CY 19: Looking Ahead While Reflecting Backward

While they may not know what lies ahead, investors can enhance their likelihood
of success if they base their actions on a sense for where the market stands in its
cycle -- Howard Marks
 CY 18 Snapshot CY 18 Snapshot: CY 18 Snapshot: CY 18 Snapshot:
A 3-Phased Correction Large Caps the clear ‘Stable Sectors’ BSE500 Returns
winners provide stability Deconstructed

CY 19 Outlook: CY 19 Outlook: CY 19 Outlook: CY 19 Outlook:

Rupee & the Markets Elections & Markets Earnings Recovery Key Macros in favor
to Markets

CY 19 Outlook: CY 19 Outlook: CY 19 Outlook:

Valuations are ‘Where the market Return Expectations
Moderate stands in its cycle?’
 CY 18 Snapshot

-29.1% NIFTY Smallcap 100

-15.4% NIFTY Midcap 100

Large Caps outperformed small Caps by a
significant margin – this is the highest difference
since the small cap index came into existence –
even higher than the crash of 2008
Nifty 50 3.2%

S&P BSE SENSEX INDEX 5.9%

-35.0% -30.0% -25.0% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0%
Source: Bloomberg, Internal Research
Data as on 30th November 2018
 CY 18 Snapshot: A 3-Phased Correction
120
Markets corrected Large Caps outperformed broader The NBFC crisis resulted in Macros turn
after the budget: Re- markets. Macro concerns - oil hitting another round of selling favourable, Small and
110 imposition of LTCG $85/barrel and the 10-Year GSEC Mid Caps yet to turn
on Equities hitting 8.2% around
100

90

80
Phase1 Phase2 Phase3

70 NIFTY -8.3% NIFTY NIFTY 8.3%

-5.1% NIFTY 9.4%

60 NSE Mid -3.7% -8.6% NSE Mid NSE Mid 10.0%

-12.6% NSE Mid

NSE small NSE small -9.1% -17.7% NSE small NSE small 12.2%
50 -15.5%

40
Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18
NIFTY NSE Mid NSE Small

Source: Bloomberg, Internal Research

Data as on 31st December 2018
 CY 18 Snapshot: A 3-Phased Correction
Macros turned negative for most of the year
90 8.2
85
Brent Crude 10 Year GSEC
8
80
75 7.8
70 7.6
65 7.4
60
55 7.2
50 7

• Rising crude put pressure on India’s BoP resulting in depreciation of the

74 INR Rupee
72
70 • Concerns over fiscal deficit on account of lower GST collections and INR
68 depreciation resulted in a spike in the 10 Year G-Sec which almost hit
66 8.2%
64
• This coupled with the liquidity crisis in September resulted in a sharp
62 market correction especially in the small cap space

• With crude falling post September, macros improved, though this didn’t
reflect in the stock markets
Source: Bloomberg, Internal Research
Data as on 31st December 2018
 CY 18 Snapshot: A 3-Phased Correction
The NBFC scare
Name Return
Dewan Housing -67%
Indiabulls Ventu -46%
Edelweiss Fin Se -45% 1 2
JM Financial Ltd -40%
IIFL Holdings Lt -40%
The so-called ‘NBFC crisis’ What was actually a ALM
PNB Housing Fina -36%
hit in September mis-match grew into a
L&T Finance Hold -36%
mini-credit scare
Bajaj Finance Lt -34%
Manappuram Finan -32%
Shriram Transprt -30%
Capital First Lt -30%
IDFC Ltd -30%
Cholamandalam In -27%
3 4
Indiabulls Housi -27%
M&M Fin Services -25%
While most observers point to the Many of the listed NBFCs
ILF&S default as the start of the corrected in excess of
Motilal Oswal -24%
crisis, the stocks of most of these 30% within a month
Aditya Birla Cap -24%
companies were stable for 2-3 weeks
LIC Housing Fin -23%
post the news of the default came
Shriram City Uni -23%
out, before they started correcting.
Gruh Finance Ltd -21%
Returns are for the period 29-Aug-18 to 8-Oct-18 Source: Bloomberg, Internal Research
 CY 18 Snapshot: A 3-Phased Correction
State Elections kept markets guessing through the year

New BJP – Vote Congress –

Date State Incumbent LS Seats
Government Share Vote Share
Feb-18 Tripura CPI (M) BJP 2 43.0% 1.8%

Feb-18 Meghalaya INC + UDP NPP + UDP 2 9.6% 28.5%

Feb-18 Nagaland NPF NDPP + NJP 1 15.3% 2.1%

May-18 Karnataka INC JD (S) + INC 28 36.2% 38.0%

Dec-18 Chattisgarh BJP INC 11 33.0% 43.0%

Dec-18 Madhya Pradesh BJP INC 29 41.0% 40.9%

Dec-18 Rajasthan BJP INC 25 38.8% 39.3%

Dec-18 Telangana TRS TRS 17 7.1% 28.4%

Dec-18 Mizoram INC MNF 1 8.0% 30.2%

• 2018 saw a resurgence of INC winning few of the large states that went for elections
• The General Elections in 2019 should be keenly contested and watched
 CY 18 Snapshot CY 18 Snapshot: CY 18 Snapshot: CY 18 Snapshot:
A 3-Phased Correction Large Caps the clear ‘Stable Sectors’ BSE500 Returns
winners provide stability Deconstructed

CY 19 Outlook: CY 19 Outlook: CY 19 Outlook: CY 19 Outlook:

Rupee & the Markets Elections & Markets Earnings Recovery Key Macros in favor
to Markets

CY 19 Outlook: CY 19 Outlook: CY 19 Outlook:

Valuations are ‘Where the market Return Expectations
Moderate stands in its cycle?’
 CY 18 Snapshot: Large Caps the clear winners
Higher the Market Cap, higher the returns, was the mantra for 2018

-29.1% NIFTY Smallcap 100

-15.4% NIFTY Midcap 100

Large Caps outperformed small Caps by a
significant margin – this is the highest difference
since the small cap index came into existence –
even higher than the crash of 2008
Nifty 50 3.2%

S&P BSE SENSEX INDEX 5.9%

-35.0% -30.0% -25.0% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0%
Source: Bloomberg, Internal Research
Data as on 31st December 2018
 CY 18 Snapshot: Large Caps the clear winners
Outperformance of NIFTY vs Small Caps highest since 2005
120%
10 out of 14 years, small caps have given similar 70%
100%
or higher returns than large caps 60%

80% 50%

40%
60%

28.7% 30%
40% 32.5% 31.3%
25.9% 20%
23.6%
20%
10%
11.3%
9.1%
0% 0%
1.8% -0.3% -0.8%
-10%
-20%
-9.3%
-15.0% -20%
-40% -19.2%
-30%
-60% -32.2% -40%

-80% -50%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
NIFTY NSE Small Difference
Source: Bloomberg, Internal Research
Data as on 31st December 2018
 CY 18 Snapshot: Large Caps the clear winners
Market breadth narrow – ‘winner takes all’
At 34%, Large Caps had the highest
proposition of positive returns followed by
midcaps at 27% and small caps at only 14%

Occurrences (%)
BSE500 Large Mid Cap Small Total • Only 21% of the
Cap Cap BSE500 stocks gave
positive returns
Returns Range
>20% 16% 14% 6% 10%
0 to 20% 18% 13% 8% 11%
-20% to 0% 34% 30% 21% 26%
-40% to -20% 24% 30% 33% 30%
-60% to -40% 4% 10% 25% 16%
<-60% 4% 3% 8% 6%

• 32% of Large Caps, 43% of

Mid Caps and 66% of Small
Caps fell in excess of -20%
Source: Bloomberg, Internal Research
Data as on 31st December 2018
 CY 18 Snapshot: Large Caps the clear winners
Top 10 stocks gave all the returns

Name Weight Return

HDFC BANK LTD 6.62 14.00

RELIANCE INDS 5.42 22.49

HOUSING DEV FIN 4.96 16.26

INFOSYS LTD 3.91 30.98

• 9 of the Top 10 stocks were positive, even
ITC LTD 3.83 9.01 though BSE500 was negative for the year
ICICI BANK LTD 3.25 15.22 • Average Top 10 return of 15.0%, significantly
TATA CONSULTANCY 2.93 42.24 higher than BSE500 Return of -3.1%
LARSEN & TOUBRO 2.61 15.71

KOTAK MAHINDRA 2.26 24.44

MARUTI SUZUKI IN 1.83 -22.60

TOP 10 37.61 15.04

BSE500 -3.08

Source: Bloomberg, Internal Research

Data as on 31st December 2018
 CY 18 Snapshot: Large Caps the clear winners
Mega Caps rule: Difference between Top 10 and BSE500 highest since 2006
100% 24%

80% 20%

16%
60%
12%
40% 6.9%
8%
2.5% 4.9%
20% 4%

Difference
0% 0%
1.1%
-0.8% -0.6% -0.4%
-20% -4%
-2.7%
-8%
-40% -6.4%
-8.6% -12%
-60% -11.0%
-16%
-14.7%
-80% -20%
-18.0% -18.1%
-100% -24%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Top 10 Return BSE500 Return Difference

Source: Bloomberg, Internal Research

Data as on 31st December 2018
 CY 18 Snapshot CY 18 Snapshot: CY 18 Snapshot: CY 18 Snapshot:
A 3-Phased Correction Large Caps the clear ‘Stable Sectors’ BSE500 Returns
winners provide stability Deconstructed

CY 19 Outlook: CY 19 Outlook: CY 19 Outlook: CY 19 Outlook:

Rupee & the Markets Elections & Markets Earnings Recovery Key Macros in favor
to Markets

CY 19 Outlook: CY 19 Outlook: CY 19 Outlook:

Valuations are ‘Where the market Return Expectations
Moderate stands in its cycle?’
CY 18 Snapshot: ‘Stable Segment’ sectors provide stability
Breadth of outperformers in sectors also narrow
Cyclical (11.97)
Telecom (7.43)
Utilities (3.10) • In the Stable Segment, Auto was the worst
Cement/BM (7.93) segment (-21.88%) whereas IT, Retail Banks
Commodities (11.71) Cyclical and Consumer Staples were the big
Industrials (7.77) Sectors outperformers
Energy 1.07
NBFC - Cyclical (2.72) • Every sector (except Energy) within the
Banks - Corp (3.56) ‘Cyclical’ segment gave negative returns

Stable 5.71 • On the whole, Stable segment gave a return

Cons Disc 0.15 of +5.71% as compared to Cyclical segment
Health Care (3.19) Stable return of -11.97%
Auto
NBFC - Stable
(21.88) Sectors
4.91
Info Tech 17.82
Cons Stap 13.43
Banks - Retail 13.22

(25.00) (20.00) (15.00) (10.00) (5.00) - 5.00 10.00 15.00 20.00

Data as on 31st December 2018 Source: Bloomberg, Internal Research

CY 18 Snapshot: ‘Stable Segment’ sectors provide stability
Stable Segment outperformed Cyclicals after 2 years
100%
62.1%
55%
80%

60%
35%
40%
14.9%
20% 15%
7.5%

0%
3.8% 2.6% 3.9% -5%
-1.9% -2.0%
-20%

-40% -19.0% -17.7% -25%

-22.2% -20.5%
-24.7%
-28.5%
-60%
-45%
-80%

-100% -65%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Stable Segment Cyclical Segment Difference

6 out of 14 years, cyclical segment sectors have outperformed stable segment sectors

Data as on 31st December 2018 Source: Bloomberg, Internal Research

 CY 18 Snapshot CY 18 Snapshot: CY 18 Snapshot: CY 18 Snapshot:
A 3-Phased Correction Large Caps the clear ‘Stable Sectors’ BSE500 Returns
winners provide stability Deconstructed

CY 19 Outlook: CY 19 Outlook: CY 19 Outlook: CY 19 Outlook:

Rupee & the Markets Elections & Markets Earnings Recovery Key Macros in favor
to Markets

CY 19 Outlook: CY 19 Outlook: CY 19 Outlook:

Valuations are ‘Where the market Return Expectations
Moderate stands in its cycle?’
 CY 18 Snapshot: BSE500 Returns Deconstructed
2018 a reversal of 2017 with cyclicals and small caps underperforming stables and large caps

2017 2018
BSE500 Returns BSE500 Returns
BSE500 Stable Cyclical BSE500 Stable Cyclical
Large Cap 31.87 35.66 33.53 Large Cap 9.50 -7.40 2.42
Mid Cap 54.09 49.17 51.82 Mid Cap -5.58 -20.64 -11.63
Small Cap 46.41 56.32 52.30 Small Cap -17.20 -33.40 -26.59
35.82 39.70 5.71 -11.97

BSE500 Weights BSE500 Weights

BSE500 Stable Cyclical BSE500 Stable Cyclical
Large Cap 43.80 34.32 78.12 Large Cap 45.38 32.57 77.94
Mid Cap 7.45 6.40 13.84 Mid Cap 8.39 5.64 14.03
Small Cap 3.23 4.72 7.96 Small Cap 3.37 4.66 8.03
54.48 45.44 57.14 42.86

Source: Bloomberg, Internal Research

Data as on 31st December 2018
 CY 18 Snapshot CY 18 Snapshot: CY 18 Snapshot: CY 18 Snapshot:
A 3-Phased Correction Large Caps the clear ‘Stable Sectors’ BSE500 Returns
winners provide stability Deconstructed

CY 19 Outlook: CY 19 Outlook: CY 19 Outlook: CY 19 Outlook:

Rupee & the Markets Elections & Markets Earnings Recovery Key Macros in favor
to Markets

CY 19 Outlook: CY 19 Outlook: CY 19 Outlook:

Valuations are ‘Where the market Return Expectations
Moderate stands in its cycle?’
 CY 19 Outlook: Rupee & the Markets
80.0
INR Movement
70.0

60.0

50.0

40.0

30.0

20.0

10.0

0.0
Mar-82

Mar-99

Mar-08
Mar-73
Mar-74
Mar-75
Mar-76
Mar-77
Mar-78
Mar-79
Mar-80
Mar-81

Mar-83
Mar-84
Mar-85
Mar-86
Mar-87
Mar-88
Mar-89
Mar-90
Mar-91
Mar-92
Mar-93
Mar-94
Mar-95
Mar-96
Mar-97
Mar-98

Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07

Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
• Every bout of sharp INR depreciation has been caused by 2-3 factors, on reversal of which INR tends to rebound
• In past, bouts of sharp INR depreciation have been followed by period of retracement, as the factors causing the depreciation reverse
• The current INR depreciation was triggered by macro concerns - oil price increases, rising yields and concerns on fiscal slippage
• As of now, the concerns on oil and yields have receded which should provide a breather to INR

Source: Bloomberg, Internal Research

Data as on 31st December 2018
 CY 19 Outlook: Rupee and the Markets
Small Cap seems to be most impacted by periods of sharp INR depreciation
Period of Depreciation

1% 16%

-47% -54% -65% -13% -20% -22% -3% -3% -12% -18% -21% -4% -3% -2% -26% -39%

-17% -17% -17%

-22%
-30% -28%

Apr-08 to Mar-09 Jul-11 to Dec-11 Feb-12 to Jun-12 May-13 to Aug-13 May-14 to Feb-16 Jan-18 to Oct-18
NIFTY NSE Mid NSE Small INR

Source: Bloomberg, Internal Research

Data as on 31st December 2018
 CY 19 Outlook: Rupee and the Markets
Small Cap seems to be most impacted by periods of sharp INR depreciation
Period of Depreciation
1% 16%

-47% -54% -65% -13% -20% -22% -3% -3% -12% -18% -21% -4% -3% -2% -26% -39%

-17% -17% -17%

-22%
-30% -28%

Apr-08 to Mar-09 Jul-11 to Dec-11 Feb-12 to Jun-12 May-13 to Aug-13 May-14 to Feb-16 Jan-18 to Oct-18

144% 12 month period immediately following INR depreciation

136%

88% 95%
72%
51% 52%
9% 42%
23% 29% 26% 28%
11% -13% 12%
-1% -4% 3%

Mar-09 to Mar-10 Dec-11 to Dec-12 Jun-12 to Jun-13 Aug-13 to Aug-14 Feb-16 to Feb-17 Oct-18 to Oct-19
NIFTY NSE Mid NSE Small INR
Source: Bloomberg, Internal Research
Data as on 31st December 2018
 CY 18 Snapshot CY 18 Snapshot: CY 18 Snapshot: CY 18 Snapshot:
A 3-Phased Correction Large Caps the clear ‘Stable Sectors’ BSE500 Returns
winners provide stability Deconstructed

CY 19 Outlook: CY 19 Outlook: CY 19 Outlook: CY 19 Outlook:

Rupee & the Markets Elections & Markets Earnings Recovery Key Macros in favor
to Markets

CY 19 Outlook: CY 19 Outlook: CY 19 Outlook:

Valuations are ‘Where the market Return Expectations
Moderate stands in its cycle?’
 CY 19 Outlook: Elections & Markets
2019 is the year of ‘the election’
45,000

40,000

35,000
50%
30,000

25,000

98%
20,000

15,000
125%

10,000

186% -1% 15%

5,000 29%
86%
127% 156%
0
Apr-88

Apr-91

Apr-06
Apr-79
Apr-80
Apr-81
Apr-82
Apr-83
Apr-84
Apr-85
Apr-86
Apr-87

Apr-89
Apr-90

Apr-92
Apr-93
Apr-94
Apr-95
Apr-96
Apr-97
Apr-98
Apr-99
Apr-00
Apr-01
Apr-02
Apr-03
Apr-04
Apr-05

Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
Apr-15
Apr-16
Apr-17
Apr-18
SENSEX Index Elections
Source: Bloomberg, Internal Research
Data as on 31st December 2018
CY 19 Outlook: Elections & Markets
2019 is the year of ‘the election’
 CY 19 Outlook: Elections & Markets
107%
99%

82% 81%

64%
56% 55%

30%
25%
13%

1991 -1% 1996 1998 1999 2004 2009 2014

-16%

SENSEX Index NSEMCAP Index NSESMCP Index

• Election years have been generally good for the markets whenever stable governments were formed
• Only in 1996 & 1998, markets were negative when the governments didn’t last 5 years
• Also, in the last 3 election years, Mid and Small Caps have outperformed Large Caps
Source: Bloomberg, Internal Research, mid-cap Index data is available only
from 2004 and small cap from 2009
 CY 19 Outlook: Elections & Markets
The Election Cycle - 6 months pre-election to 2 years post-election v/s election result to next election result
42%
37%
34%
31% 30%
24%
21%
18% 18%
15%
10% 9%

0%

-9%

1980 1984 1991 1999 2004 2009 2014

First 30 Months Full Term

The Election Cycle - 6 months pre-election to 2 years post-election vs election

result to next election result

Source: Bloomberg, Internal Research

 CY 18 Snapshot CY 18 Snapshot: CY 18 Snapshot: CY 18 Snapshot:
A 3-Phased Correction Large Caps the clear ‘Stable Sectors’ BSE500 Returns
winners provide stability Deconstructed

CY 19 Outlook: CY 19 Outlook: CY 19 Outlook: CY 19 Outlook:

Rupee & the Markets Elections & Markets Earnings Recovery Key Macros in favor
to Markets

CY 19 Outlook: CY 19 Outlook: CY 19 Outlook:

Valuations are ‘Where the market Return Expectations
Moderate stands in its cycle?’
 CY 19 Outlook: Earnings Recovery Key to Markets
Last 4 years have seen sharp downgrade in earnings estimates
600 597
Nifty EPS estimate movement
Each of the years has witnessed a large
580
sector contributing disproportionately to
560
556
the earnings cut due to reasons such as
540 530 • Sharp fall in commodity prices
527
520 • Disruption due to demonetisation

500
504 • GST rollout
497
• NPA recognition by bank
480
470
However, the NPA cycle is likely to have
460 457
448
peaked (thanks to the 12-Feb-2018 RBI
440 circular) and negative surprises are
420 422 unlikely.

400
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
2014 2015 2016 2017 2018

Data as on 31st December 2018 Source: Bloomberg, Internal Research

 CY 19 Outlook: Earnings Recovery Key to Markets
Consensus Expectations of Cyclical-led Earnings Recovery should provide support to the markets
Absolute profit BlBloomberg
oomberg IDFC
Internal
(INR, bn) esEstimate
tima te esEstimate
tima te
14-18 18-20 18-20
BSE200 FY 14 FY 18 FY 20 E FY 20 E
CAGR CAGR CAGR
Banks - Retail 127 299 23.8% 471 25.6% 424 19.2%
NBFC - Stable 186 462 25.4% 678 21.2% 576 11.7%
Auto 328 397 4.9% 528 15.3% 449 6.4%
Consumer Discretionary 53 112 20.6% 163 20.4% 163 20.4%
Consumer Staples 192 270 9.0% 355 14.6% 355 14.6%
Information Technology 483 667 8.4% 863 13.7% 904 16.4%
Health Care 166 223 7.7% 279 11.8% 293 14.5%
Stable Sectors 1,535 2,431 12.2% 3,337 17.2% 3,165 14.1%

Banks - Corp 489 -388 679 340

NBFC - Cyclical 135 139 0.7% 202 20.3% 146 2.3%
Cement / Building Mat 79 115 9.9% 158 17.4% 158 17.4%
Industrials 134 145 2.1% 285 39.9% 213 21.1%
Commodities 496 450 -2.4% 787 32.2% 631 18.4%
Energy 646 1,036 12.5% 1,346 14.0% 1,211 8.1%
Utilities 201 244 5.0% 344 18.6% 344 18.6%
Telecommunication Services 62 3 -53.5% -104 -104
Cyclical Sectors 2,242 1,745 -6.1% 3,695 45.5% 2,939 29.8%

BSE200 3,777 4,176 2.5% 7,032 29.8% 6,103 20.9%

BSE200 ex Corp Banks 3,153 4,424 8.8% 6,152 17.9% 5,618 12.7%
Data as on 31st December 2018
Source: Bloomberg, Internal Research
Internal estimates are based on IDFC’s research and anticipated trends. These assumptions are subject to change based on market and economic conditions; and should
not be construed as indication of returns in any manner.
 CY 18 Snapshot CY 18 Snapshot: CY 18 Snapshot: CY 18 Snapshot:
A 3-Phased Correction Large Caps the clear ‘Stable Sectors’ BSE500 Returns
winners provide stability Deconstructed

CY 19 Outlook: CY 19 Outlook: CY 19 Outlook: CY 19 Outlook:

Rupee & the Markets Elections & Markets Earnings Recovery Key Macros in favor
to Markets

CY 19 Outlook: CY 19 Outlook: CY 19 Outlook:

Valuations are ‘Where the market Return Expectations
Moderate stands in its cycle?’
 CY 19 Outlook: Macros in favor
Oil and 10 Year Yields are both at 2017-end levels
90 8.2
Brent Crude 10 Year GSEC
85
8
80
7.8
75

70 7.6

65
7.4
60
7.2
55

50 7

Macros - Oil and yields which were adverse for most of the year, have now turned favourable for equity markets

Source: Bloomberg, Internal Research

Data as on 31st December 2018
 CY 18 Snapshot CY 18 Snapshot: CY 18 Snapshot: CY 18 Snapshot:
A 3-Phased Correction Large Caps the clear ‘Stable Sectors’ BSE500 Returns
winners provide stability Deconstructed

CY 19 Outlook: CY 19 Outlook: CY 19 Outlook: CY 19 Outlook:

Rupee & the Markets Elections & Markets Earnings Recovery Key Macros in favor
to Markets

CY 19 Outlook: CY 19 Outlook: CY 19 Outlook:

Valuations are ‘Where the market Return Expectations
Moderate stands in its cycle?’
 CY 19 Outlook: Valuations are Moderate

35.0
Positive PE
29.6
30.0

25.0 23.9
21.1 21.4
20.0 18.4

15.0 13.5

10.0

5.0

-
NIFTY Index NSEMCAP Index NSESMCP Index

Dec-17 Dec-18

Valuations, though not cheap, have moderated from the peak of CY 17 and are now
reasonable, especially in the mid & small cap space
 CY 18 Snapshot CY 18 Snapshot: CY 18 Snapshot: CY 18 Snapshot:
A 3-Phased Correction Large Caps the clear ‘Stable Sectors’ BSE500 Returns
winners provide stability Deconstructed

CY 19 Outlook: CY 19 Outlook: CY 19 Outlook: CY 19 Outlook:

Rupee & the Markets Elections & Markets Earnings Recovery Key Macros in favor
to Markets

CY 19 Outlook: CY 19 Outlook: CY 19 Outlook:

Valuations are ‘Where the market Return Expectations
Moderate stands in its cycle?’
CY 19 Outlook: ‘Where the market stands in its cycle?’

Positives Risks
 CY 18 Snapshot CY 18 Snapshot: CY 18 Snapshot: CY 18 Snapshot:
A 3-Phased Correction Large Caps the clear ‘Stable Sectors’ BSE500 Returns
winners provide stability Deconstructed

CY 19 Outlook: CY 19 Outlook: CY 19 Outlook: CY 19 Outlook:

Rupee & the Markets Elections & Markets Earnings Recovery Key Macros in favor
to Markets

CY 19 Outlook: CY 19 Outlook: CY 19 Outlook:

Valuations are ‘Where the market Return Expectations
Moderate stands in its cycle?’
CY 19 Outlook: Return Expectations

10% to 15%...?
 CY 19 Outlook: Return Expectations
120%
Historical Annual SENSEX Returns
100% 94%

82% 81%
80% 73%
64%
60% 54% 51%
47%47%
42%
Only once since 1979, has
40% 35% 37% the SENSEX given returns in
28% 30% 28% the range of 10-15%
25% 26%
17% 17% 19% 17%
20% 13%
7%7% 9%
4% 4% 6%
2%
0%
-1% -1%
-5%
-20% -16% -16%
-21% -18%
-21%
-25%
-40%

-60% -52%
Dec-90

Dec-03

Dec-16
Dec-80
Dec-81
Dec-82
Dec-83
Dec-84
Dec-85
Dec-86
Dec-87
Dec-88
Dec-89

Dec-91
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02

Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15

Dec-17
Dec-18
Data as on 31st December 2018 Source: Bloomberg, Internal Research
 CY 19 Outlook: Return Expectations
14
Distribution of SENSEX Returns
12 12

10 10
9
8
7
No. of times

2
1
0
less than 0% 0 to 10% 10% to 15% 15% to 30% greater than 30%

SENSEX Returns are like an inverted normal curve

Very few instances of 10-15% and higher probability of extreme returns

Data as on 31st December 2018

 CY 19 Outlook: Return Expectations
120%
Historical Annual SENSEX Returns

94%
100%

82%

81%
73%
80%

64%
54%

51%

47%
47%
60%

42%
37%
35%

30%
28%

28%
26%
25%

40%

19%

17%
17%
17%

13%
20%

9%
7%
7%

6%
4%

4%

2%
0%
-1%

-1%

-5%
-20%
-16%

-16%

-18%
-21%
-21%

-25%
-40%

-60%

-52%
Dec-98
Dec-80
Dec-81
Dec-82
Dec-83
Dec-84
Dec-85
Dec-86
Dec-87
Dec-88
Dec-89
Dec-90
Dec-91
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97

Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Current Bull market Years: 6, Total Return: 136%
• Bull Market 2003-2007 Years: 5, Total Return: 500%  Since 1991, only 2 times SENSEX has given negative returns in consecutive years
 Since 1991, SENSEX has given returns between 0-10% in 4 years including 2018
• Bull Market 1988-1994 Years:7, Total Return: 788%  In the previous 3 such instances, next year returns have been 73%, 30% and 28%
• Bull Market 1980-1985 Years:6, Total Return: 344%

Data as on 31st December 2018 Source: Bloomberg, Internal Research

 CY 19 Outlook: Return Expectations

Anything but
10% to 15%!!!
IDFC view presented is based on internal research for informative purpose only and should not be construed as an indication of return in any manner.
Disclaimer:
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
The Disclosures of opinions/in house views/strategy incorporated herein is provided solely to enhance the transparency about the
investment strategy / theme of the Scheme and should not be treated as endorsement of the views / opinions or as an investment
advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document
has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis
of IDFC Mutual Fund. The information/ views / opinions provided is for informative purpose only and may have ceased to be current
by the time it may reach the recipient, which should be taken into account before interpreting this document. The recipient should
note and understand that the information provided above may not contain all the material aspects relevant for making an
investment decision and the stocks may or may not continue to form part of the scheme’s portfolio in future. The decision of the
Investment Manager may not always be profitable; as such decisions are based on the prevailing market conditions and the
understanding of the Investment Manager. Actual market movements may vary from the anticipated trends. This information is
subject to change without any prior notice. The Company reserves the right to make modifications and alterations to this statement
as may be required from time to time. Neither IDFC Mutual Fund / IDFC AMC Trustee Co. Ltd./ IDFC Asset Management Co. Ltd nor
IDFC, its Directors or representatives shall be liable for any damages whether direct or indirect, incidental, punitive special or
consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.
THANK YOU
 Currencies and Commodities
Currencies Dec-14 Dec-15 Dec-16 Dec-17 Dec-18
Indi a -2.0% -4.9% -2.7% 6.0% -9.2%

Developed Markets
US 12.8% 9.3% 3.6% -9.9% 4.4%
UK -5.9% -5.4% -16.1% 9.4% -5.6%
EURO -12.0% -10.3% -3.1% 14.1% -4.5%
Ja pa n -12.0% -0.3% 2.6% 3.8% 2.7% Commodities Dec-14 Dec-15 Dec-16 Dec-17 Dec-18

Asia Oil & Gas

Indones i a -2.1% -10.3% 2.7% -0.7% -5.8% WTI -46% -30% 45% 12% -25%
Ma l a ys i a -6.4% -18.4% -4.3% 10.5% -1.8%
Brent -48% -35% 52% 18% -20%
Pa ki s ta n 4.5% -3.9% 0.5% -5.5% -20.5%
Phi l i ppi nes -0.9% -4.5% -5.5% -0.7% -4.6% Na tura l Ga s -32% -19% 59% -21% 0%
South Korea -3.8% -7.0% -2.6% 13.1% -4.2% Metals
Ta i wa n -5.6% -4.1% 2.4% 8.1% -2.9% Gol d -1% -10% 8% 14% -2%
Chi na -2.4% -4.4% -6.6% 6.8% -5.4%
Indi a -2.0% -4.9% -2.7% 6.0% -9.2% Si l ver -19% -12% 15% 6% -9%
Other BRICS Al umi ni um 3% -19% 12% 34% -19%
Rus s i a -43.3% -19.3% 16.7% 6.8% -17.2% Copper -14% -25% 18% 31% -18%
Bra zi l -10.8% -33.2% 21.7% -1.7% -14.7%
South Afri ca -9.3% -25.3% 12.8% 10.9% -13.7%
Zi nc 6% -26% 60% 29% -26%
Europe Steel -16% -36% 75% 22% -18%
Czech Republ i c -13.1% -8.1% -3.1% 20.7% -5.1% Agri
Hunga ry -17.3% -10.0% -1.2% 13.4% -7.3%
Suga r -12% 5% 28% -22% -21%
Pol a nd -14.7% -9.7% -6.3% 20.2% -6.6%
Turkey -8.0% -20.0% -17.2% -7.1% -28.3% Cotton -29% 5% 12% 11% -8%
Latin America Rubber -38% -26% 84% -19% -14%
Argentina -23.0% -34.5% -18.5% -14.7% -50.6% Coffee 50% -24% 8% -8% -19%
Chi l e -13.4% -14.4% 5.7% 9.0% -11.3%
Col ombi a -19.1% -25.1% 5.8% 0.6% -8.1% Corn -6% -10% -2% 0% 7%
Mexi co -11.6% -14.2% -17.0% 5.5% 0.0% Whea t -3% -20% -13% 5% 18%
 Global Equity Markets
Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Comments
Indi a 27% -9% -1% 36% -3% Indi a - Sens ex Returns i n USD
Worl d 2% -4% 6% 22% -11%
Devel oped Ma rkets 3% -3% 5% 20% -10%
Emergi ng Ma rkets -5% -17% 9% 34% -17% Indi a n Ma rket bea t MSCI EM by 14% a nd MSCI DM by 7%
Developed Markets
US 11% -1% 10% 19% -6% US Ma rket fel l 6%, mos t other DMs fel l much more
UK -8% -10% -4% 18% -18%
Germa ny -10% -2% 3% 28% -22%
Ja pa n -6% 8% 4% 23% -10%
Brics
Indi a 27% -9% -1% 36% -3% Indi a the 2nd bes t performi ng BRIC a fter Bra zi l
Rus s i a -45% -4% 52% 0%
Bra zi l -13% -42% 69% 25% -2%
South Afri ca -2% -24% 13% 30% -24%
Chi na 49% 5% -18% 14% -29%
Asia
Indones i a 20% -21% 18% 20% -9%
Ma l a ys i a -12% -22% -7% 21% -8%
Pa ki s ta n 33% -2% 46% -20% -27% Indi a wa s the bes t performi ng As i a n ma rkets
Phi l i ppi nes 22% -8% -7% 24% -17%
South Korea -8% -5% 1% 37% -21%
Ta i wa n 2% -14% 13% 26% -11%
Chi na 49% 5% -18% 14% -29%
Indi a 27% -9% -1% 36% -3%
Eastern Europe
Czech Republ i c -17% -7% -7% 41% -14%
Hunga ry -26% 30% 31% 40% -9%
Pol a nd -14% -18% 4% 48% -16%
Turkey 16% -33% -10% 37% -43%
Latin America
Argenti na 21% -10% 18% 52% -50%
Chi l e -10% -18% 19% 46% -19%
Col ombi a -24% -43% 24% 13% -20%
Mexi co -10% -15% -11% 13% -16%
 Domestic Markets
Indian Market Snapshot Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Comments

After a s trong CY 17, INR wi tnes s ed a s ha rp depreci a ti on, before

USD INR -2.0% -4.9% -2.7% 6.0% -9.2%
recoveri ng towa rds the yea r-end to cl os e 9.2% bel ow

Broad Market
S&P BSE 500 IDX 37% -1% 4% 36% -3%

Market Cap Wise

Ni fty 50 31% -4% 3% 29% 3% Sma l l Ca ps underperformed NIFTY by a grea ter a mount (-32%) a s
NIFTY Mi dca p 100 56% 6% 7% 47% -15% compa red to thei r outperforma nce (+28%) i n CY 17. NIFTY a nd
NIFTY Sma l l ca p 100 55% 7% 2% 57% -29% SENSEX were pos i ti ve but the broa der ma rkets were nega ti ve

Sector Wise
SPBSEPri vBINR 67% -5% 10% 42% 7% Brea dth of pos i ti ve return s ectors wa s very na rrow - 3 to be
S&P BSE PSU 39% -17% 13% 19% -21% preci s e.
S&P BSE Fi na nce 59% -6% 7% 43% 2% IT Servi ces whi ch wa s one of the l a gga rds of CY 17, outperformed
s i gni fi ca ntl y i n CY 18
S&P BSE Fa s tMovCons Goods 19% 2% 3% 32% 11% FMCG (+11%) a nd Pri va te Ba nks (+7%) were the onl y two other
S&P BSE AUTO 52% -1% 9% 32% -22% s ectors to pos t pos i ti ve returns for the yea r
S&P BSE Cons Di s Goods &Svc 54% 8% 5% 54% -16%
S&P BSE CONSUMER DURAB 66% 24% -6% 102% -9%
Key cycl i ca l s ectors - PSU Ba nks ,Indus tri a l s , Ca p Goods ,
S&P BSE Hea l thca re 48% 15% -13% 0% -6% Infra s tructure, Tel ecom, Uti l i ti es Meta l s a nd Oi l a l l pos ted
S&P BSE Informa ti on Tech 18% 4% -8% 11% 25% nega ti ve returns
PSU Ba nk Index fel l 21% a fter the s ha rp ra l l y s een i n Oct-2017 a s
S&P BSE Tel ecom 9% 3% -21% 49% -41% thi s wa s nega ted by a s eri es of s ca nda l s
S&P BSE Uti l i ti es 20% -4% 10% 30% -15% Indus tri a l s , Cons tructi on a nd Ca ps Goods s a w a s ha rp PE dera ti ng
des pi te reporti ng good numbers a nd s trong order books
S&P BSE CAPITAL GOODS 50% -9% -3% 40% -2% Meta l s tocks corrected a s gl oba l commodi ty pri ces corrected on
S&P BSE Indi a Infra s tr -9% 12% 35% -21% concerns of i ncrea s i ng s uppl y i n Chi na
S&P BSE Indus tri a l s 55% -6% 1% 38% -19% Oi l s tocks corrected a s the government a s ked PSU oi l compa ni es
S&P BSE Indi a Ma nufa c 31% -1% 4% 31% -5% to a bs orb i ncrea s i ng oi l pri ces
The s us ta i ned pri ce wa r i n Tel ecom conti nued una ba ted wi th
S&P BSE Ba s i c Ma teri a l s 28% -14% 32% 56% -19% a ggrega te i ndus try revenues fa l l i ng
S&P BSE OIL & GAS 12% -3% 27% 34% -16%
S&P BSE METAL 8% -31% 37% 48% -21%
 India Valuation
Dec-07 Dec-13 Dec-16 Dec-17 Dec-18 Jan-18 Dec-18 Correction 5Yr Avg % Prem 10Yr Avg % Prem Comments
PE Ratio
NIFTY INDEX 22.5 16.2 20.9 23.9 22.2 23.8 22.2 -6.9% 20.8 6% 19.1 16%
NSEMCAP INDEX 21.5 13.5 27.2 45.0 44.4 43.3 44.4 2.6% 29.1 53% 21.7 105%
NIFTY PE has seen a correction of 6.9% from the peak in Jan but it is
Difference with NIFTY -1.0 -2.7 6.2 21.1 22.3 19.5 22.3 8.3 2.5
still at a premium to the 5 and 10 Year average
NSESMCP Index 44.8 129.4 73.6 670.6 73.6 -89.0% 110.1 -33% 75.7 -3%
Difference with NIFTY 28.6 105.5 51.4 646.8 51.4
Positive PE Ratio The Trailing PE for Mid and Small Cap Indices is not meaningful as
NIFTY INDEX 22.2 15.5 19.7 23.9 21.0 23.1 21.0 -9.4% 20.1 4% 18.3 14% these indices have large loss making companies - mainly PSU banks.
NSEMCAP INDEX 19.9 11.3 17.3 29.6 18.4 27.6 18.4 -33.4% 19.6 -6% 15.8 17% Positive PE - which excludes these loss making companies makes
Difference with NIFTY -2.3 -4.3 -2.4 5.7 -2.6 4.5 -2.6 -0.5 -2.5 more sense.
NSESMCP Index 9.3 15.2 21.4 13.5 19.9 13.5 -32.1% 15.1 -10% 13.2 2% The positive PE has seen a significant correction for both the Mid
Difference with NIFTY -6.2 -4.5 -2.5 -7.4 -3.2 -7.4 -5.0 -5.1 and Small Cap indices. The small cap Index PE is below the 5 year
average and in line with the 10 year average