Outlook 2018

2017 was the year of disruptions. To name the big 3: 1. Continuing impact of demonetization announced at

the end of 2016 2. Implementation of GST 3. Rollout of the Bankruptcy bill and initiation of

resolution process The disruptions (especially the first 2) have had significant impact on economic activity in the rural and unorganized economy. For the rural economy these came on top of existing challenges on account of poor monsoons in previous years, tight control on MSP increases and weakness in the real estate and infrastructure sector. This has meant that economic growth, which had

already been weak, slowed down further during 2017. GST implementation will require lots of continuing work in 2018 in order for it to stabilize and start contributing – both in terms of higher tax revenues as well as ease of business for corporates. Bankruptcy bill had a different impact. For the first time in India’s history, there is a credible process by which errant/defaulting promoters can be thrown out of their companies. As we end the year, we are coming to the end of the first set of cases that are being processed by NCLT and there is a good chance of several companies getting auctioned.

How this process plays out will be crucial to resolving the banking system’s NPA crisis. Economic disruption has also affected corporate earnings.

Outlook 2018 1

0

2

4

6

8

10

Dec-14 Dec-15 Dec-16

GDP^

Source: Tradingeconomics, Bloomberg, Axis AMC Internal

Analysis. ^GDP is India GDP Annual Growth Rate. And Earnings

are represented by Nifty Earnings YoY. *as on 26th Dec 2017

16.1%

-5.5%

0.9%

4.7%

CY 14 CY 15 CY 16 CY 17*

Earnings^

There were number of acknowledgements of the structural reform path India has taken in the last few years from the global audience. India jumped 30 notches and entered the Top 100 in the World Bank’s ‘ease of doing business’ Index released in October. November saw Moody’s upgrade India’s sovereign credit ratings one notch above investment grade (Baa3 to Baa2). And finally the year ended with a report from the Centre of Economics and Business Research (CEBR) – A British consultancy – that predicted that India will leapfrog the UK and France to become the fifth largest global economy in Dollar terms in 2018.

Outlook 2018 2

2017 was a busy year in the country’s political space. The year started with BJP winning UP elections in a landslide and ended with them retaining Gujarat. In fact with 19 states now under their governments, they are the most dominant political force that we have seen in the country’s history. While all this should augur well for the current government’s re-election prospects in 2019, there are some hints of impatience from weak growth and pain taken by the unorganized sector. The government on its part has pivoted towards

boosting the rural economy and boosting housing and infrastructure spending in order to tackle these challenges.

Therefore 2018 will be about moving from disruptions into reflating the economy as the government readies itself for the 2019 elections. In this regard, the budget in Feb 2018 will be keenly watched.

Outlook 2018 3

2017 was a great year for equity fund raising. This was true of both IPOs and secondary fund raises. IPOs saw heavy demand across retail and institutional investors. From an investor’s perspective, the IPO boom has helped new companies and themes to come into the market. Given that many of these companies are profitable and with strong management credibility, they are helping broaden the investment universe.

Outlook 2018 4

7,009 1,452 1,243

13,905

26,869

66,493

CY

2012

CY

2013

CY

2014

CY

2015

CY

2016

CY

2017*

Amount Raised in IPOs

(INR cr.)

11

3 5

21

26

35

CY

2012

CY

2013

CY

2014

CY

2015

CY

2016

CY

2017*

No of IPOs

Source: Prime Database, Kotak Institutional Equities. *Data as on

12th Dec 2017. Includes only Mainstream IPOs

The financialization of savings continued apace in 2017. Mutual funds saw record flows and on the back of that DII flows into equity hit new records. Financialisation was given a strong fillip by demonetization but also helped by low inflation and the consequent fall in interest rates as well as weakness in real assets – notably gold and real estate. Despite the seeming large numbers, this trend has a lot of room to run. Indian households generate huge savings every year. Additionally equity and mutual funds allocations remain low – both in absolute terms and in comparison with other economies.

Outlook 2018 5

-10,854 -12,942

-5,090

10,315

5,425

14,092

CY 12CY 13CY 14CY 15CY 16CY 17

Domestic Flows (US mn)

DII -Domestic Institutional Investors (Includes Bank, DFIs,

Insurance, New Pension Scheme and MF).

Source: Bloomberg, Kotak Institutional Equities

2017 will be remembered as the one where volatility disappeared or ceased to matter. The volatility of the Nifty for the year at 8.9% was 60% lower than its number for 2016 and almost half its average for the last few years. That is a staggering low number and is not likely to be sustainable. The year has ended with the market close to its all-time highs and combined with low volatility, strong domestic lows, boom in IPOs does seem to suggest that a healthy correction may be due sometime in the next year.

Outlook 2018 6

Data as on 26th Dec 2017. Source: NSE, Axis AMC Internal

Analysis. Volatility is calculated based on daily return on daily

frequency for calendar year periods.

16.1% 15.1%

9.0%

CY2015 CY2016 CY2017*

Volatility

The Rupee had a positive year against the US Dollar in 2017 after falling for each of the previous 6 straight years. In reality though, the external situation has been comfortable for the last few years now – as evidenced by record external flows, all time high and rising forex reserves and a sharp improvement in the current account deficit. Few notes of worry in the new year emerge from rising crude prices and weakness in the exports sector. Further any global risk-off may impact portfolio flows into the country as well and cause volatility in the external accounts.

Outlook 2018 7

61

63

65

67

69

2015 2016 2017

Currency

Source: Credit Suisse, Bloomberg, Axis AMC Internal Analysis.

Currency is represented by USD/INR

330

350

370

390

2015 2016 2017

Forex Reserves (USD Bn)

The second half of 2017 was characterized by persistent concerns/worries about the government slipping on hits fiscal targets. A key issue is the weakness in indirect tax collections post GST implementation as things remain in a bit of a flux. The government may also choose to go easy on fiscal consolidation going forward as it gets into election mode with 2019 round the corner. The bond markets took it on the chin as a result with the 10 year selling off sharply by more than 75 bps for the year.

Outlook 2018 8

Source: Bloomberg, Axis AMC Internal Research

6.0

6.2

6.4

6.6

6.8

7.0

7.2

7.4

Dec-16 Jun-17 Dec-17

10 Year G-Sec Yield

Yields were also affected by increasing conviction in the market that inflation has bottomed and subsequently the RBI was done with its rate cutting cycle. The budget on 1st February is likely to set the stage for 2018. While the selling may have been overdone, yields are likely to remain stable around broadly these levels going forward.

The short-end of the curve has been in a see-saw mode through the last 14 months. Reading RBI moves under the new dispensation (new Governor + MPC format) has proven tricky for the markets. Things were not helped by huge swings in the liquidity environment due to demonetization. Liquidity boost into the market then caused short term rates to nose-dive – a move that was further aided by expectations of aggressive rate cuts which proved unfounded. As liquidity and rate cut expectations have normalized,

yield spreads at the short end have reached a new high for the current cycle.

Outlook 2018 9

Liquidity is represented by the spread between 3month OIS and

Repo rate. Source: Bloomberg, Axis AMC Internal Analysis

-20

-15

-10

-5

0

5

10

15

20

Dec-16 Jun-17 Dec-17

Liquidity

Weak economic growth, demonetization, favorable currency and weakness in commodity and food prices saw CPI inflation hit all-time low numbers of 1.5% during June 2017. However this level was always likely to be temporary and as we end the year, inflation has inched back to 4.9% in November. Going forward fiscal slippage, rebound in commodity prices and revival in economic growth all mean that inflation is unlikely to fall dramatically from here and is likely to hover around the higher end of the RBI target zone.

Outlook 2018 10

Source: Bloomberg, Axis AMC Internal Research. Inflation is

represented by CPI Inflation.

3.4 3.2

3.7 3.9

3.0

2.2

1.5

2.4

3.3 3.3 3.6

4.9

D-1

6

J-1

7

F-1

7

M-1

7

A-1

7

M-1

7

J-1

7

J-1

7

A-1

7

S-1

7

O-1

7

N-1

7

Inflation

Formal Inflation Target of

4% +/- 2%

Global economy is expected to have grown by 3.2% in 2017 – its strongest pace since 2011 – as most major developed economies (US/Eurozone/Japan) continue to show strength. The growth has causing monetary policy to get tighter at the margin across leading central banks – especially for the US Fed and ECB. 2018 is estimated to maintain this good growth momentum.

Outlook 2018 11

Source: Schroders, Axis AMC Internal Analysis

3.6

2.8 2.6 3.1 3.1

2.6

3.2 3.3 3

World GDP Growth (%)

Strong global growth and a mix of falling inventories and supply disruptions caused the oil market to tighten in 2017. Prices of Brent crude rose by almost 50% from its intra-year lows to over $66 per barrel. Prices have more than doubled from their lows reached in early 2016. However crude is not an isolated case. Industrial metals have largely bounced back sharply as well and so have agri-commodities. However prices remain well off their highs of the boom-era .

Outlook 2018 12

Source: Bloomberg, Axis AMC Internal Research.

Crude: Brent Crude

15

25

35

45

55

65

75

Dec-15 Dec-16 Dec-17

Crude

Brent Crude (US$/Barrel)

Average (US$/Barrel)

India Crude Basket (US$/Barrel)

Nothing came close to Bitcoin in terms of global investor frenzy in 2017 as tech disruption continued to be a dominant theme. 2018 promises to be another roller coaster ride for the crypto-currency phenomena.

Outlook 2018 13

Source: Coindesk, Axis AMC Internal Analysis

0

5

10

15

20

Dec-16 Jun-17 Dec-17Th

ou

san

ds Bitcoin

(USD)

This document represents the views of Axis Asset Management Co. Ltd. and must not be taken as the basis for an investment decision. Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors or associates shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information contained herein. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The material is prepared for general communication and should not be treated as research report. The data used in this material is obtained by Axis AMC from the sources which it considers reliable. While utmost care has been exercised while preparing this document, Axis AMC does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Investors are requested to consult their financial, tax and other advisors before taking any investment decision(s). The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time. Axis Mutual Fund has been established as a Trust under the Indian Trusts Act, 1882, sponsored by Axis Bank Ltd. (liability restricted to Rs. 1 Lakh). Trustee: Axis Mutual Fund Trustee Ltd. Investment Manager: Axis Asset Management Co. Ltd. (the AMC) Risk Factors: Axis Bank Limited is not liable or responsible for any loss or shortfall resulting from the operation of the scheme. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Outlook 2018