october 2021 investment products

October 2021

Market

Macroscope

Investment Products

MARKET MACROSCOPE | INVESTMENT PRODUCTS | OCTOBER 2021

Index

Contents Page No

From the MD & CEO’s Desk…………………………………………………….. 1

Equity Outlook ……………………………………………………………………. 2-5

Fixed Income Outlook …………………………………………………………… 6-9

Deep dive – Rising US yields v/s India Investor returns……………………… 10-14

Dots to Join……….……………………………………………………………….. 15-16

Index Performance ……….……………………………………………………… 17

Macro Economic Indicators ……………………………………………………… 18-19

India Horizons Portfolios …………...……………………………………………. 20-21

Crossword …………...……………………………………………………………. 22


From the MD & CEO’s desk

01

Dear Investors,

We don’t have to be smarter than the rest. We have to be more disciplined than the rest

-Warren Buffet

I recently wrote an article for the Economic Times on the importance of controlling one’s emotions

while trading and how a trader might achieve this (read the article here). A trader needs to cultivate

habits to develop emotional resilience just like top athletes do in order to achieve peak performance.

Traders should treat themselves as entrepreneurs with a well-defined business plan, risk profiling

and defined capital risk limits.

Traders should acknowledge emotions and develop practices to control their emotions. Market

research is crucial and will help understand the investment prospects, return expectations and risks.

Traders should learn from history that markets tend to recover even from large losses and a

diversified asset portfolio will limit losses. Engaging in non-market activities like exercising, creative

activities and reading can help calm the mind and prevent getting fixated on the markets. Traders will

probably need these qualities in the near term as the risk factors in the markets rise.

The market has a lot on its plate. The US Fed tapering, high inflation prints in developed economies,

natural gas shortages, China’s power shortage and China Evergrande Group’s likely default on its

USD 300 bn debt. Read about these in our monthly equity and debt market outlooks. In addition, the

Macroscope contains the regular “Dots to Join” and Crossword sections.

This month's Deep Dive section analyses the impact of global and domestic bond yield movement on

bond portfolio returns for domestic and foreign investors. The study has covered data for last two

decades which includes multiple economic cycles and major events and thus provides valuable

insights for investors. The section also covers correlation analysis of bond yields with equity market.

India’s Covid vaccination drive picked up momentum with an estimated 23 cr doses likely to be

administered in September compared to 18.0 cr doses in August. On this cheerful note, wishing you

all successful investing.

Yours Sincerely

Dhiraj Relli

MD and CEO – HDFC Securities

https://economictimes.indiatimes.com/wealth/invest/trading-in-stock-market-is-similar-to-being-a-professional-athlete-5-ways-to-control-emotions/articleshow/86114354.cms


Equity Outlook

02

Macroeconomic Review:

Domestic review:

ICRA revised its India GDP growth estimate for FY21 to 9% from 8.5% earlier. Central government’s

direct tax receipts till Sept 22 were Rs. 6.4 lac cr compared to Rs. 4.4 lac cr a year ago and Rs. 5.5

lac cr in the same period in FY19. This was well ahead of the government’s budget estimates. Press

reports suggested that India aims to narrow its FY22 budget deficit to 6.3% of GDP from 6.8%

estimated in the budget. The reports further suggested that central government would not be cutting

any spending and the entire improvement would be due to buoyant tax collections.

Rainfall in the month of September made up for much of the deficit that had been witnessed till

August. IMD said that India received normal rainfall during the June-Sept period. India’s CPI retail

inflation eased to 5.3% in August compared to 5.59% in July. India’s 8 core industries expanded by

11.6% in August and the output was 3.9% higher than in the pre-Covid period of August 2019. All of

the above data suggests that the economy continues to recover from the second wave of Covid-19

infections.

Global Review:

ECB announced that it would slow down purchases under its Pandemic Emergency Purchase

Program (PEPP). ECB President, Christine Lagarde, insisted that this was “recalibrating” rather than

“tapering”. The ECB kept its PEPP timeline the same (to end by March 2022) and said that total

purchases too would remain at EUR 1.85 trillion. The ECB upgraded its Euro Zone growth forecast

for CY21 to 5% from a previous 4.6% estimate. It also increased its inflation forecast for CY21 to

2.2% compared to its June forecast of 1.9%.

Federal Reserve Chair Jerome Powell said the central bank could begin scaling back asset

purchases as soon as November and complete the process by mid-2022. Jerome Powell also

insisted that the economic recovery still needs to strengthen before the US Federal Reserve

increases interest rates. Markets shrugged off the news regarding the taper. The US Federal

Reserve said that half of the 18 members of its Federal Open Market Committee (FOMC) now expect

to raise rates at least once in CY22 compared to 7 members earlier who said so.

The US unemployment rate fell to 5.2% in August from 5.4% in July, well below the peak rate of

14.8% in April 2020. The jobs growth was disappointing but was likely impacted by a surge in Covid

cases in the US. Placement firm Indeed estimates that there are about 10.5 million openings now,

likely a record for the U.S. labor market.

A lot of press articles were focused last fortnight on the liquidity crunch being faced by China

Evergrande Group, China’s largest real estate developer. Its attempts to raise liquidity by selling real

estate inventory at deeply discounted prices failed and its apartment sales were down sharply in

August. The markets currently appear to support the thesis that the Chinese government will step in

to prevent contagion. However, in the longer term, difficulties at Evergrande might impact other real

estate developers. In such a scenario, real estate construction and China’s GDP growth could be

negatively impacted over the next couple of quarters. This is a risk that needs to be monitored

closely.

China is also facing a severe power shortage as demand spiked because of economic activity. At the

same time, the Chinese government is asking provincial governments to reduce carbon emissions

and meet their targets on the same. China is likely to prioritize power supply to residents and offices

over power guzzling sectors such as aluminum and copper production. This could result in further

supply side disruptions in the months to come.


Equity Outlook

03

Equity Markets Review:

Indian equity markets continued to rally in September. Nifty gained 2.8%, while the BSE S&P Midcap

and Smallcap Indices gained 5.9% and 4.3% respectively.

Nifty Media, Nifty Realty and S&P BSE Consumer Durables indices were the best performing

sectoral indices gaining 33.5%, 32.8% and 10.7% respectively this month. Nifty Metal, Nifty Pharma

and Nifty IT indices were the worst performing indices with returns of (-1.8%), +0.8%, and +1.3%

respectively.

Governments’ relief package for the Telecom sector led to a sharp rally in the beaten down Telecom

sector stocks. Investor activism by institutional investors resulted in a sharp rally in Zee

Entertainment and Dish TV. PSU stocks also rallied sharply as they offered significant value relative

to the market. The best and worst performing stocks during Sept 2021 from the NSE 500 universe

are shown in the table below.

Flows: FPIs were net buyers of Indian equities in cash to the tune of Rs. 13,154 cr in the month of

September 2021 while DIIs were net buyers to the tune of Rs. 5,948 cr. (Source: NSDL,

Moneycontrol.com).

IPO Review:

September 2021 was a muted month for IPOs with 4 companies raising Rs. 3,918 cr. Paras Defence

received a total subscription of 304x but the IPO size was quite small at Rs. 171 cr. Paras Defence

and AMI Organics had listing gains of 168% and 48% respectively, while the other 2 listings gave

muted returns. As per press reports, FY22 is likely to be a record year for merchant bankers in terms

of fees because of the number of IPOs likely to be concluded.

Best Performing Stocks Among NSE 500 in September 2021

Large Cap Mid Cap Small Cap

Stock Name Returns Stock Name Returns Stock Name Returns

Indus Towers Ltd. 43.5% Vodafone Idea Ltd. 94.8% Dish TV India Ltd. 62.8%

DLF Ltd. 30.2%Zee Entertainment Enterprises

Ltd.76.4%

Gujarat Alkalies &

Chemicals Ltd.47.6%

Coal India Ltd. 27.0% Godrej Properties Ltd. 55.2% Delta Corp Ltd. 45.3%

NTPC Ltd. 22.3% JSW Energy Ltd. 47.3% Chalet Hotels Ltd. 40.5%

IDBI Bank Ltd. 20.4% Oil India Ltd. 43.1%Prestige Estates

Projects Ltd.39.4%

Worst Performing Stocks NSE 500 in September 2021

Large Cap Mid Cap Small Cap

Stock Name Returns Stock Name Returns Stock Name Returns

Tata Steel Ltd. -11.1% Bank of India -16.5%Mahindra Holidays &

Resorts India Ltd. -22.6%

Apollo Hospitals

Enterprise Ltd.-9.7% Sanofi India Ltd. -13.6%

Computer Age

Management Services-20.5%

SBI Cards and

Payment Services Ltd.-9.7% Gujarat Gas Ltd. -11.8% Aegis Logistics Ltd. -14.5%

Bharat Petroleum

Corporation Ltd.-8.3% Alkyl Amines Chemicals Ltd. -10.6%

KNR Constructions

Ltd. -13.7%

Adani Enterprises Ltd. -7.6% Gujarat State Petronet Ltd. -9.8%JK Lakshmi Cement

Ltd. -12.9%

Source: NSE


Equity Outlook

04

The table below summarizes the IPOs which either closed or listed during September 2021:

*Note: AB Sun Life AMC IPO would close on October 1, 2021

Outlook:

Global macroeconomic issues highlighted in the earlier part of the note could impact the markets this

month. The markets are currently pricing in a benign outcome for the macro risks. Any significant

adverse developments in these variables could result in higher volatility in the markets.

This month the markets would be focused on quarterly earnings releases. We note that in Q1FY22

most of the companies had performed largely in line with expectations. Analysts have further

upgraded earnings expectations as stock prices have climbed and economic activity has

strengthened. This poses a much tougher hurdle for companies to be able to beat expectations.

The outlook is murky for the small finance banks and NBFC sector as the impact of lockdowns and

expiration of moratoriums might impact asset quality. We expect earnings across other sectors to be

broadly in line with market expectations during the quarter given that all macroeconomic data pointed

to strong recovery from the second wave of Covid-19.

The table below shows select “buy” and “reduce”/“sell” rated stocks as rated by HDFC Securities’

Institutional Equities (HSL IE) team. The full list of stocks rated and their target prices can be

accessed on our website.

(Source: HSL IE)

Source: NSE

Name of the company

Size of

IPO (Rs.

Cr)

Issue close

Date

IPO price

(Rs. Per

share)

Listing

date open

(Rs. Per

share)

%

Inc/(Dec)

from issue

price

Overall

Subscripti

on (times)

QIP

Subscripti

on (times)

Vijaya Diagnostic Centre Ltd 1,894 3-Sep-21 531 542.3 2.1% 4.5 13.1

AMI Organics Limited 570 3-Sep-21 610 902.0 47.9% 64.5 86.6

Sansera Engineering Limited 1,283 16-Sep-21 744 811.4 9.1% 11.5 26.5

Paras Defence and Space

Technologies Limited171 23-Sep-21 175 469.0 168% 304.3 169.7

HDFC Sec Institutional Equities: Select "Buy" rated stocks

Name Industry Target price CMP % Upside

Gail Natural Gas - Transmission 195 159 22.72%

JK Lakshmi Cement 850 618 37.50%

Kalpataru Power Transmission Capital Goods 590 404 46.00%

Maruti Suzuki Auto - OEM 8,190 7,338 11.60%

SBI Life Insurance 1,350 1,215 11.10%

Recommended reading for the month:

This month’s recommended reading is an article titled “Goldman flags $8.2 trillion threat worse than China

Evergrande” published on Forbes.com. (read the article here)

Local government financing vehicles (LGFVs) have $8.2 trillion of outstanding liabilities up from $2.5 trillion in 2013.

The debt now amounts to 52% of China’s GDP. Japan’s $1.75 trillion Government Pension Investment Fund,

the world’s largest, now says it won’t even include yuan-denominated Chinese sovereign debt in its portfolio.

https://www.forbes.com/sites/williampesek/2021/09/30/goldman-flags-82-trillion-threat-worse-than-china-evergrande/?sh=522fdff515cc


Equity Outlook

05

(Source: HSL IE)

The table below gives select positional buy calls issued by the HDFC Retail Research team:

(Source: HSL Retail Research)

All of the above institutional equities reports and retail research calls can be accessed on our

website.

Risks:

The risks in the market are now increasing. Taper, supply disruptions, higher energy prices and

Evergrande default are near term risks. These risks appear to be within acceptable range in the near

term but need to be monitored closely for any negative surprises. The longer term risks relate to

inflation and economic activity. The global economic recovery appears to be on a strong footing.

However, Chinese economic activity needs to be monitored closely. Valuations in equity markets do

not provide any cushion for negative surprises.

Company Name Reco date Entry price CMPTarget 2

(Rs/share)% Upside

Sonata Software 22-Sep-21 917 893 1,099 23.10%

NBCC 24-Sep-21 47 48 56 16.20%

J. B. Chemicals 24-Sep-21 1,795 1,891 2,200 16.30%

Godrej Industries 04-Aug-21 585 574 720 25.40%

HDFC Sec Institutional Equities: Select “Sell/Reduce" rated stocks

Name Industry Target price CMP % Downside

AU Small Finance Bank Banks - PVT 1,046 1,164 -10.10%

Avenue Supermart Retail & Fashion 2,260 4,250 -46.80%

Interglobe Aviation Aviation 1,575 2,021 -22.10%

Jubilant Foodworks Food Services 2,850 4,040 -29.40%

L&T Technologies IT Services 3,035 4,697 -35.40%

06

India’s 10yr bond yield remained volatile because of a mix of domestic and global triggers

During the month of Sep 2021, the 10yr G-sec yield remained relatively volatile touching a low of

6.12% but rose towards month end and closed flat MoM at 6.22% as of Sep 30, 2021. The volatility

was caused by a mix of domestic and global factors. On the positive side, inclusion of benchmark

securities in G-SAP auctions, government’s improved fiscal position, increased FPI participation and

fall in CPI inflation supported bond yields. However, sharp rise in crude oil prices, higher global yields

due to the hawkish monetary policy stance of the US Fed and RBI’s gradual liquidity normalisation

stance led to a rise in bond yields.

India’s 10yr G-sec yield remained volatile in September

Source: Financial Benchmarks India Private Limited (FBIL)

Last 7 weekly G-sec auctions did not witness any devolvement or cancellation (which had become a

regular affair in the recent past) and RBI accepted additional amount of Rs. 10,363 cr, against notified

amount, through greenshoe option. This was led by improved investor demand/sentiment and reduced

direct intervention by RBI to anchor G-sec yields.

In the last two tranches (worth Rs. 30,000 cr) of G-SAP 2.0 auction, RBI decided to include an

equivalent sell leg to the auctions making its bond purchase program liquidity-neutral. Furthermore,

with rise in auction size of variable rate reverse repo (VRRR) auctions to Rs. 4 lakh cr by end of Sep-

21 and cut-off level for 7-day tenure at 3.99% (almost touching repo level of 4%) in recent auction

signifies the RBI’s gradual stance of liquidity normalisation.

Government announced its H2 FY22 borrowing target at Rs. 5.03 lakh cr, after borrowing Rs. 7.02

lakh cr in H1 FY22. Prima facie, this keeps the total borrowing for FY22 unchanged at Rs. 12.05 lakh

cr (as budgeted). However, H2 FY22 borrowing numbers include the GST compensation loan to be

provided to states, estimated at Rs. 84,000 cr in H2 FY22. Earlier, government had planned to borrow

additional Rs. 1.59 lakh cr to make up for the shortfall in GST compensation payable to states. Out of

this, government has already paid out Rs. 75,000 cr to states in H1 FY22.

The effective H2 FY22 borrowing for financing the fiscal deficit is lower at Rs. 4.2 lakh cr, considering

the government has subsumed GST compensation cess related borrowing worth Rs. 1.59 lakh cr in its

FY22 borrowing plan. This reflects the improved fiscal position of the government as revenue receipts

have been tracking higher than budgeted estimates so far. Announcement of lower borrowings was

expected to cheer the bond market. However, the positive sentiment got nullified by rise in crude oil

prices and global yields.


Fixed Income Outlook

6.05

6.22

5.80

5.90

6.00

6.10

6.20

6.30

6.40

07

India’s CPI inflation eased further in August with softening in food prices

CPI headline inflation eased further to 5.3% YoY in Aug-21 from 5.6% in the previous month and

remained below the RBI’s upper threshold of 6.0% for 2nd consecutive month. The moderation in

inflation was led by softening in food prices with drop in vegetable and cereal prices. Sequentially

(MoM), CPI inflation eased to a 5-month low of 0.25% in Aug-21 vs. 0.74% in Jul-21.

Core CPI inflation (excluding food and fuel) also eased to 5.8% YoY in Aug-21 from 5.9% in Jul-21 on

account of moderation in personal care and effects. Fuel inflation rose to 12.9% YoY in Aug-21 vs

12.4% in Jul-21, reflecting higher LPG and kerosene prices.

As per HDFC Bank research, headline CPI inflation for Sep-21 is expected to come in at a 5-month

low of 4.35%, down from 5.3% in Aug. The subsequent prints are also expected to remain subdued at

least till the end of this calendar year. Despite elevated fuel and core inflation, lower than earlier

expected food price momentum and a high base from last year are likely to keep headline prints in

check.

India’s CPI inflation moderated further in August

Source: Ministry of Statistics and Programme Implementation (MOSPI)

US 10yr bond yield rose sharply in September as US Fed turned hawkish with tapering signal

US 10yr bond yield rose sharply by 18 bps MoM during September and closed at 1.49%. The US Fed,

in its latest monetary policy meeting, signalled that a scale back in its asset purchases may be

warranted soon.

Source: investing.com



6.77.3 7.6

6.9

4.64.1

5.05.5

4.2

6.3 6.35.6 5.3

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CPI YoY (LHS) CPI MoM (RHS)

1.461.49

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1.80

08

Fed Chair Jerome Powell said the central bank could start tapering by Nov-21 and complete the

process by the middle of CY22. He further added that the timing and pace of taper is not intended to

signal the lift off in interest rates. The latter is likely to happen only once the taper process is complete

and requires much higher economic thresholds to be reached.

The Fed’s dot plot (expectation of interest rate changes) highlighted that an increasing number of

members now expect a rate hike in CY22 compared to the earlier median forecast of a rate hike

beginning only in CY23. The median projection by FOMC members for the Fed’s fund rate is at 1% by

the end of CY23 (up from 0.6% in Jun-21 meeting) and at 1.8% by end of CY24.

Source: Bloomberg

US CPI inflation eased to 5.3% YoY in Aug-21 from 5.4% in Jul-21 suggesting that inflation has

probably peaked. Core Inflation (CPI excluding food and energy components) eased to 4.0% YoY,

lower than consensus expectations of 4.2% (Jul-21: 4.3%). On a sequential basis (MoM), CPI rose by

0.3% in Aug vs. 0.5% in July. Price spikes associated with reopening of the economy are beginning to

wane but supply disruptions are likely to keep inflation elevated in the remaining months of 2021.

US CPI Inflation fell marginally in August

Source: tradingeconomics.com



1.3 1.4 1.2 1.2 1.4 1.41.7

2.6

4.2

5.05.4 5.4 5.3

0.0

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g-2

1

CPI YoY (LHS) CPI MoM (RHS)

09

Outlook

In the paragraphs below, we list various global and domestic factors which will likely influence the

bond markets in the near to medium term.

Globally central banks have turned hawkish in their monetary policy stance with improving economic

recovery and rising inflation. This has led to a sharp rise in global bond yields. China’s cash strapped

Evergrande Group’s missed payments on bank loans and bonds have kept investors guessing and

sparked concerns on China’s financial system and its contagion effects around the world. Crude oil

price breached $ 80 per barrel mark recently (a 3-year high) raising concerns on rise in import bill,

inflation and forex volatility.

Enhanced quantum of VRRR auctions to Rs. 4 lakh cr coupled with a rise in cut-off levels close to

repo rate, regular shorter tenure (3-7 days) VRRR auctions being conducted by RBI to absorb excess

liquidity, and recent liquidity-neutral bond purchase programme signal RBI’s discomfort with surplus

liquidity and its gradual liquidity normalisation stance.

In the upcoming Monetary Policy Committee (MPC) meeting on 8th Oct 2021, we expect the MPC to

maintain status quo on policy rate and accommodative stance. Bond market will watch out for RBI’s

guidance on liquidity stance and continuation of bond purchase programme to support the bond

yields. Recent drop in CPI inflation shall provide some comfort to MPC members in maintaining its

accommodative stance for longer.

We expect bond yields to rise gradually in the medium-term given the huge G-sec borrowings in FY22.

With enhanced VRRR auction amount and likely increase in auction tenure in near future, yield curve

is expected to flatten with rise in short-term rates to be relatively higher than rate increases at long end

of the curve.

The G-sec yield curve continues to remain quite steep up to 5yr segment and is relatively flat thereon.

Beyond the 10yr segment, the risk-reward scenario looks unfavourable at current juncture. Hence,

fixed income investors should avoid the long end of the curve. Steepness at the short end of the curve

provides lucrative opportunities to lock carry by investing up to 3yr segment with low to moderate

interest rate risk. The steepness in the curve shall compensate for any MTM losses in the near to

medium term.



10

Introduction:

Since the Global financial crisis in 2008, central banks across the globe have kept interest rates low

and have regularly purchased bonds to pump in liquidity. From a high of 2.4% in Apr-2019, Fed Funds

rate has been at 0-0.25% since Apr-2020. US Fed currently buys $120 bn of government

bonds/mortgage securities every month. Elsewhere in Europe, situation is not too different where

ECB’s average monthly bond purchase has been €74 bn since Mar-2020. The result is that $14.8 tn

(21.6% of total debt issued) worth of bonds across the world trade at negative yields (e.g German 10yr

bond currently yields -0.24%).

Covid Pandemic not only delayed the normalization, but actually helped in creating even more

liquidity. US Fed balance sheet today has ballooned from $4.2 tn to $8.5 tn in the last 3 years.

Covid crisis era monetary policies have to normalize at some point. The central banks will normalize

through two means – reducing bond buy back and increasing policy rates. While the latter is some

distance away, the former is expected to start soon (in the case of US, as early as November). The

end effect of both actions is likely to be the same – rising yield.

As per projections of FOMC members, median Fed funds rate is expected to be at 1.0% and 1.8% by

end of 2023 and 2024 respectively.

This is the largest shadow looming on the global markets. Investors are worried about the adverse

impact of rising yields on the financial assets. After all, we did go through the Taper Tantrum in 2013.

So in this deep dive, we have tried to analyze the effect of rising yields on equity and debt markets (in

India and US). Specifically, we asked ourselves the following questions –

1. What is the impact of change in US yields on Indian debt markets?

2. What impact does the yield difference (India minus US yields) have on future bond returns?

3. What is the impact of change in US yields on Indian equity markets?

4. What is the impact of change in Indian yields on Indian equity markets?

Approach:

We have analyzed data over the last two decades covering multiple economic cycles and major

economic events to answer the above questions

To understand the impact on debt investors, we have taken the MTM gains/losses in the 10 year G-

sec. While the total returns that an investor gets is always accrual + MTM, it is largely the change in

price (MTM) that is a good indicator of the impact on the bond returns.

Deep Dive – Rising US yields v/s India Investor returns


11

Section 1 – Domestic Debt Investor:

Section 1.1 - Impact of rising US yields (10 Yr) on India debt return

(For each month, we see the next 1 year change in US yield and compare it to the next 1 year MTM in

India 10 year G-sec)

Observation:

The lines have tended to move in opposite directions. There is an inverse correlation of 40% which

means that when the US yields have gone up, Indian bond investors have suffered MTM losses

Following Table gives the same data in a different form –

Conclusion:

The past suggests that rising US yields have coincided with negative MTM returns for domestic bond

investors. With subdued starting yields the impact of MTM on the overall debt returns can be higher

Section 1.2 - Impact of India G-sec yield premium (over US) on future India debt return

(For each month, we calculate the difference between India 10 yr G-sec yield and US 10 yr G-sec

yield. We then plot it against the next 12 month MTM returns from India 10 yr G-sec)

-20.0%

-10.0%

0.0%

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30.0%

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Chart 1 – US yield change vs India 10 Yr G-sec MTM change

Change IN US Bond Yield (bps) Indian 10 Yr Gsec MTM Change

Ch

ange

in U

S b

on

d Y

ield

s Ind

ia 10

Yr

Gse

cM

TM C

han

ge

Source: Investing.com

Change in 10 Yr US Yield (bps)No. of

Months

% of

Observations

Median Debt MTM Returns

(next 12 months)

<-100 38 15% 7%

-100 to 0 118 48% 2%

0 to 100 81 33% -2%

>100 11 4% -4%

-20.0%

-10.0%

0.0%

10.0%

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30.0%

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Chart 2 – India yield premium vs Next 1 year MTM change in Indian debt

India Gsec Yield Premium India 10 Yr Gsec MTM

Ind

ia Y

ield

Pre

miu

mIn

dia 1

0 Y

rG

sec

MTM

Source: Investing.com



12

Observation:

The lines have tended to move in same directions. There is a correlation of 35% which means that

when the India yield difference is high, investors have benefitted in the next 1 year in MTM gains


Conclusion:

The past suggests that India’s yield premium has been beneficial for the debt investor. Whenever the

yield premium has been high, the future MTM gains have been good.

Currently, India yield premium is at 4.7% (US 10 Yr at 1.5% & India 10 Yr G-sec at 6.2%)

Section 1.3 – Combined impact of India’s yield premium and rise in US yields on India debt

return

As we see in section 1.1, rising US yields have meant negative MTMs for Indian debt investors.

Similarly, section 1.2 shows that higher starting India yield premiums have meant positive MTMs for

the investors.

However, given that we are in the middle of both these scenarios (potential rising US yield and high

India yield premium), which one takes precedence? To understand that, we further broke down the

data –

Combined impact of rising US yield and India’s yield premium on future debt return

(For each month, we consider the current difference between India 10 yr G-sec yield and US 10 yr G-

sec yield. We also consider the next 12 months rise in US yields. We find out the next 12 month MTM

returns on India 10 yr G-sec)

Observation & Conclusion:

The table successfully parses the individual impact of the two forces. It tells us that when the US

yields have risen sharply, it has been able to nullify the benefit of a high India yield premium. Thus, at

times such as now, when the India yield premium is high but there is a likelihood of a rise in US yields,

debt investors generally end up with negative MTM returns.

India Yield PremiumNo. of

Months

% of

Observations


(next 12 months)

<2% 15 6% -9%

2-4% 74 30% -1%

4-6% 127 51% 3%

>6% 32 13% 3%

Differential 10 Yr - India v/s US

Change in 10 Yr US

Yield (bps)

<2% 2-4% 4-6% >6%

CountMedian

Returns*Count

Median

Returns*Count

Median

Returns*Count

Median

Returns*

<-100 1 8% 13 9% 23 6% 1 7%

-100 to 0 9 -10% 27 -2% 63 4% 19 5%

0 to 100 5 -9% 29 -3% 39 -1% 8 -2%

>100 0 5 -4% 2 -3% 4 -3%


* Median debt MTM returns for next 12 months


13

Section 2 – India Equity Investor

Section 2.1 - Impact of rising US yields on India equity return

(For each month, we see the next 1 year change in US yield and compare it to the next 1 year return

of Nifty)

Observation:


when the US yields have gone up, Indian equity returns have generally been positive.


Conclusion:

Quite counterintuitively, rising US yields have benefitted Indian equity investors. This is contrary to

perceived wisdom. Rising US yields have coincided with strong economic growth.

Section 2.2 - Impact of rising Indian yields on India equity return

(For each month, we see the next 1 year change in India 10 yr yield and compare it to the next 1 year

return in Nifty)

-100.0%

-50.0%

0.0%

50.0%

100.0%

-300

-200

-100

0

100

200

Feb

-00

Oct

-00

Jun

-01

Feb

-02

Oct

-02

Jun

-03

Feb

-04

Oct

-04

Jun

-05

Feb

-06

Oct

-06

Jun

-07

Feb

-08

Oct

-08

Jun

-09

Feb

-10

Oct

-10

Jun

-11

Feb

-12

Oct

-12

Jun

-13

Feb

-14

Oct

-14

Jun

-15

Feb

-16

Oct

-16

Jun

-17

Feb

-18

Oct

-18

Jun

-19

Feb

-20

Chart 3 - US yield change vs Nifty Returns

Change in US 10 yr Nifty Ret

Ch

ange

in U

S b

on

d Y

ield

sN

ifty Re

turn

s

Change in 10 Yr US Yield (bps)No. of

Months

% of

Observations


(next 12 months)

<-100 38 15% -6%

-100 to 0 118 48% 9%

0 to 100 81 33% 22%

>100 11 4% 42%

-100.0%

-50.0%

0.0%

50.0%

100.0%

-400

-300

-200

-100

0

100

200

300

Feb

-00

Oct

-00

Jun

-01

Feb

-02

Oct

-02

Jun

-03

Feb

-04

Oct

-04

Jun

-05

Feb

-06

Oct

-06

Jun

-07

Feb

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Oct

-08

Jun

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Feb

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Oct

-10

Jun

-11

Feb

-12

Oct

-12

Jun

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Feb

-14

Oct

-14

Jun

-15

Feb

-16

Oct

-16

Jun

-17

Feb

-18

Oct

-18

Jun

-19

Feb

-20

Chart 4 –Indian 10 Yr G-sec yield change vs Nifty Returns

Change in Ind 10 yr Nifty Ret

Ch

ange

in In

dia

n 1

0 Y

rG

-se

c Y

ield

sN

ifty Re

turn

s



14

Observation:


when the G-sec yields have gone up, Indian equity investors have made positive returns


Conclusion:

Similar to Section 2.1, quite unexpectedly, Indian equity investors have benefitted when the yields

have risen.

To complete this study, we also studied the impact of rising US yields on US equity markets. Again,

we found a high correlation of 56% over the last two decades with the following observation table.

Key Takeaways:

1. We are at a crucial global economic juncture where yields are expected to rise in the near to

medium term

2. Rising US yields have coincided with negative MTMs for Indian debt investors

3. Current India yield premium over US debt is high. Historically, this has coincided with positive

MTM gains for domestic debt investor

4. However, the combined effect of 2 and 3 shows that rise in US yield has a greater negative effect

than the positive support from higher yield differential

5. Against the popular wisdom, rising US yields have historically meant higher returns for US and

Indian equity markets as it coincided with strong economic growth

6. Similarly, in the past, even rising Indian yields have coincided with higher equity returns

Note:

These can be called median conclusions from the vast data over the last two decades. It is foolhardy

to make hard conclusions as each scenario will need to be studied in isolation. However the study still

gives some interesting results – some expected and some counterintuitive.

Change in 10 Yr Ind Yield

(bps)

No. of

Months

% of

Observations

Median Debt MTM

Returns (next 12 months)

<-150 31 13% -10%

-150 to 0 106 43% 10%

0 to 150 102 41% 19%

>150 9 4% 18%

Change in 10 Yr US

Yield (bps)

No. of

Months

% of

Observations

Median Debt MTM Returns (next

12 months)

<-100 38 15% -1%

-100 to 0 118 48% 7%

0 to 100 81 33% 15%

>100 11 4% 22%



Dots to Join

15

1. Debt Quality: Credit rating upgrades of corporates have outpaced downgrades in Q1 FY22,

indicating improved debt servicing ability. Icra upgraded ratings of 142 entities and downgraded 82

entities in April- June. Rising scale of operations and order book, longer track record of operations

and favourable corporate actions are some of the reasons for upgrades in Q1FY22.

2. M-Cap to GDP Ratio: The market-cap of listed companies in India currently is 122% of India’s

latest annualised GDP. The ratio was 112% in June and 103% in March 2021. The ratio currently

is the highest since December 2008, when it was 150%. It is nearly 55% higher than the 15-year

median ratio of 79%.

3. SIP Accounts: New Systematic Investment Planning (SIP) account registrations hit a record high

at 24.9 lakhs in August 2021. The number of registrations in August was 2.5x the long-term

average. For the 3rd consecutive month, SIP registrations were more than 20 lakhs, taking the total

tally of SIP accounts to 4.3 crore.

Source – Mint

Source – Business Standard


Source – Economic Times

Dots to Join

16

4. Global Equity Flows: Annualized inflows to global stocks in 2021 topped $1 trillion as per Bank of

America analysts. Global central banks have kept monetary policy accommodative to fight the

pandemic and have made record purchases of securities since the pandemic. The cumulative

inflows in global stocks between 2001 and 2020 were at $800 bn

5. US Consumers’ Inflation Expectations: U.S. consumers’ inflation expectations rose to the

highest levels since 2013 as per a survey by Federal Reserve of New York. Year-ahead inflation

expectations increased for the 10th straight month to a median of 5.2% in August. Inflation

expectations over the next three years increased to a median of 4.0%. The higher inflation

expectations may result in a faster monetary policy normalization.

.

6. Chinese EV Fundraising: As per Qichacha report, investors have poured in more than 82 bn

Yuan ($12.7 bn) into 50 electric car-related projects in H1 2021. BYD topped the list by amount

raised. Nio shares surged more than 10x in 2020 after it received a capital injection of 7 bn Yuan

($1 bn) from state-led investors. Xpeng had also announced raising 500 mn Yuan from theinvestment arm of Guangdong province.

Source: Market Watch

Source: South China Morning Post, CNBC

Source: Reuters


3.2

4.9

7.7

9.6

11.3

Li Auto WM Motors Xpeng Nio BYD

Total Funds Raised by Chinese EVs ($ bn)

Index Performance

17

Data as on 30th September 2021. Returns less than 1 year are in absolute terms and greater than 1 year are CAGR

Source: ACE MF, BSE, NSE

Index Performance (30-September-21)

Indices 1 M 3 M 6 M 1 Y 2 Y 3 Y 5 Y 10 Y

NIFTY 50 2.8 12.1 19.9 56.6 25.2 17.2 15.4 13.5

S&P BSE SENSEX 2.7 12.7 19.4 55.3 24.6 17.7 16.2 13.6

S&P BSE 500 3.3 11.5 22.1 61.2 28.3 18.3 15.4 14.1

S&P BSE Mid-Cap 5.9 12.1 25.1 71.7 35.1 19.5 13.9 15.2

S&P BSE Small-Cap 4.3 11.3 36.0 88.9 47.2 24.8 17.0 15.1

NIFTY AUTO 5.6 0.0 7.5 34.0 21.9 3.4 1.1 11.5

NIFTY BANK 2.7 7.6 12.4 74.5 16.1 14.2 14.2 14.7

Nifty Financial Services 1.3 11.3 16.5 72.3 20.4 20.0 18.1 16.9

NIFTY FMCG 2.3 12.0 15.7 35.5 16.8 10.7 13.4 15.0

NIFTY INFRA 6.7 15.8 22.9 63.1 28.0 19.1 12.5 6.9

NIFTY IT 1.3 20.1 35.5 75.6 45.5 30.2 27.7 19.9

NIFTY MEDIA 33.5 19.0 38.4 38.2 5.4 -4.4 -6.4 6.0

NIFTY METAL -1.8 7.6 41.1 150.2 53.6 17.2 17.3 6.7

NIFTY NEXT 50 1.9 10.1 24.0 56.8 25.4 15.8 13.1 15.7

NIFTY PHARMA 0.8 1.1 17.9 22.9 32.2 13.2 4.8 12.3

NIFTY PRIVATE BANK 3.2 6.3 9.5 64.6 12.1 11.1 12.6 0.0

NIFTY PSU BANK 6.3 -1.4 15.1 94.4 0.2 -2.8 -4.5 -2.5

NIFTY REALTY 32.8 49.4 53.8 142.5 36.8 32.7 20.4 8.0

S&P BSE Consumer Durables 10.7 16.2 25.9 70.3 31.3 29.2 26.9 20.6

S&P BSE OIL & GAS Index 7.1 13.1 23.5 49.5 17.1 7.2 10.0 8.0

S&P BSE Power Index 9.5 16.1 29.2 93.5 28.7 18.3 10.0 4.2

S&P BSE Telecom 10.6 28.5 35.9 70.1 37.1 19.8 8.4 3.6


Macro Economic Indicators

GDP Growth (%): Inflation:

Industrial Production Growth: India Composite PMI:

Domestic Yield Movement: 10 Year US Treasury Yield Movement:

Sep-20 Dec-20 Mar-21 Jun-21 Sep-21

US Yields 0.69 0.92 1.74 1.47 1.49


Repo 4.00 4.00 4.00 4.00 4.00

1 Yr CD 6.02 5.89 6.18 6.05 6.22

10 Yr Gsec 3.95 3.65 3.95 4.03 3.98

Jul-20 Oct-20 Jan-21 Apr-21 Jul-21

IIP -10.50 4.50 -0.60 133.50 11.50

Aug-20 Nov-20 Feb-21 May-21 Aug-21

Composite PMI 46 56.3 57.3 48.1 55.4

Aug-20 Nov-20 Feb-21 May-21 Aug-21

WPI 0.41 2.29 4.17 13.11 11.39

CPI 6.69 6.93 5.03 6.3 5.3

Source : Ministry of Statistics & Programme Implementation

Source : investing.com, RBI, Bloomberg

Source : investing.com

Source :www.fxempire.comSource : Ministry of Statistics & Programme Implementation

Q4

FY20

Q1

FY21

Q2

FY21

Q3

FY21

Q4

FY21

Q1

FY22

Quaterly

GDP %3.0 -24.4 -7.4 0.5 1.6 20.1

Source : Ministry of Statistics & Programme Implementation

7.1

20.1

-30

-20

-10

0

10

20

30Q

1 F

Y19

Q2

FY1

9

Q3

FY1

9

Q4

FY1

9

Q1

FY2

0

Q2

FY2

0

Q3

FY2

0

Q4

FY2

0

Q1

FY2

1

Q2

FY2

1

Q3

FY2

1

Q4

FY2

1

Q1

FY2

2

0.41

11.39

6.695.30

0

5

10

15

Au

g-2

0

Sep

-20

Oct

-20

No

v-2

0

Dec

-20

Jan

-21

Feb

-21

Mar

-21

Ap

r-2

1

May

-21

Jun

-21

Jul-

21

Au

g-2

1

WPI CPI

-10.511.5

-50

0

50

100

150

Jul-

20

Au

g-2

0

Sep

-20

Oct

-20

No

v-2

0

Dec

-20

Jan

-21

Feb

-21

Mar

-21

Ap

r-2

1

May

-21

Jun

-21

Jul-

21

46

55.4

40

45

50

55

60

Au

g-2

0

Sep

-20

Oct

-20

No

v-2

0

Dec

-20

Jan

-21

Feb

-21

Mar

-21

Ap

r-2

1

May

-21

Jun

-21

Jul-

21

Au

g-2

1

4.00

4.00

6.026.22

3.95 3.98

3

3

3

4

4

4

4

3

4

5

6

7

Sep

-20

Oct

-20

No

v-2

0

Dec

-20

Jan

-21

Feb

-21

Mar

-21

Ap

r-2

1

May

-21

Jun

-21

Jul-

21

Au

g-2

1

Sep

-21

Repo Rate 10 Yr G-sec 1 Yr CD Rates (RHS)

0.69

1.49

011111222

Sep

-20

Oct

-20

No

v-2

0

Dec

-20

Jan

-21

Feb

-21

Mar

-21

Ap

r-2

1

May

-21

Jun

-21

Jul-

21

Au

g-2

1

Sep

-21

18MARKET MACROSCOPE | INVESTMENT PRODUCTS | OCTOBER 2021

Macro Economic Indicators

FII Equity Flows (Rs cr): FII Debt Flows (Rs cr):

USD vs. INR: Gold Price (Rs/10gm):

Brent Crude (USD/Barrel):

Sep-20 Dec-20 Mar-21 Jun-21 Sep-21Brent

Crude40.95 51.80 63.54 75.13 78.35


$ vs. ₹ 73.77 73.07 73.11 74.33 74.24


Gold Price 50,528 50,123 44,228 46,773 45,959


FII Debt

Flows4,364 6,542 6,822 -3,946 13,363

Source : NSDL

Source :Investing.com

Source : India Bullion and Jewellers AssociationSource : Bloomberg


FII Equity

Flows-7,783 62,016 10,482 17,215 13,154

Source : NSDL

(7,783)

13,154

(20,000)

-

20,000

40,000

60,000

80,000Se

p-2

0

No

v-2

0

Jan

-21

Mar

-21

May

-21

Jul-

21

Sep

-21

4,364 13,363

-10,000

-5,000

0

5,000

10,000

15,000

20,000

Sep

-20

No

v-2

0

Jan

-21

Mar

-21

May

-21

Jul-

21

Sep

-21

73.77

74.24

72

73

73

74

74

75

75

Sep

-20

Oct

-20

No

v-2

0

Dec

-20

Jan

-21

Feb

-21

Mar

-21

Ap

r-2

1

May

-21

Jun

-21

Jul-

21

Au

g-2

1

Sep

-21

50,528

45,959

40,000

43,000

46,000

49,000

52,000

55,000

Sep

-20

Oct

-20

No

v-2

0

Dec

-20

Jan

-21

Feb

-21

Mar

-21

Ap

r-2

1

May

-21

Jun

-21

Jul-

21

Au

g-2

1

Sep

-21

40.95

78.35

30

40

50

60

70

80

90

Sep

-20

Oct

-20

No

v-2

0

Dec

-20

Jan

-21

Feb

-21

Mar

-21

Ap

r-2

1

May

-21

Jun

-21

Jul-

21

Au

g-2

1

Sep

-21


India Horizons All-star Portfolio

20

Portfolio Details:

Performance

Data as on 30th Sep 2021 Launch Date: 06-Apr-21, Returns less than 1 year are absolute, more than 1 year are CAGR

Stock % Stock %

Bank Bees 9.3% Mahindra & Mahindra 3.0%

Infosys 5.8% Supreme Industries 2.9%

Reliance Industries 5.1% Minda Industries 2.9%

State Bank of India 4.7% Zydus Wellness 2.8%

Axis Bank 4.6% Max Financial Services 2.8%

Apollo Hospitals 4.4% Larsen & Toubro 2.7%

Somany Ceramics 4.1% Sun TV Network 2.6%

Birla Corporation 4.0% Mrs. Bectors Food Specialities 2.6%

Saregama India 4.0% Radico Khaitan 2.6%

Atul Ltd 3.9% Thyrocare Technologies 2.2%

Laurus Labs 3.5% Phoenix Mills 2.1%

PNC Infratech 3.4% Bajaj Auto 2.0%

Jk Cement 3.2% KEC International 1.6%

Crompton G. Consumer Elec 3.2% Cash 4.1%


3.1%

7.5%

25.9%

2.8%

12.1%

18.7%

5.9%

12.1%

23.3%

1M Returns 3M Returns Since Inception

India Horizons All-star Portfolio Nifty 50 S&P BSE Midcap

Large Cap, 42%

Mid Cap, 30%

Small Cap, 24%

Cash, 4%

Market Cap Allocation

2%

2%

3%

4%

4%

5%

6%

6%

7%

7%

8%

10%

15%

21%

POWER

RETAIL

MISCELLANEOUS

FERTILIZER &…

CASH

OIL & GAS

TECHNOLOGY

CAP GOODS &…

MEDIA

CEMENT

AUTO

PHARMA /…

CONSUMER

BFSI

Sector Allocation

India Horizons Bellwether Portfolio

21

Portfolio Details:

Performance

Data as on 30th Sep 2021. Launch Date: 06-April-21. Returns less than 1 year are absolute, more than 1 year are CAGR

Stock % Stock %

Bank Bees 14.5% Bata India 3.5%

United Spirits 6.2% KNR Constructions 3.0%

Infosys 5.5% Mahindra & Mahindra 2.7%

SBI Life Insurance Company 5.4% Ultratech Cement 2.7%

Reliance Industries 5.2% Thyrocare Technologies 2.5%

ITC 5.1% Bajaj Auto 2.5%

ICICI Bank 5.0% UPL Ltd 2.4%

State Bank of India 4.8% Sun TV Network 2.3%

Carborundum Universal 4.8% Godrej Agrovet 1.8%

TCS 4.3% Huhtamaki PPL 1.5%

Dr. Reddy's Laboratories 4.2% KEC International 1.3%

Larsen & Toubro 3.7% Cash 5.0%

Large Cap, 74%

Mid Cap, 6%

Small Cap, 15%

Cash, 5%

Market Cap Allocation


3.5%

8.1%

23.2%

2.8%

12.1%

18.7%

1M Returns 3M Returns Since Inception

India Horizons Bellwether Portfolio Nifty 50

1%2%2%2%3%4%

5%5%5%

7%10%

11%13%

30%

POWER

MISCELLANEOUS

MEDIA

FERTILIZER &…

CEMENT

RETAIL

CASH

Oil & Gas

AUTO

PHARMA /…

TECHNOLOGY

CAP GOODS &…

CONSUMER

BFSI

Sector Allocation


CROSSWORD

Note : Solution for the above crossword will be provided in next month’s newsletter

Across

4 An option _________ is the current market price of an option contract (7)

7 An entity established by a wealthy family to manage its assets and investments (6,6)

8 ____ rate refers to the minimum interest rate charged by a Bank(4)

9 A stock, bond, or other asset that cannot easily and readily be sold(8)

11 _____ ratio is a measurement of the portfolio's outperformance per unit of the portfolio's volatility (6)

13 Entity that computes insurance risks and premiums in a scientific manner(7)

14 _____ inflation refers to the non-food, non-fuel component of the inflation basket(4)

Down

1The process of selling a government-owned enterprise to a privately owned and operated entity(13)

2 Interest rate differential between two bonds(6)

3 Measure of sensitivity of the price of a debt instrument to a change in interest rates(8)

5 Goods produced domestically but consumed abroad(7)

6 _____________ Fund is a concentrated mutual fund which invests in a limited number of stocks(7)

10 A contract whose value is based on an underlying financial asset (10)

12 A Corporation's purchase of its own shares in the stock market (3,4)

Answers of last month’s crossword: Across

4 Crowdfunding

6 Lock in

8 Reflation

11 Bid

12 Cashier

14 Contract

Down

1 Acquisition

2 Loan to value

3 Bull

5 Dividend

7 Contra

9 Maturity

10 Merger13 Coupon

1

2 3

4 5

6

7 8

9 10

11 12

13

14

Disclaimer

24

Investment in securities market are subject to market risks, read all the related documents carefully before investing.

This note has been prepared exclusively for the benefit and internal use of the recipient and does not carry any rightof reproduction or disclosure. Neither this note nor any of its contents maybe used for any other purpose without theprior written consent of HDFC Securities Ltd (HSL)

Information herein is believed to be reliable however HDFC Securities Ltd. does not warrant its completeness oraccuracy. Although HDFC Securities Ltd. tries to ensure that all information and materials in relation to the products,services, facilities, offerings or otherwise provided as part of its website or through any other source ofcommunication, is correct at the time of inclusion on the communication, it does not guarantee the accuracy of theinformation.

Use of this presentation /note is at the sole risk of the user / client. The data and information provided on the websiteor in any presentation / note is not professional advice and should not be relied upon as such. HDFC Securities Ltd.may at any time edit, alter and or remove any information in whole or in part that may be available and that it shall notbe held responsible for all or any actions that may subsequently result into any loss, damage and or liability. Nothingcontained herein is to be construed as a recommendation to use any product or process, and HDFC Securities Ltd.makes no representation or warranty, express or implied that, the use thereof will not infringe any patent, or otherwise

HDFC Securities Ltd. would have an exclusive discretion to decide the clients who would be entitled to its investingservices. HDFC Securities Ltd. also reserves the right to decide on the criteria based on which clients would bechosen to participate in these services. HDFC Securities Ltd. is incorporated under the regulatory laws of India andhence adheres to the same laws for entering into or executing an agreement with the client

This note does not purport to contain all the information that the recipient may require. Recipients should not construeany of the contents herein as advice relating to business, financial, legal, taxation, or investment matters and areadvised to consult their own business, financial, legal, taxation and other advisors concerning the company.

This note does not constitute an offer for sale, or an invitation to subscribe for, or purchase equity shares or otherassets or securities of the company and the information contained herein shall not form the basis of any contract. It isalso not meant to be or to constitute any offer for any transaction.

As a distributor, HDFC Securities Ltd. does not assume any responsibility or liability arising from the sale of anyproduct and the investor's contract for purchase/sale is directly with the product provider. HDFC Securities Ltd. mayearn a distribution fee from the product provider on completion of sale of such products. To reiterate, HDFC SecuritiesLtd. only acts as a Distributor. There is no element of advisory involved.


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