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8/14/2019 Market Update and View Dec2008
1/15
Fixed Income Summary and View
December 2008
8/14/2019 Market Update and View Dec2008
2/15
Summary
2 contrarian forces one inflationary and the other deflationary have been in playsince last year
Strong demand from emerging economies leading commodities higher and fuellinginflation worldwide
Housing led credit crisis in the US starting to exert a deflationary force
The first force was dominant till early July 2008 leading commodity prices to freshpeaks and inflation to multi year highs. Since then, however, the second force hasconclusively taken hold
As a result commodity prices have fallen 50% from the top, growth and inflationnumbers are toppling worldwide, and central bankers have shifted focus toachieving financial stability and protecting growth
8/14/2019 Market Update and View Dec2008
3/15
Inflation Is Falling Across The Globe
Commodity prices peaked in July 2008and are down by more than 50% since
then
The intensity of the fall indicates thestrength of the ongoing de-leveraging
process
In line with the above, inflation is fallingat a sharp pace in almost all majoreconomies across the world
Recent data has sparked serious threatof deflation in the US
Source: Bloomberg
Source: Bloomberg
PRODUCER PRICE INDEX
4.5
5
5.5
6
6.5
7
7.5
8
8.5
9
9.5
10
10.5
3 1 - J a n - 0
8
2 9 - F e b - 0
8
3 1 - M a r - 0 8
3 0 - A p r - 0 8
3 1 - M a y - 0
8
3 0 - J u n - 0
8
3 1 - J u l - 0 8
3 1 - A u g - 0
8
3 0 - S e p - 0
8
3 1 - O c t - 0 8
US EUROZONE UK CHINA
COMMODITY PRICES
200
250
300
350
400
450
500
J a n - 0
8
F e b - 0
8
M a r - 0 8
A p r - 0 8
M a y - 0
8
J u n - 0
8
J u l - 0 8
A u g - 0
8
S e p - 0
8
O c t - 0 8
N o v - 0
850
60
70
80
90
100
110
120
130
140
150
GENERIC COMMODITY INDEX CRUDE PRICE
8/14/2019 Market Update and View Dec2008
4/15
As Growth Collapses
Major economies like the US, UK, EuroZone, Japan, Hong Kong and Singapore
are witnessing a significant slowdown ingrowth
Lead indicators are pointing towards
further contraction around the world(including in China)
Source: Bloomberg
Source: Bloomberg
GDP
8
8.5
9
9.5
10
10.5
11
11.5
12
12.5
13
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
S e p - 0
8-0.5
0
0.5
1
1.52
2.5
3
3.5
4
4.5
5
CHINA US EUROZONE
PURCHASING MANAGERS' INDICES
34
36
38
40
42
44
46
48
5052
54
56
58
60
62
64
3 1 - J a n - 0
7
2 8 - F e b - 0
7
3 1 - M a r - 0 7
3 0 - A p r - 0 7
3 1 - M a y - 0
7
3 0 - J u n - 0
7
3 1 - J u l - 0 7
3 1 - A u g - 0
7
3 0 - S e p - 0
7
3 1 - O c t - 0 7
3 0 - N o v - 0
7
3 1 - D e c - 0
7
3 1 - J a n - 0
8
2 9 - F e b - 0
8
3 1 - M a r - 0 8
3 0 - A p r - 0 8
3 1 - M a y - 0
8
3 0 - J u n - 0
8
3 1 - J u l - 0 8
3 1 - A u g - 0
8
3 0 - S e p - 0
8
3 1 - O c t - 0 8
3 0 - N o v - 0
8
US EUROZONE UK CHINA
8/14/2019 Market Update and View Dec2008
5/15
Policy Response Has Been Unprecedented
The US Fed has been proactive incutting rates given that the US has been
the epicenter of the current crisis
Inflation targeting Central Bankers ofEurope have also shifted stance. UK has
cut drastically recognizing the catchingup required
Most Asian central bankers, mostnotably the Peoples Bank of China, havestarted cutting aggressively as well
Source: Bloomberg
POLICY RATES
1
1.5
2
2.5
3
3.5
4
4.5
5
5.5
6
6.5
7
7.5
8
3 1 - J a n - 0
7
2 8 - F e b - 0
7
3 0 - M a r - 0 7
3 0 - A p r - 0 7
3 1 - M a y - 0
7
2 9 - J u n - 0
7
3 1 - J u l - 0 7
3 1 - A u g - 0
7
2 8 - S e p - 0
7
3 1 - O c t - 0 7
3 0 - N o v - 0
7
3 1 - D e c - 0
7
3 1 - J a n - 0
8
2 9 - F e b - 0
8
3 1 - M a r - 0 8
3 0 - A p r - 0 8
3 0 - M a y - 0
8
3 0 - J u n - 0
8
3 1 - J u l - 0 8
2 9 - A u g - 0
8
3 0 - S e p - 0
8
3 1 - O c t - 0 8
2 8 - N o v - 0
8
US EUROZONE UK CHINA
8/14/2019 Market Update and View Dec2008
6/15
A Similar Theme is Underway In India
Wholesale Price Index (WPI) inflationhas fallen drastically over the past few
weeks in line with global trends
We expect it to fall to below 3% levels byMarch 2009
GDP growth is decidedly slowing despitesupport hitherto from the services sector Source: Bloomberg &
HSBC AMIN research
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
J a n - 0
2
M a y - 0
2
S e p - 0
2
J a n - 0
3
M a y - 0
3
S e p - 0
3
J a n - 0
4
M a y - 0
4
S e p - 0
4
J a n - 0
5
M a y - 0
5
S e p - 0
5
J a n - 0
6
M a y - 0
6
S e p - 0
6
J a n - 0
7
M a y - 0
7
S e p - 0
7
J a n - 0
8
M a y - 0
8
S e p - 0
8
J a n - 0
9
ProjectedInflation
Source: Bloomberg
GDP
7
7.5
8
8.5
9
9.5
10
10.5
11
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
GDP
8/14/2019 Market Update and View Dec2008
7/15
With Further Weakness Ahead
Relative freeze in domestic creditmarkets has happened starting October
2008
Monthly growth indicators like trade dataand purchasing managers index point to
sharply lower prints in incremental GDPnumbers
Source: Bloomberg
Source: Bloomberg
TRADE
68
1012141618202224
26283032343638404244464850
3 1 - M a r - 0 7
3 0 - A p r - 0 7
3 1 - M a y - 0
7
3 0 - J u n - 0
7
3 1 - J u l - 0 7
3 1 - A u g - 0
7
3 0 - S e p - 0
7
3 1 - O c t - 0 7
3 0 - N o v - 0
7
3 1 - D e c - 0
7
3 1 - J a n - 0
8
2 9 - F e b - 0
8
3 1 - M a r - 0 8
3 0 - A p r - 0 8
3 1 - M a y - 0
8
3 0 - J u n - 0
8
3 1 - J u l - 0 8
3 1 - A u g - 0
8
3 0 - S e p - 0
8
3 1 - O c t - 0 8
EXPORTS IMPORTS
PURCHASING MANAGERS' INDEX
44
46
48
50
52
54
56
58
60
3 1 - M a y - 0
8
3 0 - J u n - 0
8
3 1 - J u l - 0 8
3 1 - A u g - 0
8
3 0 - S e p - 0
8
3 1 - O c t - 0 8
PURCHASING MANAGERS' INDEX
8/14/2019 Market Update and View Dec2008
8/15
Policy Has Been Proactive
Policy makers have been quite proactive sofar with monetary as well as otheradministrative tools
However, while bank lending rates havebeen cut in response, flow of credit is still toresume fully
We expect more rate cuts ahead given theneed to anchor overnight rates at much lowerlevels in order for banks to feel thesteepness
The 1 yr swap rate is already pricing inovernight rates of below 5%
Government security yields have fallen butstill look lucrative as rate cuts shouldcontinue
Source: Bloomberg
RATES
5
6
7
8
9
10
11
3 1 - J a n - 0
7
2
8 - F e b - 0
7
3 0 - M a r - 0 7
3
0 - A p r - 0 7
3 1 - M a y - 0
7
2
9 - J u n - 0
7
3 1 - J u l - 0 7
3 1 - A u g - 0
7
2 8 - S e p - 0
7
3 1 - O c t - 0 7
3
0 - N o v - 0
7
3
1 - D e c - 0
7
3 1 - J a n - 0
8
2
9 - F e b - 0
8
3 1 - M a r - 0 8
3
0 - A p r - 0 8
3 0 - M a y - 0
8
3
0 - J u n - 0
8
3 1 - J u l - 0 8
2 9 - A u g - 0
8
3 0 - S e p - 0
8
3 1 - O c t - 0 8
2
8 - N o v - 0
8
REPO RATE 1 YEAR OIS 10 YEAR GOVERNMENT SECURITY
8/14/2019 Market Update and View Dec2008
9/15
Excess Supply Is No Longer A Worry
Government will breach its fiscal target for the year, in line with our long held view
However, given rising delinquencies on loan books and trader appetites already whipped bya sharp rally so far, the additional supply will be comfortably absorbed
RBI is already committed to providing liquidity for incremental borrowing throughsimultaneous buy-back of market stabilization bonds
The opening up of spread between government securities and the swap curve partly reflectsexpectation of additional supply.
The government securities curve still provides a lucrative entry point as it might gear up forthe next leg of rally when fears around absorption of incremental excess supply aredecidedly eliminated.
8/14/2019 Market Update and View Dec2008
10/15
Credit Spreads May Still Compress Reluctantly
India has had a phenomenal credit cyclewith the stock of credit having doubled over
last 3 years
A sustained current account deficit duringthis time has meant we have consistentlyrelied on external funding
The current risk aversion (as reflected inrising emerging market bond spreads andweakening currencies) has led to severe fall
in external sources of funding
With equity markets being weak and banksless willing to lend, the process of
channeling domestic savings intoinvestments has been disrupted as wellSource: Bloomberg
Source: Bloomberg
INDIA'S PHENOMENAL CREDIT CYCLE
5000075000
100000125000150000175000200000225000250000275000300000325000350000375000400000425000450000475000500000
M
a r - 0 1
M
a r - 0 2
M
a r - 0 3
M
a r - 0 4
M
a r - 0 5
M
a r - 0 6
M
a r - 0 7
M
a r - 0 83
4
5
6
7
8
9
10
11
12
13
14
NON FOOD CREDIT (INR CRS) CREDIT TO GDP RATIO (%)
ASIAN CURRENCIES AND EMERGING MARKET BOND SPREADS
102103104105106107108109110111112113114115116117118
J a n - 0 7
F e b - 0 7
M a r - 0 7
A p r - 0 7
M a y - 0 7
J u n - 0 7
J u l - 0 7
A u g - 0 7
S e p - 0 7
O c t - 0 7
N o v - 0 7
D e c - 0 7
J a n - 0 8
F e b - 0 8
M a r - 0 8
A p r - 0 8
M a y - 0 8
J u n - 0 8
J u l - 0 8
A u g - 0 8
S e p - 0 8
O c t - 0 8
N o v - 0 8
100150200250300350400450500550
600650700750800
ASIA DOLLAR INDEX EMERGING MARKETS' BOND SPREADS
8/14/2019 Market Update and View Dec2008
11/15
Credit Spreads May Still Compress Reluctantly (cont)
All this means that demand for funds far outstrips supply as of now. As long as this is thecase, it is unlikely that there will be any meaningful compression in spreads
Some stability in international risk appetite (and in turn currency) may lead stabilization incorporate spreads domestically since it may open window for external funds again
A sustained contraction in spread will, however, only happen once demand versus supply ofcredit finds a better balance than currently
Consequently, current strategy favors government securities in building duration. Atsome point, however, as triggers mentioned above begin to fructify we will go
overweight corporate bonds
8/14/2019 Market Update and View Dec2008
12/15
The last secular bond bull run lasted approximately 3 years beginning October2000
Average returns of of 17 income funds which were in existence over this fullperiod were: Year 1 = 16.9%, Year 2 = 16.6% and Year 3 = 7.9% (all returnspost expenses)*
Average returns over the 3 years was 13.8% (post expenses)
There are 2 inferences to be made:
Duration play can potentially be much more powerful than play on credit risk
One needs to stay invested over the period of a cycle in order to benefit fullyfrom a fall in interest rates
Income Fund returns during the last cyclical bull run
*Source: MFIE, HSBC AMIN Research
8/14/2019 Market Update and View Dec2008
13/15
Disclaimer
This document has been prepared by HSBC Asset Management (India) Private Limited (HSBC) for informationpurposes only and should not be construed as an offer or solicitation of an offer for purchase of any of the funds ofHSBC Mutual Fund. All information contained in this document (including that sourced from third parties), is obtainedfrom sources HSBC, the third party believes to be reliable but which it has not independently verified and HSBC, thethird party makes no guarantee, representation or warranty and accepts no responsibility or liability as to the accuracy
or completeness of such information. The information and opinions contained within the document are based uponpublicly available information and rates of taxation applicable at the time of publication, which are subject to changefrom time to time. Expressions of opinion are those of HSBC only and are subject to change without notice. It does nothave regard to specific investment objectives, financial situation and the particular needs of any specific person whomay receive this document. Investors should seek financial advice regarding the appropriateness of investing in anysecurities or investment strategies that may have been discussed or recommended in this report and shouldunderstand that the views regarding future prospects may or may not be realized. Neither this document nor the units
of HSBC Mutual Fund have been registered in any jurisdiction. The distribution of this document in certain jurisdictionsmay be restricted or totally prohibited and accordingly, persons who come into possession of this document arerequired to inform themselves about, and to observe, any such restrictions. Mutual fund investments are subject tomarket risks. Please read the offer documents carefully before investing.
Copyright. HSBC Asset Management (India) Private Limited 2008, ALL RIGHTS RESERVED.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by anymeans, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBCAsset Management (India) Private Limited.
HSBC Asset Management (India) Private Limited; 314, D. N. Road, Fort, Mumbai 400 001. Tel: 6614 5000.
8/14/2019 Market Update and View Dec2008
14/15
Risk Factors
Investors may obtain Offer Documents/ Scheme Information Document/Statement of Additional Information and KeyInformation Memorandums along with application forms from the office of HSBC Mutual Fund, 314 D. N. Road, Fort,Mumbai 400 001. Tel: 022-6666 8819.
Statutory Details: HSBC Mutual Fund has been set up as a trust by HSBC Securities and Capital Markets (India)Private Limited (liability restricted to the corpus of Rs 1 lakh). The Sponsor / associates of the Sponsor/ AssetManagement Company (AMC) are not responsible or liable for any loss or shortfall resulting from the operation of theSchemes. The Trustees of HSBC Mutual Fund have appointed HSBC Asset Management (India) Private Limited as theInvestment Manager.
Risk Factors: All investments in mutual funds and securities are subject to market risks and the Net Asset Value (NAV)of the Scheme(s) may go up or down depending on the factors and forces affecting the securities markets. There can
be no assurance that the objectives of the Scheme(s) will be achieved. Past performance of the Sponsor, AMC, MutualFund or any associates of the Sponsor/AMC does not indicate the future performance of the Scheme(s) of the MutualFund. Please read the Offer Documents/ Scheme Information Document/Statement of Additional Informationcarefully before investing.
8/14/2019 Market Update and View Dec2008
15/15
Thank You