and the total investment/ exposure in HFCs shallnot exceed 25% of the net assets of the scheme.

• SEBI proposed measures to boost liquidity in the corporate bond market. The regulator proposed that issuers can have only oneInternational Securities Identification Number (ISIN) per quarter or every two months for consolidation and re-issuance of debt securities.SEBI is of the view that if the above restriction is implemented, a situation of liquidity mismatch and bunching of liabilities for the issuermay arise. To overcome it, SEBI has suggested the issuer to make a choice of having bullet maturity payment as a one-time exercise. Underthe bullet maturity payment, the issuer concerned can make equated quarterly payment or equated monthly payment of the maturityproceeds within that fiscal. SEBI has proposed that issuers having large number of outstanding issues and multiple ISINs reduce the numberof outstanding ISINs in a phased manner. For this, it has proposed methods of switching or conversion namely Tender offer and ReverseAuction Conversion.

• SEBI has proposed to reduce the time gap between the initial public offer (IPO) and listing of shares from the current six days (T+6). Themarket regulator has also proposed to allow institutions like banks and mutual funds to participate in commodity derivatives markets.

• SEBI has permitted municipalities holding surplus in their books in any of the three preceding financial years to issue municipal bonds inorder to boost the market. Also, the municipality should not have negative net worth in any of three immediately preceding financial yearsand should not have defaulted in repayment of debt securities or loans obtained from banks or financial institutions.

• The Central Bank has permitted multilateral and regional financial institutions to invest in rupee denominated bonds listed abroad, calledas masala bonds. This move will provide more choices of investors to Indian entities issuing masala bonds abroad.

Regulatory Update

27,800

28,200

28,600

29,000

-2,500

2,000

6,500

11,000

1-Feb-17 10-Feb-17 19-Feb-17 28-Feb-17 S&P

BSE

Sens

ex In

dex

valu

e

Net

Inve

stm

ent b

y FI

I/FP

I &

DII

in R

s. C

r.

FII/FPI Net investment DII Net investment S&P BSE SensexSource: MFI Explorer

Source : Reuters

22,000

25,000

28,000

31,000

-22,000

-6,500

9,000

24,500

Feb-16 Jun-16 Oct-16 Feb-17

FII/FPI Net investment DII Net investment S&P BSE Sensex

Source: MFI Explorer

Net

Inve

stm

ent b

y FI

I/FP

I &

DII

in R

s. C

r.

S&P

BSE

Sens

ex In

dex

valu

e

FII, DII Investment & Sensex - February 2017

FII/FPI, DII Net Investment & Sensex Movement in last 12 Mths


Key Rates (%)Reverse Repo Rate

Repo Rate

CRR

SLR

Bank Rate

Debt Indicators (Yield %)Call Rate

1 Month FBIL Term MIBOR

10-Yr Benchmark Bond

91-Day T-Bill#

182- Day T-Bill#

364-Day T-Bill#

Source: RBI

# Indicates Monthly Average cut off during Auction

6.25%

6.24%

6.26%

6.25%

6.25%

6.16%

Feb-17

5.75 5.75

6.25 6.25

4.00 4.00

20.50 20.50


Current^RBI Policy Rates

5.95% 6.02%

6.45%

6.41%

6.75 6.75

6.87%

6.35%

Previous

^Based on RBI Bi-monthly Monetary Policy Statement on 08-Feb-2017

Jan-17

• Bond yields witnessed the biggest monthly rise in more thanthree years after MPC kept interest rates on hold in its sixthbi-monthly monetary policy review on Feb 8 and changed itsstance on monetary policy from accommodative to neutral.Indication by the U.S. Fed chief of a near term rate hike in theU.S., also weighed on market sentiment.

• Yield on the 10-year benchmark bond (6.97% GS 2026)surged 46 bps to close at 6.87% from the previous month’sclose of 6.41%. During the month, bond yields moved withina wide range of 6.38% to 6.95%.

• Bond yields initially treaded lower after the government in theUnion Budget 2017-18 adhered to the fiscal consolidationroadmap as it aimed to bring down the fiscal deficit to 3.2%of GDP in FY18 and lower it further to 3% in the followingthree fiscals. This increased hopes of a rate cut by MPC in itsmonetary policy review scheduled on Feb 8. Furthermore, thegovernment also lowered the net market borrowing to Rs.3.48 lakh crore as against Rs. 4.25 lakh crore in the previousyear, which also had a positive bearing on the domestic debtmarket.

• However, gains were short lived as bond yields shot up 43 bpsin just two trading sessions after the outcome of the monetarypolicy review was contrary to market expectations. MPC inthe monetary policy review kept interest rates on hold andchanged its stance on monetary policy from“accommodative” to “neutral” as it warned about the risks ofhigh inflation and forecasted that inflation may increase inthe second half of FY18. MPC identified these risks asemanating from increase in global crude oil prices, volatilityin exchange rates on account of global financial marketdevelopments and the impact of the house rent allowancesunder the 7th Central Pay Commission award.

• Bond yields in the interim received some support as it camedown following strong demand n the last weekly debt auctionof FY17 on Feb 10 and as market participants resorted tobargain hunting in order to benefit from the recent decline inprices. However, bond yields went up again following acontinuous rise in India’s core inflation in Jan 2017.

• Fed chief’s indication of a near term rate hike also weighed onmarket sentiment even though no clarity was providedregarding the timeline of the next rate hike. Losses wereextended as the Central Bank governor also expressedconcerns regarding high core inflation, which led to worriesthat the key policy repo rate might not be eased any timesoon. Lack of any domestic triggers at the month end alsokept investors on the sidelines.

Indian Fixed Income

5.90

6.60

7.30

8.00


Source: CCIL

10-Yr Benchmark Bond Yield

Yie

ld (I

n %

)

-120

-80

-40

0

6.00

6.90

7.80

8.70

1 Yr 5 Yr 10 Yr 20 Yr 30 Yr

Cha

nge

in b

ps

Yie

ld (I

n %

)

India Yield Curve Shift (Y-o-Y)

Change in bps Feb-17 Feb-16Source: Reuters

0

16

32

48

5.90

6.40

6.90

7.40

7.90

1 Yr 5 Yr 10 Yr 20 Yr 30 Yr

Cha

nge

in b

ps

Yie

ld (I

n %

)

India Yield Curve Shift (M-o-M)

Change in bps Feb-17 Jan-17Source: Reuters



• MPC’s decision of keeping interest rates on hold andchanging its stance on monetary policy from “accommodativeto neutral” had a profound impact on short term papersnamely certificate of deposits (CDs) and commercial papers(CPs). Yield on CPs fell across maturities in the range of 16bps to 25 bps. The maximum fall was witnessed on 3-monthmaturity and the minimum on 1-year paper. Yield on CDsalso fell across 3- and 6-month maturities by 12 bps and 2bps, respectively, while it increased on 9-month and 1-yearpaper by 5 bps and 12 bps, respectively.

• The large overhang of liquidity following demonetisationweighed on money markets in Dec 2016. However, from midof Jan 2017, rebalancing has been underway with expansionof currency in circulation and new bank notes being injectedinto the system at an accelerated pace. Throughout thisperiod, Central Bank's market operations have been inliquidity absorption mode. With the abolition of theincremental cash reserve ratio from Dec 10, liquiditymanagement operations have consisted of variable ratereverse repos under the Liquidity Adjustment Facility (LAF)of tenors ranging from overnight to 91 days and auctions ofcash management bills under the market stabilisation scheme(MSS) of tenors ranging from 14 to 63 days.

• As a result, liquidity was ample in the banking sector andbanks remained net lenders to the Central Bank, same as thatof the previous month. Banks’ net average lending to thecentral bank through the LAF window stood at Rs. 5,496.19crore in Feb 2017 from the previous month’s average lendingof Rs. 8,602.17 crore. However, banks’ average borrowingsunder the Marginal Standing Facility (MSF) window rose toRs. 1,920.46 crore in Feb 2017 from the previous month’saverage borrowing of Rs. 398.19 crore.

• To suck out excess liquidity following demonetisation, theCentral Bank conducted variable reverse repo auctions.Average net absorption of liquidity by the Central Bankthrough variable repo rate and reverse repo auctionsincreased to Rs. 10,3572.68 crore in Feb 2017 from Rs.72,427.81 crore in Jan 2017. After taking into account theentire gamut of LAF, MSF, term repo, and reverse repo, theaverage net absorption of liquidity by the Central Bank stoodat Rs. 98,016.43 crore in Feb 2017, higher than Rs. 93,585.35crore in Jan 2017.

• Yield on gilt securities (annualised) surged across maturitiesin the range of 7 bps to 56 bps. Yield on corporate bonds alsosurged across maturities in the range of 20 bps to 50 bps.Spread between AAA corporate bond and gilt expandedacross 1-, 2-, 3-, 6-, and 15-year papers in the range of 2 bpsto 13 bps and closed steady on 9- and 10-year maturities.Spread on the remaining maturities contracted 2 bps each.

20.00

22.00

24.00

26.00

2.00

5.00

8.00

11.00

Feb-07 Feb-09 Feb-11 Feb-13 Feb-15 Feb-17

Source: RBI Reverse Repo Repo CRR Bank Rate SLR

Movements of Key Policy Rates in India

Rep

o,R

ever

se R

epo,

CR

R, S

LR &

Ba

nk R

ate

(In

%)

SLR

(In

%)

10

50

90

130


5 Year Corporate Bond Spread (for AAA & AA bonds)

AAA Bond Spread (in bps) AA Bond Spread (in bps)Source: Reuters

In b

ps

5

50

95

140


10 Year Corporate Bond Spread (for AAA & AA bonds)

AAA Bond Spread (in bps) AA Bond Spread (in bps)Source: Reuters

In b

ps

-30,000

0

30,000

60,000

4.50

7.00

9.50

12.00


Call Rate Net Borrowings

Liquidity Monitor - Call Rate and Net Borrowings

Cal

l Rat

e (I

n %

)

Source: Reuters

LAF

(In

Rs.

Cr.

)


66.74 67.81 68.53 68.62

70.72 72.55 72.84 75.08

83.05 84.85 85.53 95.20

59.35 59.77 60.79 60.78

1 Wk Ago1 Mth Ago

6 Mths Ago

1 Year Ago

Crude Brent($/Barrel)

52.45 -6.81 -5.14 13.53 45.45

Gold ($/Oz) 1,248.52 1.02 3.14 -4.58 0.87

Gold (Rs./10 gm) 29,591.00 1.44 2.01 -3.97 1.41

Silver ($/Oz) 18.31 2.04 4.43 -1.63 23.02

Silver (Rs./Kg) 43,206.00 1.76 4.42 -2.11 19.41

Performance of various CommoditiesReturns (in %)

Value(as of 28-Feb-

2017)

Source: Reuters, MCX

Commodities


1 Mth Ago

3 Mths Ago

Movement of Major Currencies (Denominated in Indian Rupee)

Source: RBI

Currency

INR/1 USD

INR/1 EURO

INR/1 GBP

INR/ 100 YEN

1 Year Ago

Value(as of 28-Feb-

2017)

INR• The Indian rupee strengthened following strong gains in the

domestic equity market. Lack of clarity about the timing ofthe U.S. Fed's future rate hikes added to gains. Marketsentiment improved further after lower than expectedincrease in U.S. hourly wages in Jan 2017 quelled worries of anear term rate hike by the U.S. Fed. Further, minutes of thelatest U.S. Fed policy meeting lowered the probability of arate hike in Mar 2017. Rupee rose further following heavyselling of the greenback by foreign banks and huge foreignfund inflows. However, renewed political uncertainty in theeurozone and dwindling Chinese foreign exchange reservesrestricted gains.

Euro• Euro fell mainly because of political uncertainty and renewed

worries about Greece's debt problems. The euro was hit afterthe European Central Bank said the recent rise in eurozoneinflation is temporary and mainly due to rising oil prices, andrestated that underlying inflation remains very subdued.Upbeat U.S. jobless claims data, hawkish comments fromU.S. Fed officials, and positve comments from the U.S.President on tax cuts boosted the dollar.

Currency

Crude• Brent crude prices witnessed volatility over the month before

closing in the red. Oil prices were hit initially followinggrowth in U.S. drilling activity. Growth in drilling activitycould have weakened efforts taken by the Organization of thePetroleum Exporting Countries (OPEC) and other majorproducers to curb oversupply and aid the market. Butdownside was limited as OPEC indicated that it would standby its agreement to curb output.

Gold• Gold prices climbed after U.S. President’s stringent

immigration policies made investors cautious and triggeredthe metal’s safe haven appeal. While the U.S. Fed keptinterest rates unchanged at its first meet since the newPresident took over, uncertainty over the timing of nextinterest rate hike kept equity market investors wary. As aresult, market participants offloaded riskier assets like stocksand went for the bullion. The minutes of the Fed’s latestpolicy meet also contributed to such concerns, furtherboosting the safe haven appeal of the precious metal. Politicalambiguities in the eurozone also prevented investors fromtaking bets on riskier assets, boosting demand for gold. Theprecious metal gave up some gains on the last trading sessionof the month after the U.S. President gave a strong law-and-order speech to the U.S. Congress, while calling for a vastoverhaul of the nation's tax system and increased spending oninfrastructure and defense.

Commodity

66

67

68

69Feb-16 Jun-16 Oct-16 Feb-17

Rupee Versus Dollar during the year

Rup

eepe

r D

olla

r

Source: RBI

80

110

140

170


Movement of Commodity Prices Over 1 Year (Rebased to 100)

Gold (US$) Silver (US$) Brent CrudeSource:Reuters

In U

.S.D

olla

r


FSE DAX

Europe

2.59Germany

2.61

3.93

1.62

Shanghai SE Composite

S&P BSE Sensex

S&P/ASX 200

FTSE 100

CAC 40

0.41

SET IDX

JSX Composite

FTSE Straits Times

KOSPI

Hang Seng

4.17

3.72

Thailand

Indonesia

Singapore 1.63

Source: MFI Explorer & Reuters

1.16

1.63

S. Korea

Hong Kong

NIKKEI 225

India

Australia

2.31

2.31

U.K.

France

Japan

China


Performance of Major International Markets (as on February 28,2017)

Asia Pacific-1.13

1.75

4.77

U.S.

U.S.

U.S.

United StatesNasdaq 100

S&P 500

DJ Industrial Average

1 MthCountryIndices

United States • U.S. markets grew with the conclusion of a meeting between

the U.S. President and Japanese Prime Minister, highercorporate earnings, and upbeat economic data. Investorsturned optimist about economic policies on infrastructurespending, foreign policy, and tax reforms of the U.S.President. However, gains were capped by the release ofminutes of the U.S. Fed's policy meeting and the unstablepolitical situation in Europe.

Europe• European markets climbed as Greece and its creditors agreed

to work out structural reforms for the country’s labourmarket regulation, and tax and pension systems. This easedconcerns over Greece’s probable exit from the euro area.Markets were also supported by Bank of England’s decisionto continue with its record low interest rate, positiveeconomic data, and upbeat corporate earnings results.

Asia• Most of the major Asian markets gained after the U.S.

President signed two directives to remove restrictions fromthe finance industry and indicated at maintaining positiverelations with China. Positive indication on China tradepolicy and uptick in some of the global peers further boostedsentiment.

• Yield on the 10-year U.S. Treasury bond fell 9 bps during themonth to close at 2.36% compared with the previous month’sclose of 2.45%. The paper moved in a range of 2.32% to2.50%.

• U.S. Treasury prices fell initially after the U.S. Fed keptinterest rates unchanged and painted a relatively upbeatpicture of the U.S. economy.

• Losses were soon erased due to growing political uncertaintyin Europe ahead of upcoming elections in Netherlands,France, and possibly Italy. However, prices again fell after theU.S. President promised a major tax reform plan and Fedchief indicated towards a rate hike sooner rather than later.Also, better than expected increase in U.S. import prices andinflation in Jan 2017 further led to decrease in U.S. Treasuryprices.

• Prices increased during the end of the month after minutes ofFed’s latest monetary policy meeting represented a cautioustone thereby reducing the expectations of an interest rate hikenext month. Concerns over lack of clarity in the newPresident’s administrative policies further supported U.S.Treasuries prices.

Global Equity Market

Global Fixed Income - U.S.

-14

-6

2

10

0.00

1.20

2.40

3.60

1 M

onth

3 M

onth

s

6 M

onth

s

1 Y

ear

2 Y

ears

3 Y

ears

5 Y

ears

7 Y

ears

10 Y

ears

30 Y

ears

Cha

nge

in b

ps

Yie

ld (I

n %

)

U.S. Treasury Yield Curve Shift (M-o-M)

Change in bps 28-Feb-17 31-Jan-17Source: Reuters

1.20

1.80

2.40

3.00


Yie

ld (

In %

)

U.S. 10 Year Treasury Yield

Source: Reuters

Movement during the Month



Decoded: Main indicators of investment risk applied in the analysis of mutual funds

Investment Classroom

People invest their money in order to get good returns. But returns are not risk-free. So, while choosing an investment, for example mutualfunds, it is important to look beyond the returns. There has to be an acceptable or optimal balance between risk and returns for a fund. Thereare certain parameters through which investors can better understand risk measures.

BetaBeta is a measure of volatility or systematic risk of a portfolio or fund in comparison with the market as a whole. Beta is used in the CapitalAsset Pricing Model (CAPM), which describes the relationship between risk and expected return and is used in the pricing of risky securities.The general idea behind CAPM is that investors need to be compensated in two ways i.e. for placing money in any investment over a period oftime and for taking on additional risk.

Beta is also known as the beta coefficient. A beta of 1 means that the portfolio is neither more nor less volatile or riskier than the wider market.A beta of more than 1 indicates greater volatility and vice versa.

Jensen’s AlphaAlpha is used to determine whether the fund manager through his stock selection ability has been able to beat the market. Stock selection couldbe a combination of sound fundamentals and market timing. Alpha measures the excess returns generated over a statistically adjustedbenchmark return. Alpha is also used in CAPM. For example, if two mutual funds are generating 12% return each, a rational investor wouldwant to opt for the fund that took lower risk. Alpha would be positive if the 12% generated by the fund is over and above the returns (say10%) generated by a diversified portfolio like the BSE-200 in a year’s time. If BSE-200 would have generated 14%, then the alpha would benegative signifying inordinate risk for the investor. In other words, a positive value for Jensen's alpha means a fund manager has the ability to'beat the market' with his or her stock picking skills. Higher the value, better the performance.

For a retail investor, the alpha value is important because it measures the excess returns a fund has generated in relation to the returnsgenerated by its benchmark.

Standard DeviationStandard Deviation is the variation from the mean or average returns. A higher dispersion will imply more volatility of the returns and hencehigher risk. In the financial jargon, standard deviation is synonymous with risk assessment. For example, if a fund generates astounding gainsin one year and incurs loss in the following year then for an investor it would be difficult to judge the time of investment. With a low standarddeviation, the investor would feel more comfortable that the fund’s return would not fluctuate to that extent. Investors often use this parameterto measure the dispersion of fund’s return from its average return over a specified time frame. With this information, one can predict the rangeof returns which the fund is likely to generate in the future. However, one cannot rely on standard deviation alone; one must also look at theholistic picture before drawing conclusions.

Sharpe RatioThe Sharpe Ratio is a way of checking whether an investment is being rewarded suitably for an incremental addition in risk. The ratio represents the units of return received per unit of risk, over and above the return that would be achieved for taking no risk at all. It is a reward to variability measure. Also, being a ratio, it provides a pure number. This can only be used as a comparative tool. Hence, Sharpe ratio should be used to compare the performance of a number of funds. The ratio provides the investor with an evolved picture of fund performance and helps the investors to evaluate the relative success of competing funds following the same broad investment strategies. The Sharpe ratio uses standard deviation as its risk component. This ratio looks at both returns and risk and delivers a single measure that is proportional to the risk adjusted returns. A fund with low returns but with a relatively mild standard deviation can end up with a high Sharpe ratio. Such a fund will not generate high returns. For investors who invest all their money in a single fund, Sharpe ratio is a useful measure of risk-adjusted return because it measures total risk. Higher the Sharpe ratio, better could be the risk-adjusted performance of the fund. If the ratio is negative, this would indicate that a risk-less asset would be a better option than an analyzed security.

R-squaredR-squared measures the relationship between a portfolio and its benchmark. Its value can range from 0 to 1 and is stated as percentages from 0 to 100%. R-squared does not show a fund’s performance, it only measures how much a fund is like or alike its benchmark. It is simply a measure of the correlation between the portfolio's returns and the benchmark's returns.

For a fund that moves like the benchmark, go for a high R-squared and vice-versa.



Source for data, graphs and analysis, unless otherwise specified: ICRA Online Research

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Documents

Principal Monthly Insight-Feb 2017 · • Consumer Price Index (CPI) based inflation in Jan 2017 plunged to the lowest level since Jan 2012 to 3.17%, from 3.41% in Dec 2016 and 5.69%