the silver lining - idfc first bank · 2021. 1. 13. · • the silver lining • the covid - 19...

FIRST ealthMAY 2020

www.idfcfirstbank.com

• The Silver Lining

• The Covid - 19 setback

• Equity Market - Patience To Hold

• Debt Market - Covid Maze.. Market in Haze...

Unlock yourFinancial Wellness.

The Coronavirus pandemic has triggered a crash in

stock markets worldwide. In India, it threatens to be the

third 50% fall since the turn of the millennium.

In this article, I suggest that the way to handle such

stock market crashes are through the vision to see, the

courage to buy, and the patience to hold.

How to handle stock market crashes

"Unless you can watch your stock holding decline by

50% without becoming panic-stricken, you should not

be in the stock market." - Warren Buffett

Warren Buffett’s above words have proved relevant at

the market level at least twice so far this millennium.

And we may well be in the midst of the third.

The first time was the dotcom bust followed by 9/11 –

from 1,700 levels in Feb-2000, the Nifty crashed 51% to

850 levels around Oct-2001. The second time was the

2008-09 global financial crisis – from nearly 6,300 in

early 2008, the Nifty crashed 59% to 2,600 levels by

Mar-2009. We may well be in the middle of a third such

decadal cleansing of the market – from a high of 12,300

in Jan-2020, Nifty collapsed 38% to 7,600 levels in just

over two months, before recovering somewhat.

The key question – how should investors handle such

stock market crashes?

This question can be addressed from the perspective of

two kinds of investors –

1. Existing investors i.e. those already invested; and

2. Prospective investors i.e. those wanting to invest

Existing investors may well be advised to heed

Buffett’s words and stay invested through the market

cycles. The only pre-condition – they need to stay

invested in “wonderful” companies. As Buffett has also

said, “Time is the friend of the wonderful company, the

enemy of the mediocre.” During market crashes,

wonderful companies will at best suffer ‘quotational

loss’ i.e. temporary loss in stock price, followed by a

recovery. In contrast, mediocre companies will suffer

“permanent capital loss” i.e. loss not only in stock price

but in business value itself.

What constitutes a “wonderful” company will differ from

investor to investor. I evaluate companies using the

QGLP framework – Q for Quality of business and

Quality of management, G for Growth in earnings, and

L for Longevity of both, quality and growth. Finally, a

‘wonderful’ company, should also be a wonderful stock

i.e. all of QGL should be available at a reasonable

price, the P of QGLP.

For prospective investors, all such market crashes are

godsend opportunities for supernormal returns. They

get a chance to ride the “bottom-to-top cycle”. Thus,

from the Nifty top of 1,700 in Feb-2000, the next top was

6,300 in early 2008 i.e. 8-year return CAGR of 18%.

However, for investors who invested in the Oct-2001

Nifty bottom of 850, the 6.5-year return CAGR works out

to a massive 36%!

Likewise, from the 6,300 top in early 2008, the next top

was about 12,300 in early 2020. The top-to-top return

CAGR works out to just 6%. However, from the early

2009 bottom of about 2,600, the bottom-to-top return

works out to a decent 14%.

Going forward, say, the Nifty touches 25,000 in the next

8 years. From the Jan-2020 top of 12,300, the return

CAGR works out to 9%. However, from the bottom of

7,600, the return CAGR works out to a robust 16%.

Back to basics

Stock market crashes are best handled by getting back

to the basics of long-term investing. In his classic book,

100 to 1 in the Stock Market, Thomas Phelps has said,

“To make money in stocks, you must have a vision to

see, courage to buy and patience to hold. Patience is

the rarest of the three.”

Vision to see

This is the first and most critical step in long-term

investing. Stock market crashes are marked by a high

level of noise about the present and the near-term

future. This is where a clear vision of the long-term

future proves handy. Such a vision to see comes from

the long-period India story, what I call the NTD (Next

Trillion Dollar) Opportunity.

It took India almost 60 years to clock its first

trillion-dollar of GDP in FY08. After that, given the power

of compounding, the second trillion-dollar of GDP came

in just 7 years. Every next trillion-dollar (NTD) of India’s

GDP is expected to come in successively shorter

periods. This linear growth in GDP spells exponential

opportunity for several businesses run by

management with integrity competence and a growth

mindset.

Courage to buy

Warren Buffett has famously said, “Be fearful when

others are greedy and greedy when others are fearful”.

The courage to buy when the whole world is fearfully

selling arises from the above vision to see itself.

Experience also suggests that following a sharp

correction, most sound companies bounce back with a

vengeance across sectors.

Patience to hold

As Thomas Phelps’s quote itself says, patience to hold

is the rarest of the three attributes. During market

crashes, it is very difficult to catch the bottom. Investors

may see a further fall in the stock prices after they have

bought, testing investors’ patience. Only those investors

will emerge successfully from market crashes who have

full conviction in their vision and high level of patience to

see it become a reality.

In conclusion



third 50% fall since the turn of the millennium. Each

time, the trigger is different, but the outcome is broadly

the same – the fall is sharp but short-lived, and post the

recovery, investors enjoy a great run of the

“bottom-to-next-top” cycle.

Expect the Corona-led lock-down to disrupt Q1 of

FY21 at most. However, post that, multi-year low

prices of crude should help lead the recovery in GDP

and corporate sector profits. The time is ripe to invest

in “wonderful” companies i.e. great businesses

(preferably consumer-facing) run by great

managements.

Investors who stay put through this crisis, and have

the gumption to take advantage through staggered

allocation over the next 3-4 months, stand to benefit.























































to a massive 36%!










Back to basics







Vision to see
















mindset.

Courage to buy








Patience to hold









In conclusion














managements.




Dear Sir /Madam,

Hope you and your family are safe and healthy.

This edition of FIRSTWealth reaches you when the

world is amidst one of the biggest pandemics

encountered in recent history, with unprecedented

ferocity and uncertainty around its impact. India too

is grappling with the health scare and the subsequent

economic slowdown while earnestly making efforts

to control Covid - 19.

The silver lining-

Medical fraternity is putting all its might to formulate

vaccination to contain Covid - 19 spread, and we are

hopeful that the virus will soon be an event of the

past. Policymakers have taken three-fold approach

to mitigate its impact 1) Lockdown to control the

spread of the disease, 2) Fiscal support to stressed

households and businesses and 3) Monetary policy

actions to ensure smooth market functioning.

Simultaneously, we have some encouraging news to

share from our Bank. A brief snapshot of our FY20

performance:

• The strong growth of CASA of ` 4,631 Cr during

the quarter ending on 31st March 2020 resulted in

significant improvement of CASA Ratio of the Bank.

The Silver LiningAmit Kumar - Head of Retail Liabilities, IDFC FIRST Bank

CASA ratio reached 32.03% as on 31st March 2020 as compared to 24.06% as on 31st

December 2019, an improvement of 8% Q-o-Q.

• The CASA ratio of the Bank registered a strong Y-o-Y improvement to reach 32.03% as on 31st

March 2020 as compared to 11.40% as on 31st

March 2019, an improvement of 21% Y-o-Y.

• Retail Assets grew to ` 54,027 Cr as on 31st

March 2020 from ` 40,812 Cr as on 31st March

2019, a Y-o-Y growth of 32.4%.

• Wholesale Funded Assets (including stressed

equity and security receipts) reduced to ` 40,415

Cr as on 31st March 2020 from ` 56,665 Cr on

31st March 2019, a Y-o-Y reduction of 29%

• Liquidity Coverage Ratio (LCR) of the Bank at 31st March 2020 was strong at 140% as

against 114% on 31st December 2019.

• The Bank continues to remain well-capitalized with Common Equity ratio (CET1) estimated to be around 13% on 31st March 2020.

I am pleased to share another key development

where our Fixed Deposit Program of ` 50,000

Crores has been rated ‘FAAA/Stable' rating by

CRISIL. We thank you for all your trust and

2

continued support. It encourages us to strive

harder to live up to your expectations.

Also, encapsulating a few key highlights of our last

investment strategy note for our wealth

management clients:

The current crude oil crisis and post-pandemic

change in global economic dynamics do indicate

a few positive takeaways for India that we believe

should be leveraged upon:

• Lower oil import bill due to lower crude oil prices

would give the much required cushion to the

government on fiscal interventions

• Manufacturing shift to India could be a reality in

the wake of talks around China plus one

manufacturing strategy picking up momentum

• A possible increase in India’s weightage on the

MSCI Emerging Market index as reported can

attract significant FPI inflows as the market

regains stability

From the equity perspective, valuations appear

reasonable across the market cap spectrum due

to Covid - 19 fear led sell-off. Earnings downgrade

is expected in high impact sectors such as

aviation, hotels, restaurants, jewelry, retail,

shipping & ports.

On the fixed-income side, markets have remained

volatile and corporate bond spreads have

widened significantly due to redemption pressure.

Thus, on the fixed income allocation strategy we

maintain that elevated Corporate Bond spreads

(AAA) offer significant opportunity over G-sec and

repo rate in the lower end of the yield curve.

However, considering the risks arising from the

impact of Covid - 19 lockdown, we remain averse

to aggressive credit risk strategies.

I would like to conclude my note by reiterating that

asset allocation based long-term investing never

goes out of fashion and is a strategy for all

seasons. And that is exactly what has given our

client portfolios the robust foundation required to

sustain an event like this and its aftermath.

Stay healthy, stay safe.























































to a massive 36%!










Back to basics







Vision to see
















mindset.

Courage to buy








Patience to hold









In conclusion














managements.




Dear Sir /Madam,

Hope you and your family are safe and healthy.

This edition of FIRSTWealth reaches you when the

world is amidst one of the biggest pandemics

encountered in recent history, with unprecedented

ferocity and uncertainty around its impact. India too

is grappling with the health scare and the subsequent

economic slowdown while earnestly making efforts

to control Covid - 19.

The silver lining-

Medical fraternity is putting all its might to formulate

vaccination to contain Covid - 19 spread, and we are

hopeful that the virus will soon be an event of the

past. Policymakers have taken three-fold approach

to mitigate its impact 1) Lockdown to control the

spread of the disease, 2) Fiscal support to stressed

households and businesses and 3) Monetary policy

actions to ensure smooth market functioning.

Simultaneously, we have some encouraging news to

share from our Bank. A brief snapshot of our FY20

performance:

• The strong growth of CASA of ` 4,631 Cr during

the quarter ending on 31st March 2020 resulted in

significant improvement of CASA Ratio of the Bank.

CASA ratio reached 32.03% as on 31st March 2020 as compared to 24.06% as on 31st

December 2019, an improvement of 8% Q-o-Q.

• The CASA ratio of the Bank registered a strong Y-o-Y improvement to reach 32.03% as on 31st

March 2020 as compared to 11.40% as on 31st

March 2019, an improvement of 21% Y-o-Y.

• Retail Assets grew to ` 54,027 Cr as on 31st

March 2020 from ` 40,812 Cr as on 31st March

2019, a Y-o-Y growth of 32.4%.

• Wholesale Funded Assets (including stressed

equity and security receipts) reduced to ` 40,415

Cr as on 31st March 2020 from ` 56,665 Cr on

31st March 2019, a Y-o-Y reduction of 29%

• Liquidity Coverage Ratio (LCR) of the Bank at 31st March 2020 was strong at 140% as

against 114% on 31st December 2019.

• The Bank continues to remain well-capitalized with Common Equity ratio (CET1) estimated to be around 13% on 31st March 2020.

I am pleased to share another key development

where our Fixed Deposit Program of ` 50,000

Crores has been rated ‘FAAA/Stable' rating by

CRISIL. We thank you for all your trust and

3

continued support. It encourages us to strive

harder to live up to your expectations.

Also, encapsulating a few key highlights of our last

investment strategy note for our wealth

management clients:

The current crude oil crisis and post-pandemic

change in global economic dynamics do indicate

a few positive takeaways for India that we believe

should be leveraged upon:

• Lower oil import bill due to lower crude oil prices

would give the much required cushion to the

government on fiscal interventions

• Manufacturing shift to India could be a reality in

the wake of talks around China plus one

manufacturing strategy picking up momentum

• A possible increase in India’s weightage on the

MSCI Emerging Market index as reported can

attract significant FPI inflows as the market

regains stability

From the equity perspective, valuations appear

reasonable across the market cap spectrum due

to Covid - 19 fear led sell-off. Earnings downgrade

is expected in high impact sectors such as

aviation, hotels, restaurants, jewelry, retail,

shipping & ports.

On the fixed-income side, markets have remained

volatile and corporate bond spreads have

widened significantly due to redemption pressure.

Thus, on the fixed income allocation strategy we

maintain that elevated Corporate Bond spreads

(AAA) offer significant opportunity over G-sec and

repo rate in the lower end of the yield curve.

However, considering the risks arising from the

impact of Covid - 19 lockdown, we remain averse

to aggressive credit risk strategies.

I would like to conclude my note by reiterating that

asset allocation based long-term investing never

goes out of fashion and is a strategy for all

seasons. And that is exactly what has given our

client portfolios the robust foundation required to

sustain an event like this and its aftermath.

Stay healthy, stay safe.

Life has changed dramatically the world over since

the emergence of the first case of Covid - 19 in

Wuhan, China in December 2019. As we write, the

virus has infected more than 30L people worldwide

with 2L people succumbing to the disease. Given the

infectious nature of the disease, and to prevent rising

human costs worldwide, most nations have imposed

a lockdown, necessary protection but one that is

severely impacting economic activity. While Wuhan

opened up after a 76 day lockdown, significant parts

of the world are expected to remain in varying

degrees of lockdown for an uncertain number of days

ahead.

IMF, in its “World Economic Outlook” published in

mid-April 2020 pointed out that the output loss

associated with this health emergency would

significantly surpass the losses seen during the

Great Financial Crisis a decade ago. Importantly,

given the very uncertain nature of this crisis and the

need for containment measures, stimulating

economic activity through traditional monetary and

fiscal tools would prove to be challenging.

Nevertheless, the policymakers across the globe

have unleashed significant doses of monetary and

fiscal policies, hoping that the deflationary trend does

not get deeply entrenched, and also creating

enablers for an upswing once the health emergency

ends. But, at this point, no one can say with certainty

The Covid - 19 setback Indranil Pan - Chief Economist at IDFC FIRST Bank

if these measures are enough or will fall short. The

IMF, for now, projects global growth to contract

sharply by -3% in 2020, Advanced Economies to

contract by -6.1%, and Emerging Markets and

Developing Economies to contract by -1%.

Unfortunately, for India, the timing of this crisis could

not have been worse, especially at a time when

analysts like myself were sieving through data to look

for signs of green shoots, and no doubt some of

these were visible. All that stands undone as

Lockdown 1.0 is estimated to have kept almost 63%

of economic activity suspended, while during

Lockdown 2.0 we estimate that 50% of activity

continues to remain in abeyance.

To talk of policy approach in India to counter this

shutdown – monetary policy has been aggressive

enough with a 75bps cut in the repo rate. The focus

has been on preventing tightness in the financial

markets and ensure adequate liquidity for all

economic agents. The RBI has opened up special

liquidity windows – earmarked for specific sectors –

the latest being a window of ` 500bn for the MF

segment. An attempt to push up credit has been

undertaken by widening the policy corridor to 90bps -

to dis-incentivise banks from parking their surplus

liquidity back with the RBI and instead focus on

creating credit.

4

The strategy from the government’s side has been to

focus first on containment and stabilisation and then

attempt at a stimulation. This has led to a fiscal

response that might appear as timid and restrictive –

amounting to only ` 1.7trn or 0.8% of GDP, focussed

on supporting the livelihood of the economically

weakest section of the population. Given the nature

of the problem and challenges that are likely to be

faced to restart the economy, these amounts will not

be enough even for the vulnerable segment – the

migrant labourers and the daily wagers. Right now

there is little point in stimulating the economy through

tax cuts (GST etc.) as all of us are sitting at home and

these amounts will remain unutilised. The stimulus

has to come only after shops again open up and the

population steps out of their homes. Apart from such

demand-side stimulus, the government will also need

to be mindful of supporting the SMEs and the

MSMEs and could provide credit guarantees to

ensure credit flows to these sectors in an

atmosphere of general risk aversion. Interest rate

subventions, with a sunset, a clause may also be

used as another tool.

No doubt the climb out of this condition will be

arduous and the government would need to ensure

that no productive capacity is lost and no business

winds down. Consumption could also be weak for

long as the general population can exhibit ‘aversion

behaviour’ and shun crowded places and not take

any discretionary travel etc. Consumers may exhibit

caution in spending as disposable incomes are hit,

wealth effect turns negative, and some could also

start building up savings buffers for such future

events. External demand will not provide any support

as global growth is expected to be negative. Thus,

rather than one big stimulus from the fiscal side, what

may work are smaller targeted doses that can be

recalibrated to suit the requirements of the evolving

situation.

A crisis period is one with lots of learnings for the

future and these opportunities should not be lost.

First, the government needs to take a real hard look

at the health infrastructure in the country and gear up

the same. Next, there needs to be a clear policy to

provide some protection to the migrant and casual

labourer to prevent disruptions in their livelihoods, as

has happened this time around. On a positive note,

the world and India will come out of this situation and

there are some indications that the rate of infection

world over has started to soften.

Stay home, stay safe!























































to a massive 36%!










Back to basics







Vision to see
















mindset.

Courage to buy








Patience to hold









In conclusion














managements.




Life has changed dramatically the world over since

the emergence of the first case of Covid - 19 in

Wuhan, China in December 2019. As we write, the

virus has infected more than 30L people worldwide

with 2L people succumbing to the disease. Given the

infectious nature of the disease, and to prevent rising

human costs worldwide, most nations have imposed

a lockdown, necessary protection but one that is

severely impacting economic activity. While Wuhan

opened up after a 76 day lockdown, significant parts

of the world are expected to remain in varying

degrees of lockdown for an uncertain number of days

ahead.

IMF, in its “World Economic Outlook” published in

mid-April 2020 pointed out that the output loss

associated with this health emergency would

significantly surpass the losses seen during the

Great Financial Crisis a decade ago. Importantly,

given the very uncertain nature of this crisis and the

need for containment measures, stimulating

economic activity through traditional monetary and

fiscal tools would prove to be challenging.

Nevertheless, the policymakers across the globe

have unleashed significant doses of monetary and

fiscal policies, hoping that the deflationary trend does

not get deeply entrenched, and also creating

enablers for an upswing once the health emergency

ends. But, at this point, no one can say with certainty

if these measures are enough or will fall short. The

IMF, for now, projects global growth to contract

sharply by -3% in 2020, Advanced Economies to

contract by -6.1%, and Emerging Markets and

Developing Economies to contract by -1%.

Unfortunately, for India, the timing of this crisis could

not have been worse, especially at a time when

analysts like myself were sieving through data to look

for signs of green shoots, and no doubt some of

these were visible. All that stands undone as

Lockdown 1.0 is estimated to have kept almost 63%

of economic activity suspended, while during

Lockdown 2.0 we estimate that 50% of activity

continues to remain in abeyance.

To talk of policy approach in India to counter this

shutdown – monetary policy has been aggressive

enough with a 75bps cut in the repo rate. The focus

has been on preventing tightness in the financial

markets and ensure adequate liquidity for all

economic agents. The RBI has opened up special

liquidity windows – earmarked for specific sectors –

the latest being a window of ` 500bn for the MF

segment. An attempt to push up credit has been

undertaken by widening the policy corridor to 90bps -

to dis-incentivise banks from parking their surplus

liquidity back with the RBI and instead focus on

creating credit.

5

The strategy from the government’s side has been to

focus first on containment and stabilisation and then

attempt at a stimulation. This has led to a fiscal

response that might appear as timid and restrictive –

amounting to only ` 1.7trn or 0.8% of GDP, focussed

on supporting the livelihood of the economically

weakest section of the population. Given the nature

of the problem and challenges that are likely to be

faced to restart the economy, these amounts will not

be enough even for the vulnerable segment – the

migrant labourers and the daily wagers. Right now

there is little point in stimulating the economy through

tax cuts (GST etc.) as all of us are sitting at home and

these amounts will remain unutilised. The stimulus

has to come only after shops again open up and the

population steps out of their homes. Apart from such

demand-side stimulus, the government will also need

to be mindful of supporting the SMEs and the

MSMEs and could provide credit guarantees to

ensure credit flows to these sectors in an

atmosphere of general risk aversion. Interest rate

subventions, with a sunset, a clause may also be

used as another tool.

No doubt the climb out of this condition will be

arduous and the government would need to ensure

that no productive capacity is lost and no business

winds down. Consumption could also be weak for

long as the general population can exhibit ‘aversion

behaviour’ and shun crowded places and not take

any discretionary travel etc. Consumers may exhibit

caution in spending as disposable incomes are hit,

wealth effect turns negative, and some could also

start building up savings buffers for such future

events. External demand will not provide any support

as global growth is expected to be negative. Thus,

rather than one big stimulus from the fiscal side, what

may work are smaller targeted doses that can be

recalibrated to suit the requirements of the evolving

situation.

A crisis period is one with lots of learnings for the

future and these opportunities should not be lost.

First, the government needs to take a real hard look

at the health infrastructure in the country and gear up

the same. Next, there needs to be a clear policy to

provide some protection to the migrant and casual

labourer to prevent disruptions in their livelihoods, as

has happened this time around. On a positive note,

the world and India will come out of this situation and

there are some indications that the rate of infection

world over has started to soften.

Stay home, stay safe!























































to a massive 36%!










Back to basics







Vision to see
















mindset.

Courage to buy








Patience to hold









In conclusion














managements.




The millennium 50% crash #1 – post the dotcom bust and 9/11

The millennium 50% crash #2 – the global financial crisis of 2008

The millennium 50% crash #3 – the Coronavirus crisis of 2020























Equity Market - Patience To Hold Mr. Raamdeo Agrawal, Chairman, Motilal Oswal Financial Services

6

































to a massive 36%!










Back to basics







Vision to see
















mindset.

Courage to buy








Patience to hold









In conclusion














managements.


























7

































to a massive 36%!










Back to basics







Vision to see
















mindset.

Courage to buy








Patience to hold









In conclusion














managements.


























































to a massive 36%!










Back to basics







Vision to see
















mindset.

8

Courage to buy








Patience to hold









In conclusion














managements.


























































to a massive 36%!










Back to basics







Vision to see
















mindset.

Courage to buy








Patience to hold









In conclusion














managements.




We have seen unprecedented events hit the medical

world in the form of Covid - 19 which has had its own

set of repercussions for the world financial markets

too. Over 75 central bankers across the world have

eased interest rates and we have seen a glut of

liquidity slosh the banking system

In INDIA too we saw a series of measures including

rate cuts to calm the nerves of the financial market.

Key to note however was the TLTRO (Targeted Long

Term Repos Operations) aimed at providing funds

to the corporate sector in India. We have seen a

slump in economic activity across segments and

timely funding from banks would, therefore do its

confidence-boosting job to some extent. The debate

between lives and livelihood is a raging one and

there is no one size fits all solution of the same.

We have seen developed countries be a tad more

aggressive in fiscal easing – especially the US, which

has also stepped in to buy BB-rated bonds among

other fiscal measures

There is a need to has some fiscal stimulus - and a

broad-based one to combat this deadly virus.

However, the government would be mindful of its

possible implications on the government bond yield

curve, which anyways are not finding durable takers

in domestic markets. Add to it, foreign portfolio

Debt Market - Covid Maze.. Market in Haze...Lakshmi Iyer - CIO & Head Products - Kotak Mutual Fund

investors (FPIs) have been net sellers of both India

debt and equities. RBI could be a possible saviour

here by buying bonds directly from the government

or from the secondary market to anchor sovereign

bond yields - which look otherwise attractive given

the low funding rates available.

The corporate bond market, on the other hand, is

singing a different song. We saw a recent episode of

one of the fund houses announce a winding down of

its 6 fixed income scheme towards the end of April.

Panic-stricken investors rushed to the exit gate and

redeemed across the MF industry- especially in

credit risk fund. This led to higher yields in the

corporate bond segment and we have seen yields

rise across Rating curve AAA and non AAA. Is this

investor behaving justified? Most definitely NOT.

We believe that isolated cases should be seen more

as an exception rather than the rule. Investors should

focus on asset quality and asset liquidity while

making an investment decision as also while making

an Exit from a fund. One cannot paint the canvas

with the same brush - which is a typical reaction post

any event risk in the markets. Panic causes pain

in portfolio returns - and exit makes that pain

permanent. Caution and panic have a very thin line of

differentiation.

9

Today, the gap in yield between a AAA and non AAA

asset is anywhere between 2-5%!

Fear across the board is offering an opportunity to

participate in the market. Flight to quality will be the

theme for 2020. Whoever said quality means only

AAA asset? There are well-managed companies in

non-AAA space too which do belong to big

conglomerates and are adequately capitalised.

We believe that fixed income has the potential to

offer risk-adjusted returns in today’s times. Important

is to assess one’s investment horizon and more

important one’s risk appetite. DIY (do it yourself) in

such markets may be cumbersome, hence do not

feel hesitant to engage the services of your advisor.

Important to remember - it is not the strongest of

species that survive, nor the most intelligent, but the

one most responsive to change.

Stay safe and healthy. Happy Investing























































to a massive 36%!










Back to basics







Vision to see
















mindset.

Courage to buy








Patience to hold









In conclusion














managements.




We have seen unprecedented events hit the medical

world in the form of Covid - 19 which has had its own

set of repercussions for the world financial markets

too. Over 75 central bankers across the world have

eased interest rates and we have seen a glut of

liquidity slosh the banking system

In INDIA too we saw a series of measures including

rate cuts to calm the nerves of the financial market.

Key to note however was the TLTRO (Targeted Long

Term Repos Operations) aimed at providing funds

to the corporate sector in India. We have seen a

slump in economic activity across segments and

timely funding from banks would, therefore do its

confidence-boosting job to some extent. The debate

between lives and livelihood is a raging one and

there is no one size fits all solution of the same.

We have seen developed countries be a tad more

aggressive in fiscal easing – especially the US, which

has also stepped in to buy BB-rated bonds among

other fiscal measures

There is a need to has some fiscal stimulus - and a

broad-based one to combat this deadly virus.

However, the government would be mindful of its

possible implications on the government bond yield

curve, which anyways are not finding durable takers

in domestic markets. Add to it, foreign portfolio

investors (FPIs) have been net sellers of both India

debt and equities. RBI could be a possible saviour

here by buying bonds directly from the government

or from the secondary market to anchor sovereign

bond yields - which look otherwise attractive given

the low funding rates available.

The corporate bond market, on the other hand, is

singing a different song. We saw a recent episode of

one of the fund houses announce a winding down of

its 6 fixed income scheme towards the end of April.

Panic-stricken investors rushed to the exit gate and

redeemed across the MF industry- especially in

credit risk fund. This led to higher yields in the

corporate bond segment and we have seen yields

rise across Rating curve AAA and non AAA. Is this

investor behaving justified? Most definitely NOT.

We believe that isolated cases should be seen more

as an exception rather than the rule. Investors should

focus on asset quality and asset liquidity while

making an investment decision as also while making

an Exit from a fund. One cannot paint the canvas

with the same brush - which is a typical reaction post

any event risk in the markets. Panic causes pain

in portfolio returns - and exit makes that pain

permanent. Caution and panic have a very thin line of

differentiation.

10

Today, the gap in yield between a AAA and non AAA

asset is anywhere between 2-5%!

Fear across the board is offering an opportunity to

participate in the market. Flight to quality will be the

theme for 2020. Whoever said quality means only

AAA asset? There are well-managed companies in

non-AAA space too which do belong to big

conglomerates and are adequately capitalised.

We believe that fixed income has the potential to

offer risk-adjusted returns in today’s times. Important

is to assess one’s investment horizon and more

important one’s risk appetite. DIY (do it yourself) in

such markets may be cumbersome, hence do not

feel hesitant to engage the services of your advisor.

Important to remember - it is not the strongest of

species that survive, nor the most intelligent, but the

one most responsive to change.

Stay safe and healthy. Happy Investing























































to a massive 36%!










Back to basics







Vision to see
















mindset.

Courage to buy








Patience to hold









In conclusion














managements.




11

COVID-19: Impact on Global EconomyDeveloped Economies likely to de-grow; Emerging Markets to still witness some growth

Response from Key Central Banks: Focus on Maintaining Liquidity to help Absorb Economic Shocks

Source: CIEL, IMF, Moody’s, S&P Global

Source: IMF, RBI

Covid - 19 containment measures, including strict lockdown and quarantine measures, put in place by governments, likely to impact economic activities and growth

European countries such as Italy, Spain, and France are in acute phases of the epidemic, followed by the United States, where the number of active cases are growing the fastest

Positive Trends:

United States

Fiscal Measures -

- US announced historic $2.3 Trillion (~11% of GDP) stimulus package

Key Monetary Policy Measures Taken By The US Fed -

- Slashed its benchmark interest rate to 0-0.25%, a $700 billion stimulus program

- Fed unveiled $2.3 Trillion stimuli targeted at mid-size businesses and purchase notes directly from states and counties

- Fed to purchase an unlimited amount of Treasuries and securities tied to residential and commercial real estate to prevent credit crunch

- New lending programmes worth $300 Billion to support financial markets

Euro Zone

Fiscal Measures -

- Announced fiscal package to the tune of €37 Billion (~0.3% of 2019 EU27 GDP)

Key Monetary Policy Measures Taken By ECB -

- Additional €750 Billion ($820 Billion) asset purchase program of private and public sector securities (Pandemic Emergency Purchase Program) until end of CY20

- Additional asset purchases worth €120 Billion ($132 Billion) until end of CY20

- Left the rate on main refinancing operations at a record low of 0%

- Relaxation of collateral standards for Eurosystem refinancing operations (MROs, LTROs, TLTROs)

Japan

Fiscal Measures -

- Announced fiscal package of ¥446 Billion (~0.1% of GDP)

Key Monetary Policy Measures Taken By BoJ -

- BoJ pledged to buy ¥200 Bn ($1.90 Billion) of 5-10-year Japanese Govt bonds

- Injected an additional ¥1.5 Trillion in two-week loans

- An increase in the annual pace of BoJ’s purchases of Exchange Traded Funds (ETFs) and Japan-Real Estate Investment Trusts (J-REITs)

- Increase in the targeted purchase of commercial paper and corporate bonds

India

Fiscal Measures -

- The government announced a ` 1.7 Trillion relief package (~1% of GDP)

Key Monetary Policy Measures Taken By RBI -

- Repo rate cut from 5.15% to 4.4%, reverse repo rate cut from 4.9% to 4%

- 100 bps reduction in CRR for banks to 3% to encourage lending

- MSF raised from 2% of SLR to 3% (up to June 3, 2020)

- LTROS of up to 3-yrs tenor for a total amount of ` 1 Lakh Crore

- 3-month moratorium on loans with no credit downgrading

Modest improvement in economic activity in China is reflected in daily satellite data on nitrogen dioxide concentrations in the local atmosphere—a proxy for industrial and transport activity

Recovery in China is encouraging, suggesting that containment measures can succeed in controlling the epidemic and pave the way for a resumption of economic activity

GDP forecast by major rating agencies indicates that despite the slowdown, India to remain amongst the fastest growing economies in CY20

GDP Growth Projection For CY 2020Area Moody’s S&P

World -0.5 0.4

USA -2 -1.3

Eurozone -2.2 -2

Japan 0 -1.2

China 3.3 2.9

India 2.5 3.5























































to a massive 36%!










Back to basics







Vision to see
















mindset.

Courage to buy








Patience to hold









In conclusion














managements.




COVID-19: Advantage IndiaSilver Lining amidst Global Slowdown

FPI Flows: Important Drivers of Indian Stock Markets

MSCI Rejig - MSCI India’s weight in the EM index is expected to rise to ~9.6%, which would imply inflows of $7.1 billion into the Indian Equity Market

Easy Monetary Policy - The US Federal Reserve has opened up the liquidity tap indefinitely, and domestically RBI is likely to keep policy rates low and widen the surplus liquidity in the system. Excess liquidity is likely to chase EM equities for higher returns

Medical Solution - Appetite for risky assets likely to improve as concerns around the spread of Covid - 19 are contained with the development of a vaccine or medication against it

India - Importing ~85% of its Oil Requirement, to benefit from Oil Prices Slump

Likely to lower oil import bill ($10/barrel saving = $ 15 billion Import savings) & ease of CAD & WPI (10.36% weight)

Excise duty increase by the government to lead to windfall gains & can be used to bridge fiscal deficit or welfare spends

Slowing global demand to help sustain lower oil prices, despite future production cuts by OPEC

India to emerge as a major beneficiary of China Plus-One Strategy for Global Cos.

Local supply chain being set up by Indian businesses to de-risk from China, lower manufacturing costs, & escape high import duties levied by government

Competitive advantage in terms of land & labour availability, improving ease of doing business and government's infra push (e.g. USD 6 billion announced last month to boost electronics manufacturing) makes India as global manufacturing destination to diversify supply chains

Competitive infrastructure & incentives like duty-free exports, tax benefits etc. provide export manufacturing opportunities for foreign firms in SEZs & free trade zones

12

Gold: Always a Safe Haven Asset

Gold movement has been negatively co-related to real interest rate since the first QE; with central banks expected to print more money, case for gold becomes stronger

Recent volatility in gold prices has been driven by massive liquidation across all assets, gold has likely been used to raise cash to cover losses in other asset classes

The deceleration in economic growth may impact consumer demand and gold’s volatility may remain high, but high risk levels combined with widespread negative real rates and quantitative easing likely to support gold demand as a safe haven

Absolute Returns in % terms, INR Returns*Ongoing Covid-19 Crisis

Source: World Gold Council, Data as on 31st March 2020

Recessionary PeriodsGold

PerformanceSensex

Performance

March 2001 - Nov 2001

Dec 2007 - June 2009

*Jan 2020 - March 2020

6.51%

44.53%

11.96%

-29.14%

-26.06%

-28.66%

Our Equity StrategySell Off Across Sectors and Market Caps As FIIs Flee Risky Assets; DII Inflows Remain Strong

Positive

Neutral

Negative

Valuations

Earnings

Volatility

1. Valuations appear attractive across the market cap spectrum due to Covid - 19 fear led sell-off in EM equities

2. Fiscal and monetary stimulus packages, along with the possibility of a current account surplus owing to crude decline to aid substantially

1. Highly leveraged companies or those with high fixed costs as a percentage of revenues likely to report lower income margins, given topline growth headwinds due to economic downturn

2. Earnings downgrade may be expected in high impact sectors such as aviation, hotels, restaurants, jewellery, retail, shipping & ports

1. FPIs liquidation of INR assets to persist in near-term as uncertainties unfold; further fiscal & monetary measures to dictate flows

2. Volatility likely to remain elevated as global trade data & its implications get clearer for market participants

1

2

3

Our Equity Allocation Strategy

Our Investment Strategy

1. India, as well as global markets, seem to have witnessed the steepest fall in recent history – making valuations look extremely attractive across market caps

2. Large-caps expected to lead the road to recovery with some bit of lag in broader market participation – ideal to start with large-cap allocations followed by Mid and Small caps subsequently

3. ‘Risk Mitigation’ of client portfolios has been our endeavour all through our journey – continued focus on Hedge and Long-short strategies has helped us safeguard client portfolios

Domestic indices fell sharply owing to Covid - 19 led economic disruptions and slowdown

Foreign Portfolio Investors (FPIs) logged the worst sell-off last month with equity markets witnessing record losses due to the rising number of Covid - 19 cases across

Banking and finance counters witnessed heavy selling pressure arising from concerns over a deterioration in asset quality due to the disruption in economic activities

Intermittent gains in the global equities after the US government announced a $2.3 trillion stimulus package to soften the economic blow of Covid - 19 outbreaks supported the local indices along with the inflows from the Domestic Institutional Investors (DIIs)

-36.23-34.00

-30.47-29.64-28.90

-27.98-27.42

-25.91-23.85-23.23-23.03-22.85

-18.64-18.52-17.85

-14.75-14.31

-9.72-6.47

S&P BSE Realty Index - TRI

S&P BSE BANKEX - TRI

S&P BSE AUTO Index - TRI

S&P BSE Small-Cap - TRI

S&P BSE METAL Index - TRI

S&P BSE Capital Goods - TRI

S&P BSE Mid-Cap - TRI

S&P BSE Consumer Durables - TRI

S&P BSE 500 - TRI

S&P BSE 200 - TRI

NIFTY 50 - TRI

S&P BSE Sensex - TRI

S&P BSE Power Index - TRI

S&P BSE OIL & GAS Index - TRI

S&P BSE Telecom - TRI

S&P BSE TECk Index - TRI

S&P BSE IT

S&P BSE Health Care - TRI

S&P BSE FMCG

Sector Performance – March 202027921.7

-61972.75-80000

-60000

-40000

-20000

0

20000

40000

MF FII Trend (Cr)MF FII

Data as on 31st March 2020; Source: Accord Fintech

13

Our Debt StrategyDebt Markets Turned Volatile As FIIs, Global Central Banks, RBI & Government Actions Come Into Play

Our Fixed Income Allocation Strategy

Positive

Positive

Neutral

Interest Rates

Liquidity

Credit Risk

1

2

3

1. RBI announced a cut in the repo and reverse repo rate, reduction in the CRR by 100 bps to encourage lending; lending rates likely to go down as transmission improves

2. Interest rates to remain low as easy monetary policies prevail globally to support the economies

1. RBI’s aggressive rate cut with an injection of liquidity of ` 3.74 lakh crores in the system under the new program likely to channelize the abundant liquidity meaningfully

2. With an expansion of LTRO, banks are required to source 50% of their incremental holdings from the secondary market, this will provide substantial liquidity to other market participants

1. Credit remains unattractive and expensive with risk-reward being unsupportive as the slowdown is likely to increase balance sheet stress

2. Due to a halt in economic activity, the coming year is likely to see more downgrades than upgrades

Our Investment Strategy

1. Significant opportunity in the elevated Corporate Bond spreads (AAA) over G-Sec and Repo Rate in the lower end of the yield curve (Average Maturity 1 to 2 years)

2. We continue to remain averse to Credit Risk (A & below-rated securities) considering the risks arising from the impact of Covid - 19 lockdown

3. IDFC FIRST Bank FD for tenure 1 to 2 years & IDFC FIRST Bank Savings Account for tenure < 1 year (Interest up to 7% pa) are preferred

4. Good quality Bond funds, Dynamic Allocation funds and Banking / PSU strategies are preferred for long term allocations

6.12%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

India - 10 Year Gsec

-4831.9

-60375.81-80000

-60000

-40000

-20000

0

20000

40000

60000

MF FII Debt Trend (Cr)

MF FII

Yields in %

Global Bond Yields 7-Apr-20 31-Mar-20 1 M 1Y

US 10 – Year 0.71 0.67 1.24 2.5

UK 10 – Year 0.41 0.35 0.44 1.12

Germany 10 – Year -0.31 -0.47 -0.63 0.01

Japan 10 – Year 0.01 0.01 -0.16 -0.04

India 10 – Year 6.40 6.12 6.39 7.33

Globally, bond yields fell as major central banks cut the monetary policy rates

Debt markets remained volatile and corporate bond spreads widened significantly during the month due to redemption pressure

Much needed relief from RBI as it infused ` 3.74 lakh crore of liquidity through various measures – Targeted Long Term Repo Operations of 3 year tenor of ` 1 Lakh Cr used to buy corporate bonds and commercial papers aided in the contraction of the spreads

10 Year Gsec yields have risen again as Centre frontloaded the FY21 borrowing (` 600 bn from the market in April'20 out of the Centre's plan of ` 4.88 trn borrowing through bonds) and ruled out a direct placement of debt with the central bank

Source: IDFC MF, Bloomberg, data as on 31st March 2020

14

Strategy of the Quarter

IIFL High Conviction Fund – Cat III AIF

Strategy Round-up:

The investment strategy of the fund will be to seek long-term capital appreciation, by investing in equity, equity-related and other permissible securities of companies.

Investment Philosophy:

It is a High Conviction Fund where investment is concentrated on 15-20 companies. Follows a robust investment framework at AMC level and unique strategy at the fund level, briefly

described as follows; 40-70% are secular growth companies - companies delivering 15% PAT and ROE growth rates,

playing out India’s secular upward growth shift. 30-50% are cyclical and defensive growth companies - high growth companies that typically

have high capital expenditures and hence a lower ROE. 0-10% value trap companies - low growth rates and ROE; these are typically avoided across

public equity strategies. The fund follows a mix of top-down (macro analysis to identify sectors) and bottom-up approach

(microanalysis to pick stocks within these sectors). The scheme will not have more than 10% allocation to any single security after full deployment

Identifying a high growthindustry or sector

Companies with a competitive advantage and consistent

higher ROE than peers

Companies with stronggovernance focused on

prudent capital allocation,in line with minority shareholder interest

Companies with attractivevaluations offering a favourable

risk-reward ratio

15

*performance as on 30th April, 2020

Performance of IIFL High Conviction Fund:

Scheme Name Performance (%)

1M 2M 3M YTD Since InceptionStrategy 12.16

14.71 -20.57-11.93

-19.94-18.07

-22.12-17.47

-20.01-17.19BSE 200 TRI

Luxe Spotlight -Virtual Museum Tours

We have always strived to bring you the best of both worlds. This time around, we treat your senses to 4 captivating virtual museum tours, that you could enjoy from the comfy nook of your homes.

Making the MET 1870s – 2020April marked the 150th anniversary of the foundation of the renowned Metropolitan Museum of Art in New York. Sit back and trace the historical transformation of this iconic cultural landmark from 1870-2020 online.

1

2

3

Mars as Art: Beauty and Discovery on the Red PlanetA magnetic bed that floats two feet above the surface might sound too good to be true. However for a hefty price of $1.6 million you too can sleep on the clouds.

4

https://artsandculture.google.com/exhibit/making-the-met-1870%E2%80%932020/GQLS-pBlvVqAJQ

https://artsandculture.google.com/exhibit/mars-as-art-beauty-and-discovery-on-the-red-planet/mQIynG8hjzJmLA

Astronomy at the Palace of Versailles The former royal residence of Louis XIV, this historic palace is as much a harbinger of science as it is an abode of art. Take this fascinating journey through this online photo gallery to find out just how.https://artsandculture.google.com/exhibit/sciences-at-versailles-part-2-astronomy-queen-of-sciences%

C2%A0/fgLSnpjEa-CTKw

The creation of the Statue of Liberty | Musée des arts et métiersFlip through the pages of history and look behind the grandeur of the famous statue of liberty in photographs – online visual storytelling at its best.https://artsandculture.google.com/exhibit/the-construction-of-the-statue-of-liberty/QRWHcXMU

16

DISCLAIMERThis document has been prepared by IDFC FIRST Bank Limited based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. The contents of this report are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Nothing in the report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to the investor's circumstances. While due care has been taken in preparing this document, IDFC FIRST Bank and its affiliates accept no liabilities for any loss or damage of any kind arising out of any inaccurate, delayed or incomplete information nor for any actions taken in reliance thereon.

The securities/funds discussed and opinions expressed in this mail may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives and financial position. Please be informed that past performance is not necessarily a guide to future performance. Actual results may differ materially from those set forth in projections. Unless expressly stated, the performance of products is not guaranteed by IDFC FIRST Bank or its affiliates. The information provided may not be taken in substitution for the exercise of independent judgement by any investor.

This document is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country, or other jurisdiction, where such distribution, publication, availability, or use would be contrary to law, regulation or which would subject IDFC FIRST Bank and affiliates to any registration or licensing requirement within such jurisdiction.

Please note that Mutual Fund Investments are subject to market risks, please read the Statement of Additional Information and Scheme Information Document carefully before investing for full understanding and detail. IDFC FIRST Bank Limited shall receive brokerage for Mutual fund transactions through AMC’s as permitted under the extant regulations. For the applicable brokerage rates for each transaction, please visit idfcbank.com or contact your IDFC FIRST Bank representative.

The information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied, or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of IDFC FIRST Bank Limited. IDFC FIRST Bank limited accepts no liability nor responsibility whatsoever with respect to the use of the information provided hereinabove.

The customers acknowledge that none of the Information has been subject to verification and neither IDFC FIRST Bank nor any of its representatives accepts responsibility for or makes any representation, expressed or implied, or gives any warranty with respect to the accuracy or completeness of the Information. The Customers shall be responsible for making their own decision on the Information and acknowledge that it shall not have any right of action against IDFC FIRST Bank or any of its Representatives in relation to the accuracy, reasonableness, or completeness of any of the Information. Accordingly, IDFC FIRST Bank and any of its Representatives will not be liable for any direct, indirect, or consequential loss or damage suffered by any person as a result of any reliance on any statement contained in or omitted from the Information.

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the silver lining - idfc first bank · 2021. 1. 13. · • the silver lining • the covid - 19...

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