Fixed Income Markets - November 2008

8/14/2019 Fixed Income Markets - November 2008

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Fixed Income Markets

At a turning point ?


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2

Key factors affecting interest rates Inflation

Commodity prices Currency Base effect

Fiscal Deficit Subsidies Oil, Fertilizer Elections - Farm loan waiver Sixth Pay Commission

Liquidity Money supply, elections


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3

Outlook in summary

We expect the fiscal deficit (including the off balancesheet items), the current account deficit and theinflation to peak out in the current financial year (FY

09)

In the short term, the markets are always uncertain andwill continue to react to newsflow

However, over medium term, yields are likely to fall

Similarly, over the medium term, Corporate spreadsshould also moderate


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4

Inflation to moderate significantly in

FY10 US / Euro region / Japan all major economies are

slowing down. This should lead to lower commodityprices. Oil, Steel & Chemicals constitute 27% of the WPI

basket. ( refer slides 28 - 32 in Annexure ) Monsoons have been close to normal and should have asoothing effect on agri-commodity prices

With the Indian story still intact, FII flows likely toimprove by next year. FDI inflows are strong. Along with

lower oil, INR likely to appreciate from current levels Base effect to moderate inflation sharply in the next six

months


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5

Currency/BOP should peak in the

FY09 INR has sharply depreciated against the USD (24.76%)

in the current year till date* Some of the reasons for the above are:

High oil prices, resulting in current account deficit likely totouch 2.5% of GDP in FY09

FII outflows However we expect INR to start appreciating soon due

to: Likely lower oil prices

From FY10-11, all increase in domestic oil consumptionwould be met through domestic production by CAIRN and Reliance (excluding gas)

Given higher domestic capacities and some demandcompression locally, current account deficit shouldimprove to below 1% of GDP by FY11

* As on November 24, 2008.


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6

Fiscal Deficit Due to coincidence of multiple factors, centres fiscal

deficit (including off balance sheet items) is likely toexceed 6%?

Exceptional Items (Rs crs) FY09E FY10E FY11E

Farm Loan Waiver 22900 13600 27900Sixth Pay CommissionArrears 11760 17640

Tax on Full Arrears @ 30.99% -9111Salary Increase 15700 15700 15700

Oil Bonds 66000 15000 15000Fertiliser subsidy / Bonds 55000 0 0Total 162249 61940 58600

Est. Nominal GDP (growth 15%) 4949202 5691582 6545320Exceptional items as a % of GDP 3.28% 1.09% 0.90%

Source: Finance Ministry, In-House ResearchE Estimates


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Fiscal Deficit likely to peak in FY09Fiscal Deficit and OffBalanceSheet Items How do they stack up?

Fiscal Deficit may be mitigated to an extent by 3G license fee / special

dividend and sale of assets


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Liquidity

RBI has adopted tight liquidity policy due to the highinflation and also due to high sensitivity of inflation(impending elections next year)

In the remaining part of current financial year and nextfinancial year, as inflation eases and elections get over,liquidity should ease

FII flows, as and when they resume, should add to theliquidity


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Corporate spreads

Factors affecting the corporate spreads High absolute levels of interest rates Tight liquidity

High SLR (24%) and CRR (5.5%) are resulting in crowdingout of private sector by the banking sector. It is alsoincreasing the cost of borrowing of the banking sector

Off balance sheet funding of the fiscal deficit in the form of buying oil bonds, giving loans to oil and fertilisercompanies is aggravating the problem

Corporate sector has undertaken large capex and needshuge funding. The poor equity market sentiment as wellas the restriction on ECBs is increasing the need for debtfinancing


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5 year Corporate Bond Spread

peaking?

Source: Bloomberg. As on November 24, 2008.

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

3 1

- D e c - 0

1

3 1

- M a r - 0 2

3 0

- J u n - 0

2

3 0

- S e p - 0

2

3 1

- D e c - 0

2

3 1

- M a r - 0 3

3 0

- J u n - 0

3

3 0

- S e p - 0

3

3 1

- D e c - 0

3

3 1

- M a r - 0 4

3 0

- J u n - 0

4

3 0

- S e p - 0

4

3 1

- D e c - 0

4

3 1

- M a r - 0 5

3 0

- J u n - 0

5

3 0

- S e p - 0

5

3 1

- D e c - 0

5

3 1

- M a r - 0 6

3 0

- J u n - 0

6

3 0

- S e p - 0

6

3 1

- D e c - 0

6

3 1

- M a r - 0 7

3 0

- J u n - 0

7

3 0

- S e p - 0

7

3 1

- D e c - 0

7

3 1

- M a r - 0 8

3 0

- J u n - 0

8

3 0

- S e p - 0

8

Spread for 5yr Corp Bond (%)


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10 yr Corporate Bond Spread

peaking?


-0.50

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

3 1 - D e c - 0

1

3 1 - M a r - 0 2

3 0 - J u n - 0

2

3 0 - S e p - 0

2

3 1 - D e c - 0

2

3 1 - M a r - 0 3

3 0 - J u n - 0

3

3 0 - S e p - 0

3

3 1 - D e c - 0

3

3 1 - M a r - 0 4

3 0 - J u n - 0

4

3 0 - S e p - 0

4

3 1 - D e c - 0

4

3 1 - M a r - 0 5

3 0 - J u n - 0

5

3 0 - S e p - 0

5

3 1 - D e c - 0

5

3 1 - M a r - 0 6

3 0 - J u n - 0

6

3 0 - S e p - 0

6

3 1 - D e c - 0

6

3 1 - M a r - 0 7

3 0 - J u n - 0

7

3 0 - S e p - 0

7

3 1 - D e c - 0

7

3 1 - M a r - 0 8

3 0 - J u n - 0

8

3 0 - S e p - 0

8

Spread for 10yr Corp Bond (%)


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Optimal Investment Strategy over

medium term


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Basis for indicative optimal portfolio* Over the medium term, inflation should stabilise around

5%. The fiscal deficit should also come down as also laidin the Fiscal Responsibility and Budget Management(FRBM) Act.

Over the medium term, the absolute yields as well ascorporate spreads should also fall

Over the medium to long term, India is fast catching upwith the bigger economies of the world due to thehigher growth rates and may soon be the ninth largesteconomy in the world. Hence the inflation and interestrates should also align with the larger economies atsome point. ( refer slides 34 and 35 in Annexure )

*Portfolio of Investor and not Mutual Fund.


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Indicative optimal portfolio* In such a scenario, we think it is time to add duration to

portfolios

An indicative optimal portfolio, based on current G-sec

yields and corporate spreads is as follows:G-sec 20%, Corporate bonds 80%Modified Duration of 6.40Portfolio yield of 9.75%



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Indicative optimal portfolio* performance over1 year

Assumption:

Expenses have not been considered in the above analysis

Green cell indicate the most likely scenarios to investors in ouropinion

This table is for illustration purpose only. HDFC Mutual Fund is not guaranteeing, promising orforecasting any returns on investments. All the above returns have been annualised.



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16


Assumption:






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Assumption:





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HDFC Income Fund Current

Strategy HDFC Income Fund shall aim to adopt the indicative

optimal portfolio strategy with 20-30% in G-secs* and70-80% in corporate bonds

The Fund would aim to keep the modified duration inthe range of 6-7 Trade on spreads across asset class, ratings sectors and

maturities With high quality issuers available for longer tenors

(10yrs and above) at high absolute yields, the Fundshall endeavour to keep credit risk to the minimal.

*subject to availability of instruments at the time of investments and in line with the investment objective of the scheme.


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HDFC Income Fund - Product

Features

Purchase: Rs. 5,000 and any amount thereafter

Additional Purchase: Rs. 1,000 and any amount thereafter

MinimumApplicationAmount

CRISIL Composite Bond Fund IndexBenchmark Index

Growth and Dividend. The Dividend Option offersDividend Payout and Reivestment facility

InvestmentPlan / Options

September 11, 2000Inception Date

To optimize returns while maintaining a balance of safety, yield and liquidity

InvestmentObjective

An open-ended Income SchemeType of Scheme


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HDFC Income Fund Product

Features*

In respect of each purchase / switch-in of unitsequal to or greater than Rs. 1 crore in value:

An exit load of 0.50% is payable if units are redeemed / switched outwithin 3 months from the date of allotment

An exit load of 0.25% is payable if units are redeemed / switched outafter 3 months but within 6 months from the date of allotment

In respect of each purchase / switch-in of unitsless than Rs. 1 crore in value:

An exit load of 2.00% is payable if units are redeemed / switched outwithin 6 months from the date of allotment

An exit load of 1.00% is payable if units are redeemed / switched out after 6 months but within 1 year from the date of allotment

Exit Load(Non-SIP/STP)

Direct Applications & Applications routed throughany Agent / Distributor / Broker: Nil

Entry / SalesLoad(NonSIP/STP)

*The aforesaid change will be applicable on a prospective basis from December 15, 2008 in respect of investmentsmade in HDFC Income Fund. The Trustee reserves the right to change / modify the load structure at a later date onprospective basis. All other terms and conditions of the scheme will remain unchanged.

For details on load structure on SIP / STP refer SIP / STP enrolment form available on the website, Investor Service Centres (ISCs)

www.hdfcfund.com or with the distributors / agents.
http://www.hdfcfund.com/http://www.hdfcfund.com/http://www.hdfcfund.com/


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Why HDFC Income Fund?

Exposure to a diversified portfolio of debt securities

Strong emphasis on risk control credit, interest rate andliquidity risk

Emphasis on superior credit quality; no investments ininstruments below investment grade

Flexibility to invest in the entire range of debt and moneymarket instruments to take advantage of various interest ratescenarios

Units of HDFC Income Fund are declared as Public Securitiesunder the Bombay Public Trust Act, 1950

No entry load


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HDFC High Interest Fund Current

Strategy HDFC High Interest Fund shall aim to adopt the

indicative optimal portfolio strategy with 25-40% in G-secs* and 60-75% in corporate bonds

The Fund would aim to keep the modified duration inthe range of 5-8 Trade on spreads across asset class, ratings sectors and

maturities With high quality issuers available for longer tenors

(10yrs and above) at high absolute yields, the Fundshall endeavour to keep credit risk to the minimal.

*subject to availability of instruments at the time of investments and in line with the investment objective of the scheme.


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HDFC High Interest Fund - Product

Features

Purchase: Rs. 5,000 and any amount thereafterAdditional Purchase: Rs. 1,000 and any amount thereafter

MinimumApplicationAmount

CRISIL Composite Bond Fund IndexBenchmark Index

Growth plan, Dividend Plan offers Quarterly, Half Yearly and Yearly Dividend Options. All the Dividend Options offerDividend Payout and Reinvestment facility

Investment Plan /Options

April 28, 1997Inception Date

To generate income by investing in a range of debt andmoney market instruments of various maturity dates with aview to maximise income while maintaining the optimal

balance of yield, safety and liquidity

InvestmentObjective

An open-ended Income SchemeType of Scheme


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HDFC High Interest Fund - Product

Features

In respect of each purchase / switch-in of unitsgreater than Rs. 10 lakhs in value:

No exit load is payable

In respect of each purchase / switch-in of units

upto and including Rs. 10 lakhs in value: An exit load of 0.50% is payable if units are redeemed / switched outwithin 6 months from the date of allotment

Exit Load

(Non-SIP/STP)

Direct Applications & Applications routed throughany Agent / Distributor / Broker: Nil

Entry / SalesLoad(NonSIP/STP)

For details on load structure on SIP / STP refer SIP / STP enrolment form available on the website,Investor Service Centres (ISCs) www.hdfcfund.com or with the distributors / agents.
http://www.hdfcfund.com/http://www.hdfcfund.com/


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Annexures


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Slowing Real economy

200.00

220.00

240.00

260.00

280.00

300.00

320.00

1 - S e p - 0 6

1 - N o v - 0 6

1 - J a n - 0 7

1 - M a r - 0 7

1 - M a y - 0 7

1 - J u l - 0 7

1 - S e p - 0 7

1 - N o v - 0 7

1 - J a n - 0 8

1 - M a r - 0 8

1 - M a y - 0 8

1 - J u l - 0 8

1 - S e p - 0 8

IIP

Source: Bloomberg, IIP Index of Industrial Production

7.50

8.00

8.50

9.00

9.50

10.00

10.50

D e c - 0 5

M a r - 0 6

J u n - 0 6

S e p - 0 6

D e c - 0 6

M a r - 0 7

J u n - 0 7

S e p - 0 7

D e c - 0 7

M a r - 0 8

J u n - 0 8

GDP Qtrly yoy


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Indias vulnerability to oil

Higher CurrentAccount Deficit

Higher FiscalDeficit

High Interestrates, Inflation

High Oil prices

Slower Growth

We feel all these have peaked and Markets will start discounting the same


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Impact of oilIndias vulnerability to oil has been a major concern, particularly for

the FIIs Oil consumption = ~7% of Indias GDP

World average ~5%, US = 5%, China = 7%

Oil Imports - 30% of Indias total imports in FY08 Gross Oil imports = $77bn in FY08 (net imports (E) - $58bn) FY08 avg price = $85/bbl At avg $110, FY09E oil imports to rise $20bn (2% of GDP)

Large subsidy bill FY08 Rs.770bn ($19bn) FY09e Rs.1.7trillion ($38bn) @ $1105, ($1/bbl = $600mn of

subsidy)

Fuel & Light - 14% weight in WPISource: Media, Merrill Lynch, World Bank, British Petroleum


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Sharp Correction in Crude & other

Commodities

Slowing global growth, stability in USD, suggest best of commodity prices are behind

0.00

100.00

200.00

300.00

400.00

500.00

600.00

700.00

800.00

900.00

5 -

J a n -

9 8

5 -

J u

l - 9 8

5 -

J a n -

9 9

5 -

J u

l - 9 9

5 -

J a n -

0 0

5 -

J u

l - 0 0

5 -

J a n -

0 1

5 -

J u

l - 0 1

5 -

J a n -

0 2

5 -

J u

l - 0 2

5 -

J a n -

0 3

5 -

J u

l - 0 3

5 -

J a n -

0 4

5 -

J u

l - 0 4

5 -

J a n -

0 5

5 -

J u

l - 0 5

5 -

J a n -

0 6

5 -

J u

l - 0 6

5 -

J a n -

0 7

5 -

J u

l - 0 7

5 -

J a n -

0 8

5 -

J u

l - 0 8

Crude Oil Zinc Lead



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WPI

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

1 0

- N o v - 0

7

2 4

- N o v - 0

7

8 - D

e c - 0

7

2 2

- D e c - 0

7

5 - J

a n - 0

8

1 9

- J a n - 0

8

2 - F

e b

- 0 8

1 6

- F e b

- 0 8

1 - M

a r - 0 8

1 5

- M a r - 0 8

2 9

- M a r - 0 8

1 2

- A p r - 0 8

2 6

- A p r - 0 8

1 0

- M a y - 0

8

2 4

- M a y - 0

8

7 - J

u n - 0

8

2 1

- J u n - 0

8

5 - J

u l - 0 8

1 9

- J u l - 0 8

2 - A

u g - 0

8

1 6

- A u g - 0

8

3 0

- A u g - 0

8

1 3

- S e p - 0

8

2 7

- S e p - 0

8

1 1

- O c t - 0 8

2 5

- O c t - 0 8

8 - N

o v - 0

8

WPI

Source: Bloomberg. WPI Wholesale Price Index


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10 year G-sec Yields


4.00

5.00

6.00

7.00

8.00

9.00

10.00

11.00

12.00

13.00

2 5 - N o v - 9

8

2 5 - M a r - 9 9

2 5 - J u l - 9 9

2 5 - N o v - 9

9

2 5 - M a r - 0 0

2 5 - J u l - 0 0

2 5 - N o v - 0

0

2 5 - M a r - 0 1

2 5 - J u l - 0 1

2 5 - N o v - 0

1

2 5 - M a r - 0 2

2 5 - J u l - 0 2

2 5 - N o v - 0

2

2 5 - M a r - 0 3

2 5 - J u l - 0 3

2 5 - N o v - 0

3

2 5 - M a r - 0 4

2 5 - J u l - 0 4

2 5 - N o v - 0

4

2 5 - M a r - 0 5

2 5 - J u l - 0 5

2 5 - N o v - 0

5

2 5 - M a r - 0 6

2 5 - J u l - 0 6

2 5 - N o v - 0

6

2 5 - M a r - 0 7

2 5 - J u l - 0 7

2 5 - N o v - 0

7

2 5 - M a r - 0 8

2 5 - J u l - 0 8

2 5 - N o v - 0

8

10 Yr G-Sec (%)


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India transitioning to a large economy2006 GDP

(US$bn)5 year CAGR

2011GDP(US$bn)

USA 13,202 3.0 15,313Japan 4,340 1.8 4,746Germany 2,907 1.1 3,063

UK 2,345 2.5 2,647France 2,231 1.5 2,406Italy 1,845 0.7 1,907Canada 1,251 2.7 1,433

Mexico 839 2.8 963Brazil 1,068 3.2 1,252

0China 2,668 10.0 4,301India 906 7.8 1,318

India is fast catching up with the bigger economies of the world due tothe higher growth rates. The Indian economy will be one of the biggestamong developed and developing countries, nearing that of Canada inthe coming years.

Source: Based on recent data from Bloomberg

(Estimates)


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10yr G-sec yield spread of India with US andEuro

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

1 - N

o v - 9

8

1 - M

a r - 9 9

1 - J

u l - 9 9

1 - N

o v - 9

9

1 - M

a r - 0 0

1 - J

u l - 0 0

1 - N

o v - 0

0

1 - M

a r - 0 1

1 - J

u l - 0 1

1 - N

o v - 0

1

1 - M

a r - 0 2

1 - J

u l - 0 2

1 - N

o v - 0

2

1 - M

a r - 0 3

1 - J

u l - 0 3

1 - N

o v - 0

3

1 - M

a r - 0 4

1 - J

u l - 0 4

1 - N

o v - 0

4

1 - M

a r - 0 5

1 - J

u l - 0 5

1 - N

o v - 0

5

1 - M

a r - 0 6

1 - J

u l - 0 6

1 - N

o v - 0

6

1 - M

a r - 0 7

1 - J

u l - 0 7

1 - N

o v - 0

7

1 - M

a r - 0 8

1 - J

u l - 0 8

India - US India - Euro

Source: Bloomberg. As on October 31, 2008.


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Disclaimer : This presentation is for information purposes only. These views alone are not sufficient and should not be usedfor the development or implementation of an investment strategy. It should not be construed as investment advice to anyparty. All opinions, figures and estimates included in this presentation are as of the latest available date and are subject tochange without notice. The opinions, figures and other charts, etc. are sourced from publicly available information, othersources like Bloomberg , in house research and/or are just internal interpretation/analysis of reports/data sourced from theaforesaid sources. The statements contained herein may include statements of future expectations and other forward-lookingstatements that are based on our current views and assumptions and involve known and unknown risks and uncertaintiesthat could cause actual results, performance or events to differ materially from those expressed or implied in suchstatements. Neither HDFC Asset Management Company Limited (HDFC AMC), nor any person connected with it, accepts andliability arising from the use or in respect of anything done in reliance of the contents of this information /data. While utmostcare has been exercised while preparing the presentation, HDFC AMC does not warrant the completeness or accuracy of theinformation and disclaims all liabilities, losses and damages arising out of the use of this information. The recipient of thismaterial should rely on their investigations and take their own professional advice.

Risk Factors: All mutual funds and securities investments are subject to market risks and there can be no assurance thatthe Schemes objectives will be achieved and the NAV of the Scheme may go up or down depending upon the factors andforces affecting the securities market. Past performance of the Sponsors and their affiliates / AMC / Mutual Fund and its

Scheme(s) do not indicate the future performance of the Scheme of the Mutual Fund. There is no assurance or guarantee tounit holders as to the rate of dividend distribution nor that dividends will be paid regularly. Investors in the Scheme(s) are notbeing offered any guaranteed / assured returns. The NAV of the units issued under the Scheme(s) may be affected, inter-aliaby changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individualsecurities. The NAV will inter-alia be exposed to Price / Interest Rate Risk and Credit Risk. HDFC Income Fund (an open-ended income scheme; the objective of the scheme is to optimize returns while maintaining a balance of safety, yield andliquidity) and HDFC High Interest Fund (an open-ended income scheme; To generate income by investing in a range of debt and money market instruments of various maturity dates with a view to maximise income while maintaining theoptimal balance of yield, safety and liquidity) are only the name of the Scheme(s) and does not in any manner indicateeither the quality of the Scheme(s), their future prospects and returns. Please read the Offer Document of the Scheme(s)before investing. Investment Pattern: HDFC Income Fund: Debt Instruments (including securitised debt): 80% - 100%.Money Market Instruments (including cash/call money): 0%- 20%. HDFC High Interest Fund: Debt and Money MarketInstruments (including Securitised debt): 100%. Load Structure: HDFC Income Fund: Entry Load: Direct applications and

applications routed through any agent / distributor / broker: Nil. Exit Load: In respect of each purchase/switch-in of units lessthan Rs. 5 crore in value an exit load of 2.00% is payable if units are redeemed / switched out within 1 year from the date of allotment. In respect of each purchase/switch-in of units less than Rs. 5 crore in value an exit load of 1.00% is payable if unitsare redeemed / switched out after 1 year but within 2 years from the date of allotment. In respect of each purchase / switch in of units equal to or greater than Rs. 5 crore in value an exit load of 0.50% is payable if units are redeemed / switched outwithin 3 months from the date of allotment. In respect of each purchase / switch in of units equal to or greater than Rs. 5crore in value and exit load of 0.25% is payable if units are redeemed / switched out after 3 months but within 6 months fromthe date of allotment. HDFC High Interest Fund : Entry Load: Direct applications and applications routed through anyagent / distributor / broker: Nil. Exit Load: In respect of each purchase/switch-in of units upto and including Rs.10 lacs invalue, an exit load of 0.50% is payable if units are redeemed / switched out within 6 months from the date of allotment. Inrespect of each purchase/switch-in of units greater than Rs.10 lacs in value, no exit load is payable. Statutory Details:HDFC Mutual Fund has been set up as a trust sponsored by Housing Development Finance Corporation Limited and StandardLife Investments Limited (liability restricted to their contribution of Rs. 1 lakh each to the corpus) with HDFC TrusteeCompany Limited as the Trustee (Trustee under the Indian Trusts Act, 1882) and with HDFC Asset Management CompanyLimited as the Investment Manager.


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Fixed Income Markets - November 2008

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Transcript of Fixed Income Markets - November 2008