ANNUAL

OUTLOOK -
2019.
 INDEX

PAGE NO.

Foreword 1

Crystal Ball gazing 4

5
Macro-economic summary

Key themes that would shape the markets in 2019 7

• Will a slowing world stall Fed rate action? 9
• Dynamics of Crude prices? 10
• Change of guard at the RBI - pro market? 11
• The election year - More noise, less impact? 12
• Earnings remains the key driver for markets 13
• Commercial and residential impacted by 3 key resets - 14
Will they resurrect in 2019?

Views on asset class 16

• Equity 17
• Fixed Income 19
• Real Estate 21
• Gold 22
• Currency 23

Investment Strategy 25
• Equity 26
• Fixed Income 27
• High Yield Credits 28
• Real Estate 30

Suggested Asset Allocation 31

Annual Outlook 2019 Reliance Private Client 1

FOREWORD
As we welcome 2019, I would like to wish you all
CY2019 will see a lot of prosperity, happiness and a better New Year.
action in the initial few
What a year 2018 has been! As is natural at this stage
months while we
believe the later part of any year, one is tempted to reflect on what shaped

of the year would the capital markets in 2018 and the impact it had on
bring more returns across various asset classes.
stability and provide
The Nifty 50 benchmark Index (representing large
a definitive direction
caps) delivered a return of ~4 % in CY18, punching
to the markets
well below its weight. However, the damage to stock
prices in the broader market has been even severe -
Nifty Next 50 Index is down ~10% and those who held the Mid Cap stocks are staring at ~17%
eroded from the price. In CY17, these indices generated a handsome return of 29%, 43%
and 46% respectively. The earnings growth in the last few years has been lackluster.
However, markets have waded through these times of high valuation levels.

Debt investors got rudely reminded about both the key risks in this asset class. Interest
rates fluctuated wildly in 2018. The 10-year GSec yields began around 7.25%, went all the
way to around 8.15% and back at around 7.4% currently. While the economic indicators
never gave clear directional signals, advisors were telling investors to avoid duration
strategies and stick to accruals, by investing in the high yielding funds. Then shockingly,
IL&FS with close to USD 13 Billion worth of debt on its books, went belly up. Worth
mentioning here that this institution was a AAA rated company till very recently. This has
had a cascading effect on liquidity in the NBFC sector apart from some write downs in
funds holding this paper.

Will anything change much in CY2019? Most likely not until the later part of CY2019.
Upcoming general elections would only add to the chaos. Till such time as the market sees
stability of governance, policy making and execution, we can expect the volatility to stay.
Global factors like crude prices and currency, apart from trade wars also continue to spook
markets every now and then. Valuations being the way they, the next sustainable rally in
equities should predominantly be driven by strong growth in corporate earnings.

So, what really drives investor behavior? What is the trick to investing in volatile times? Is
there a strategy that can be created and deftly executed on a yearly basis? What should
advisors be cognizant of while creating portfolios for investors?

Invariably investors tend to chase returns. We believe investments should in fact chase
potential growth. Investment strategy could revolve around pure growth, valuation
appreciation & quality or a combination of these. At the top of the approach should be an
asset allocation strategy which makes sure that portfolio returns remain optimized for all
market conditions.

Annual Outlook 2019 Reliance Private Client 2

FOREWORD

We believe that portfolios should be tactically altered during certain market

conditions. There is evidence that such tactical asset allocations yield better returns in
the long run. This really is the value added by a financial advisor.

Staying in a portfolio for the long term is more critical in volatile times than during calm
periods. In fact, systematic investing will help more than ever. One should not ignore
the volatile asset class at all, also because no asset class can be predicted to be the top
performer consistently, year after year.

To our minds, CY2019 will see a lot of action in the initial few months while we believe
the later part of the year would bring more stability and provide a definitive direction to
the markets.

This report aims to capture this Tale of Two Halves that should keep both investors and
investment managers on their toes throughout the year. We have addressed the key
themes that according to us would shape this year, their impact on various asset
classes and made a sincere attempt to analyze present scenario and scientifically
stargaze into the immediate future.

Satish Rajaram
Investment Director

Reliance Private Client

Annual Outlook 2019 Reliance Private Client 3

Crystal Ball
Gazing:
FY2020
Forecasts

CPI
GVA (YoY)
4.0% -
7.50%
4.5%

INR/USD
Brent Crude
Mild under
depreciation 75($/bbl)
expected

10yr G-Sec FOMC

Yield
action
7.50% - 2 hikes
7.75% expected

RBI Monetary
CAD (%GDP) Policy
2.0% - 25bps cut
2.2% in April, pause
thereafter

Annual Outlook 2019 Reliance Private Client 4

Macro-
economic
summary:
Prospects for
2019
 Macro-
economic
summary: 2018 was a mixed year for India’s macroeconomic indicators. Higher Brent crude prices
coupled with weakness in the currency (INR v/s USD) created a challenging macro
Prospects for
environment. While the sharp fall in global crude prices is a relief (and perhaps could
2019 alter macro landscape in India for the better), the overhang of an uncertain political
outcome during the May 2019 Central Government elections leads us to advocate
caution in our CY2019 growth forecasts. However, we remain constructive on other key
macroeconomic indicators for FY20.

Bloomberg consensus estimates indicate GDP growth (YoY) for India at 7.3% in FY19
and 7.3% for FY20. On the back of a surprisingly low Q2FY19 GDP growth of 7.1%,
we are more cautious in our growth estimates for the economy for FY19 and peg it at
7.2%. Lower global trade (escalating trade wars), global growth losing steam (lower Q2
GDP prints across the globe) and rising input costs could create a drag on growth.
This gets accentuated by an adverse base in H2FY19 and the stress seen in NBFC/HFC
space can lead to demand destruction. Our FY20 growth estimates stand at a better
than consensus 7.50% which could be attributed towards increased capacity
utilization, resolution of stressed assets (better recovery), support from private
2018 consumption and pay scale revisions driven by States. Also, the base effect could
turn favorable.
GVA (YoY,%): Fy19 growth to come off; pick-up CPI (%): Lower base and growth holding up
expected in FY20 could see a rise in inflation in H2Y20
8.0%
7.0% 10.0

6.0% 8.0
5.0%
6.0
4.0%
3.0% 4.0
2.0%
2.0
1.0%
0.0% 0.0
-1.0%

(Source: Bloomberg, RBI, RWML Internal Research)

2018’s unique trend has been headline CPI inflation predominantly undershooting
RBI’s medium term target of 4%. Primarily led by unusually subdued food inflation this
has very well counterbalanced a high core and fuel inflation number. While the
intermediate rapid rise in crude prices created a scare of CPI rising yet again, an equally
sharp fall has resulted in headline number remaining well below RBI’s target.
e expect slower global growth and excess supply of oil to keep a check on crude prices
going forward. This could keep check on inflation. However, risks emanate from some
reversal in the drop seen in food prices as lower winter crop sowing and a lower base
could mean headline inflation moving up in FY20, albeit remaining within earshot of
RBI’s medium term target. We peg our FY20 headline CPI forecast in the 4.0% - 4.5%
range assuming crude under $75/bbl and India getting another year of normal
monsoons.

After 5 consecutive fiscal years of Current Account Deficit (CAD) under 2% of GDP, we
expect CAD to widen to 2.5% - 2.8% in FY19 led by a wider trade deficit as imports
growth (~18%) has averaged higher than exports growth (~14%) so far this year. Weaker
global growth in the coming year could impact Indian exports negatively, but CAD
could remain under check owing to benign crude prices (lower global demand)
meaning lower growth in import bill. We expect FY20 CAD to come closer 2% - 2.2%.

Annual Outlook 2019 Reliance Private Client 6

Key events
that would
shape the
markets
in 2019
 Will a slowing
world stall
Fed rate
action? Global growth is decelerating with few emerging economies already in recession and
similar signs witnessed in developed world like Japan, Germany, Italy, Switzerland
more recently.

This has raised uncertainties about the continued strength of the US economy,
especially at a time when the trade frictions are far from fixed. Added to this, there are
concerns on the China’s growth as well.

The straight impact of the US tariffs on international trade has now started to reflect.
Markets are sort of cautioned for a growth miss arising from the trade friction.
Nevertheless, outlook on inflation is more balanced considering relatively softer oil
prices and rare chances of upside surprises in the US inflation.

Fed may raise rates by 50 bps in 2019 as the unemployment rate continues to edge
lower, however, if inflation does not surprise on the upside, Fed may pause.

What policy options central banks might still have at their disposal to respond to any
recession? While policy rates can be cut into ever more negative, however, the central
banks, particularly the ECB and BoJ with their zero rates will be much more restricted
this time considering the already swollen balance sheet.

In December 2018 policy meeting, the FOMC raised the target range for the federal
funds rate by 25bps to 2.25% - 2.50%. However, in a slightly dovish shift, the
Committee’s median rate projections were lowered by 25bps for 2019, 2020 and 2021,
and for the longer run.

The Committee also sounded a little cautionary and mentions to “monitor global and
financial developments and assess their implications for the economic outlook.”

Fed has in the past indicated that they are close to the end of rate hike cycle, however
the same is not yet calibrated by the movements in market rates. Possibly there could
be another two rounds of hike in the offing; however, they may not come back to back.
They would possibly come in a staggered fashion. This will give market enough time to
reprice the assets. So this could be less hurting in the CY2019.

Annual Outlook 2019 Reliance Private Client 8

 Dynamics
of Global
Crude Prices
After touching a 4-year high of USD 86/bbl in Oct-2018, oil prices have been pressured
in late 2018 owing to rising crude oil supplies and concerns about global oil demand in
the wake of the US China trade war and its impact on the global economy. Also prices
declined as US crude stock piles continued to rise and as the American waivers on Iran
Oil sanctions added to the oversupply concerns. Prices also fell following considerable
increases in crude output from major oil-producing countries.

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However, going forward OPEC and its non-OPEC partners (“OPEC+”) came in
consensus and agreed to cut 1.2mbd of supply, effective 1-Jan-19. This also echoes the
determination of core OPEC members, particularly, Saudi Arabia, to guard price and
prevent the oversupply situation in the market. Russia also agreed to participate in the
cuts with 2% of its Oct-18 production level.

Moreover, a reduction in Iran’s oil exports from mid-2019 in the event of US removing its
exemptions to eight oil-importing countries from Iran may result in global oil supply
falling below demand, leading to inventory draw downs and higher global oil prices.

To our reckoning, the agreed cuts are enough to equilibrium the market in 2019, even
with a subdued view on demand, and robust US supply growth. On balance, we keep a
positive view on crude, provided OPEC sticks to production discipline and we think the
OPEC+ deal sets a stage for prices to trend towards USD70-75/bbl.

While we can’t rule out downside from here we think it now appears unlikely, and we
would expect sustained OPEC involvement if it were the case. However, a disruption
between members could witness higher production of oil, in which case we expect
Brent would likely trade lower.

India’s macro position hinges meaningfully on oil, given its influence on several key
variables as every USD 10/bbl increase may (in a ballpark manner):il prices will

1. Raise the CAD by 40 bps

2. Widen the fiscal deficit by 20-30 bps
3. Add 30 bps to inflation
4. Lower growth by 10 bps

Annual Outlook 2019 Reliance Private Client 9

 Change of
guard at the
RBI -
pro market? While the sudden exit of RBI Governor came in as a surprise (and markets reacted
negatively to it), appointment of career bureaucrat to the top post at the central bank
eased the nerves. Markets expect the new RBI governor’s vast experience of closely
working with the Government (within the Finance Ministry) and also his understanding
in policy making to come handy in easing the strained relationship between the
Government and the RBI.

The few challenges that the new governor will have to address is managing the liquidity
situation, prompt corrective action framework and decision on how much surplus
capital needs to be maintained with the RBI in its balance-sheet – the primary bone of
contention between the Government and the RBI. Within a week of taking guard,
Governor already seems to have fired his first salvo by announcing increased quantum
of Open Market Operations (OMO) purchase of bonds in last 2 weeks of December.
Starting January 2019 and until FY19 end, RBI indicated it would be injecting liquidity
to the tune of Rs.50,000 crore each month. Thus, this kind of durable / permanent
MPC to continue with liquidity infusion has benefited bond yields over the last few weeks and is expected to
existing policy aid yields further as we head into CY2019.
framework.
What the investors might want to know is the bearing this change could have or not
have on monetary policy framework.
Real rates of 150bps -
200bps basis RBI’s Additional OMO announcement by the RBI clearly indicates more accommodation /
CY19 CPI projections dovishness on the policy front. If one were to look at all the recent Monetary Policy
leaves less room for rate Committee (MPC) minutes, there has been underlying cautiousness in terms of
cuts inflation projections and a mention of closing output gap (actual and potential GDP
growth). We expect the MPC, under the new chairmanship, to continue to follow a
similar thought process at a broader level. What could play on the MPC’s mind is an
Expect policy stance to uncertain global policy backdrop – US Fed is expected to raise rates atleast twice in
change to neutral CY2019, ECB is already in the middle of quantitative tightening and Bank Of Japan is
expected to embark on that journey in H2CY2019. Also, the dynamics around crude
prices (which is favorable today) could throw up a surprise depending on how the
supply side shapes up. RBI’s recent projections on inflation provide comfort, but are at
best expected to remain closer to its medium term target of 4% with risks evenly
balanced. Another important point that the RBI / MPC would be watchful about is the
current real rate in the economy, which is well above RBI’s targeted 200bps if
compared to the recent headline inflation data. However, if compared to RBI’s
expectation of headline CPI hovering in the range of 3.7% - 4.2% in H1FY20, the real rate
is between 150bps – 200 bps at prevalent Repo rate of 6.50%.

A tightening global scenario and real rates within expected range leaves little room
even for the new Governor to aggressively go for rate cuts in the economy. A closing
out gap only compounds the problem as it could be a matter of time before headline
CPI starts inching up again as demand starts outpacing the supply in the economy.

We believe that the new Governor might only help the monetary policy stance to
change from “calibrated tightening” to being “neutral” and at best could result in a
token 25bps cut in the April policy. But to expect a series of rate cuts (that seems to be
market expectation if one looks at the forwards curve), might be a little premature to
assume given the multiple moving parts in the economy.

Annual Outlook 2019 Reliance Private Client 10

 The election
year -
more noise, Whether general elections impact markets over a longer term or not, it makes an
less impact! interesting topic of discussion in every client interaction in the months before the run
up to the elections and also for the next few months post the event. H1CY2019 would be
swarmed by political news and equations that could probably shape the fortunes of
the next Government at the centre. To our minds, what investors fear is the market
volatility that could crop up due to unexpected election result. The recently concluded
state elections were considered by many as a “semi-final’ for the upcoming elections.
With the incumbent BJP governments having lost out 3 key states (Rajasthan,
Chattisgarh and Madhya Pradesh) in the Hindi heartland, many investors have started
formulating a trend that could be expected in the 2019 general elections.

Result of Election Election day, T = 0

Nifty index rebased to 100 at T=0
MP RJ CG IN
160
1998 150
140
2004 130
120
110
2009
100
90
2014
80
70
2019
Congress BJP
*Source: Election Commission of India, Bloomberg and RWML Internal Research

The chart shown above exhibits that state election results don’t have a conclusive
bearing on the following general elections basis last 6 general elections in these 3
states. The party crossing the winning line during the state election does not
necessarily repeat the performance at the Centre. Also, the general observation is that
the voting pattern during state elections and the centre elections has seen variance in
the same constituencies.

Another aspect that is worth pondering over is the market reaction upto 4 months
prior to the election date and 4 months hence. Empirical evidence seen in the Indian
equities across these 5 general elections (since 1996 – 2014) is that the market trend
generally is not altered due to election results over an extended time period. While we
do agree that the impact might be felt a few trading days prior and post the election
(upto 10 days in our opinion).

What should matter more to investors while making a decision of whether or not to
invest into equities is the time horizon they wish to stay invested for and what the
market valuations / earnings outlook look like. Over the last 20 years, market returns
have been primarily influenced by the P/E levels and expected earnings growth. With
this perspective in mind, event based investment would not matter much for long term
investors.

It’s time to cut through the noise and focus only on the fundamentals that determine
market trends over longer periods.

Annual Outlook 2019 Reliance Private Client 11

 Earnings
remains the
key driver Equity market returns are driven by mainly 2 components – Earnings Growth (EPS) and
for markets. Multiple expansion / re-rating (P/E multiple). When markets are flush with liquidity and
are in a momentum phase, significant art of the returns are contributed by P/E
expansion over EPS growth. However, if one looks at the chart below, one can infer that
EPS growth and market returns are significantly correlated. Here we have taken EPS of
Nifty 50 Index since FY2005 through FY2018 and broadly bucketed into 2 phases – pre
and post FY2008. The market CAGR over both the phases is closely mirroring the EPS
CAGR over same periods. One can see in FY09, Nifty EPS fell by 11%, while the Nifty 50
index delivered a -36% return, as sentiments were negative also resulting in a P/E
compression.

Nifty Price CAGR FY01-FY08: 22% Nifty Price CAGR FY08-FY18: 7.8%

.5%
Y18: 5
8-F
FY0 471
GR
CA
y EPS 407 413 394 417
Nift 348
369
%
08 : 21
1-FY
315
FY0
281
GR 236 251 247
CA
EPS
Nift
y 169 184
131
92
73 78

Another way to look at the correlation between EPS growth and Price growth for Nifty
Index, we take 5yr rolling CAGR for EPS growth and returns. The chart below shows a
decent correlation between the 2 series (R squared of 71%) with intermittent
deviations from the relation.

Decent correlation between 5yr rolling EPS and Price

CAGR for Nifty Index
40%

30% 5yr EPS CAGR

20% 5yr Price CAGR

10%
R sard=71%
0%

However, over a 12 month time frame the correlation seems to slip significantly as the
market returns are driven by a combination of factors such as valuation multiples,
upgrades/downgrades to near term earnings estimates, momentum indicators,
liquidity, news flow, etc.

Annual Outlook 2019 Reliance Private Client 12

 Earnings
remains the
key driver Correlation slips between EPS and Price growth for
for markets. 100% Nifty Index over a 1yr rolling period

80%

60% 1yr EPS Growth

1yr Price Growth
40%

20%

0%

-20%

-40%
R sqrd = 12%

-60%

Recent “trust deficit” in the markets seems to have stalled runaway market rally and is
reflecting in slowing down of domestic MF flows. Global uncertainties (trade war,
crude, EM flows) and uncertain domestic political scenario continues until May 2019.
However, India’s relative macro stability and prospects of higher earnings growth
remain intact for FY20 and beyond. The aforementioned analysis provides comfort
that with expected earnings recovery market performance is a matter of time.

Annual Outlook 2019 Reliance Private Client 13

 Commercial and
residential
impacted by
3 key resets. India is one of the fastest growing nation in the world. In the latest report of
World Bank for Ease of Doing Business Report, India has been placed on 77th
Will they resurrect from 100th position among the 190 countries. The International Monetary Fund
in 2019? has quoted that the Indian economy is expected to grow by 7.3% in FY 2019 and
7.4% in FY 2020. But the country has done a substantial enhancement in
“Construction Permit”, India’s rank has improved from 181 in 2017 to 52 in 2018
and improved its ranking on the global real estate transparency index and is
now at the 35th position from 40th in 2014.

Though the Indian Real Estate Market has not performed upto the mark in last
few years, it has shown substantial improved and bounced back in 2018. JLL
reported that market has shown an increase of 25% year-on-year (y-o-y) in sale
of residential property and growth of 54% in corporate leasing on a y-o-y basis
in the top cities in H1 of 2018.

Affordable Housing to be key
focus area for government with
target of “Housing for All by
2020”
Though Demonization, Introduction of RERA & GST has hit the real estate
market in short term but has increased the transparency & reliability for the
consumers & investors.
Grant for more affordable housing and introduction of Credit Linked Subsidy
Scheme (CLSS) which has been further extended till March 2020 has
benefitted more than 3.39 lakhs people under Pradhan Mantri Awas Yojana
(urban) an initiative launched by the Government of India in which affordable
housing will be provided under the scheme ‘Housing for All by 2022.

By way of introduction & stringent implementation of RERA it will oblige the

developers to improve their business model which has given boost to buyers to
be more confident and bold enough to fight for the injustice done to them by
the developers and have laid developer to follow more polite and regulated
business processes. With the current discussion about changes in tax laws
related to unsold inventories developers are soon expected to be burdened
with a tax which could be 30% of the ready reckoner value and the only way out
for them would be to sell the inventory at the earliest, if it is unoccupied by a
tenant.

In view of India’s positive changes in its real estate regulatory framework, India
is now a lot more attractive to foreign investors along with its NRI & Indian
investors. The liberalization of the FDI norms will further improve the cash flow
into the sector.

Annual Outlook 2019 Reliance Private Client 14

 Commercial and
residential
impacted by
3 key resets. Under RERA a total of 33,750 projects and 26,018 real estate agents have been
registered across the country. Maharashtra has been the frontrunner with
Will they resurrect regards to registrations. So far, 18,392 projects and 17, 188 real estate agents
in 2019? have been registered.

Indian is still considered one of the favorite real estate investment destination,
Mumbai and Bengaluru have been rated as the top real investment destinations
in Asia. IBEF has projected Real Estate sector in India is expected to reach a
market size of US$ 1 trillion by 2030 from US$ 120 billion in 2017.

With consolidation in the real estate sector, developers with ethical practices
and strong & clear financial track records who adhere to the rules and
regulations of RERA will be able to sustain this changing market.

Real Estate market is on the dawn of revival & steadiness making it attractive
for foreign investors.

Annual Outlook 2019 Reliance Private Client 15

Views on
asset class
 Equities

In CY2018, we had maintained a Neutral allocation view on Indian equities.

We see earnings revival as the single most important factor that would provide
direction to Indian equity markets over the medium term. Global news flow and
domestic events would continue to add to market volatility and so would the mid-year
General elections in India. We expect the first half of CY19 to turn out to be busier than
the latter half of the year.

The start to CY2019 could be on a more favorable footing vis-à-vis what we witnessed
as we entered CY2018 – 1yr forward valuations look more reasonable currently @19.5x
than seen a year back (21.1x). Also, the macroeconomic construct for India seems to be
in a better shape given the closer to $50/bbl brent curde prices, headline inflation
under control (with benign outlook), manageable CAD and a contained fiscal deficit
number. Currency too (INR) vis-à-vis the USD seems to be more realistically valued
with the adjustments it has undergone through 2018.

12m Fwd Nifty P/E continues to trade Nifty valuations trading at 75% premium
above 19x - closer to +1sd levels 85% to MSCI Emerging Markets Avg.
22
premium 40%
75%
20
65%
18 55%

16 45%

35%
14
25%
12
15%

10

Q2FY19 earnings season witnessed strong sales growth being announced by most
companies, but the margin pressure was evident for the broader universe and earnings
breadth seems to be deteriorating. Input cost pressure is being increasingly absorbed
by companies as the demand environment in weakening. This could be an early sign of
an impending slowdown and warrants close monitoring.

Annual Outlook 2019 Reliance Private Client 17

 Equities

Fiscal Year FY18 FY19E FY20E FY21E

Sensex EPS 1,525 1,729 2,084 2,334

PE Multiple 17 26,010 29,391 35,417 39,666

18 27,540 31,120 37,500 42,000

19 29,070 32,849 39,583 44,333

20 30,600 34,578 41,666 46,666

• Our Sensex earnings growth estimates for FY19 are lowered to 13% (YoY) in line with
consensus.

• Valuations are at +1sd over mean of 17x; 75% premium to EM.

• As a base case, discounting FY21E EPS @17P/E, we expect Sensex closer to 40,000
(10% upside) by March 2020.

• In event of a clear majority / stable government in 2019, benign crude prices

continuing and earnings surprising on upside (bull case) we could expect re-rating of
markets.

• If this scenario plays out, we expect the Sensex to trade clsoer to 44,000 @19x P/E by
March 2020 (~22% upside)

• Whatever the case might be (base/bull) we expect the markets to move higher in
CY2019. While a stable government and continuity of policy framework would be
cheered by markets, uncertainty might only delay the upside as we have observed that
over a medium - longer term, markets starts focusing on fundamentals.

We continue to remain neutral and selective in our allocation towards equities given
the limited upside (base case) and unfolding uncertainties until first half of CY2019.

Annual Outlook 2019 Reliance Private Client 18

 Fixed
Income
The year 2019 begins with numerous headwinds in the form of uncertainties in both
Global & Domestic issues.

Some of them are?

National Elections in 2019

After the recent setbacks in the state elections, there have been reports that NDA
Government at the Centre might be rolling out a DIS (Direct Income Scheme)
nationally. We have 160mn hectares of agricultural land. Assuming the current
Government uses the model like the state of Telangana, where DIS is applied at the rate
of Rs 4000 per acre per season; total cost at the National level works out to be
approximately Rs 3.0 trillion. Even if it is rolled out on a mini scale level in select states,
total costing might be to the tune of Rs 0.7-1.0 Trillion.

Whichever party comes to power at the Centre post May 2019, one thing is for sure,
they are expected to take up Pro-poor Policies & there is a high possibility of numerous
freebies & subsidies being doled out. The cost of this would result in some large
spending. There is a huge probability of all that impacting Prices of essential goods &
articles and subsequent rise in Inflation.

Our view is that Inflation should start marginally inching up by the end of Q2.

Crude Oil

Crude oil prices are key to any economy’s performance. The current events in 2018,
does have a recipe for renewed action in 2019. The House of Cards that was played on
by the OPEC Countries in managing the price of Global crude oil prices can be seen
again getting enacted in 2019.

Global Trade wars

The China-US trade was has currently seen a lame pullback from both sides. However,
the there are several issues that are unsolved. This brewing up of unresolved pinching
points could snowball to another round of fresh Sanctions from either side. Indian
exports are sensitive to these actions & we can see the impact on INR/$ rates & thus
impacting Domestic Rates.

Fed Action & Way forward

Fed has in the past indicated that they are close to the end of rate hike cycle, however
the same is not yet calibrated by the movements in market rates. Possibly there could
be another two rounds of hike in the offing; however they may not come on back to
back. They would possibly come in a staggered fashion. This will give market enough
time to reprice the assets. So this could be less hurting in CY2019.

Annual Outlook 2019 Reliance Private Client 19

 Views on
asset class
New RBI Governor,MPC Members & their Actions

The incumbent Governor of RBI, as done recently would soothe the markets & provide
a succor to the volatile times we are in. There would be a change in stance to Neutral
from previous hawkish stance. This would be supported by quantum increase in OMO &
Buy back of bonds in 2019. The fiscal deficit numbers for Apr-Nov 2018 is currently at
115% of the estimated figures (last fiscal it was 112% for similar period). Add to this the
lower tax revenue at 49.4% of collection targets for FY 19, (against 57% last fiscal same
period); a 3.5% Fiscal deficit for FY19 is a near certainty.

CPI is currently falling due to Rural Food Deflation. But to address this we will likely see
some ''Dole out money'' come in the form of: Farm Loans & Interest waivers, Direct
Cash Transfers, Increase in Collateral Free Loans. All CPI positive! What needs to be
measured is the Lag time for the above - rates down then up or flat .There is also the
question of FPI being supportive come Jan 2019. The key still remains the RBI. If OMOs
were to reduced or stopped there will be a sharp correction. Part of the OMO has been
to return the liquidity taken out by FX intervention. If rupee were to stabilize around 70
to the Dollar, this would cease.

So RBI might be forced to cool off the market volatility through OMOs & Buy back of
bonds in 2019. They might even signal a change in stance to neutral.

Possible Event / Scenario Positive Outcome Negative Outcome Overall Impact

National Elections 30% 70% Rise in Rates
Crude Oil 40% 60% Rise in Rates
Global Trade War 40% 60% Rise in Rates
Fed Action 70% 30% Neutral
New RBI Governor, 50% 50% Positive
MPC Members & their Actions

Period Major factors expected Range of Range of 3Y

to dominate 10Y G-Sec AAA rated paper

Jan 2019 to March 2019 RBI actions dole outs by GOI 7.10% - 7.35% 8.10% - 8.50%

Apr 2019 to June 2019 National elections, RBI actions, 7.30% - 7.45% 8.25% - 8.70%
Crude oil, Fed action

Jul 2019 to Sep 2019 Global trade war, Crude oil, Fed 7.50% - 7.75% 8.40% - 8.80%
action, Domestic consumption

Oct 209 to Dec 2019 Domestic consumption 7.70% - 7.80% 8.50% - 9.00%

Annual Outlook 2019 Reliance Private Client 20

 Real Estate
Increasing Demand

• With decline in the number of transactions in few years, the demand of houses has
been increasing due to urbanization, growing population and increasing disposable
income.
• Increasing demand for 10 million migrants to urban population
• India is among the top 10 price appreciating housing markets internationally
• Growing economy driving demand for commercial and retail space

Increasing Opportunities

• Growing demand for commercial, logistic, education, healthcare & e-commerce

• There is a global rise in co-working culture and start-ups prefer these flexible working
spaces at affordable rates
• Developers offering budget sensitive homes and indirect discounts to the buyers
• The Securities and Exchange Board of India (SEBI) has given its approval for the Real
Estate Investment Trust (REIT) platform which allows investors to invest in the Indian
realty industry
• Emerging new sector for senior living and student housing in India

Increasing Investment

• NRIs are expected to invest more in real estate sector in 2019 due to decline in the rupee
value v/s dollar
• Private Equity and Venture Capital investments in the sector has reached US$ 3.37 billion
between Jan-Oct 2018 (IBEF Report)
• Ease in the FDI norms has increased foreign capital inflows to India’s real estate sector

Annual Outlook 2019 Reliance Private Client 21

 Gold
Gold failed to witness any uptrend in CY18 (down 1.6% to close at USD1269/oz) amid
various risks triggering flows into US assets. The tightening by Fed and decent US growth
further caused investors to view USD as a safe haven asset greatly changing the fund flows
in market.

Gold price (USD/oz)

1400

1350

1300

1250

1200

1150

1100

1050

1000
May 16

Nov 16

Nov 18
May 17

Nov 17
Sep 16

Sep 18
Mar 16

Sep 17

Mar 18
Mar 17
Jan 16

Jan 18
Jan 17
Jul 16

Jul 18
Jul 17

Despite majority of geo-political and economic issues being initiated by United States, the
USD basked in all its glory backed by strong fundamentals. The major issues which created
high demand for USD are listed below:

• Brexit
• Sino-U.S. Trade War
• NAFTA
• Death of Saudi Journalist & Resulting Tensions between US-Saudi
• US Tariff on European Markets with Main Focus on Automotive Products
• German Political Proceedings Which Saw Chancellor Merkel lose Influence
• Italian Budget Crisis

Post Sep-18, gold rebounded from lows made during the initial half of the year as political
and economic issues in US market affected USD value in broad market. This combined with
unfavourable proceedings in geo-political issues and concerns of slowdown in global
economy helped gold reclaim losses ending Dec-18 on neutral levels.

Going forward, on a demand-supply, mine output is expected to be modestly up and scrap

supply to be limited, whereas central banks demand should be steady and technological
demand for gold is rising. Price sensitive EM demand mostly for jewellery has been
instrumental in putting a floor on prices and may aid a rally.

Fed tightening remains a headwind for bullion, but a reversal in QE may also reduce
demand for riskier assets and may support gold. Geopolitical and trade risks, which have
been strangely negative for gold, may yet turn positive.

As 2019 proceeds, we believe gold is set to recover modestly on signs that the Fed is
nearing the end of its hiking cycle and this should act as tailwind for gold. We also expect
as volatility picks up in the financial markets, investors may consider buying gold for its
insurance qualities.

We believe any price below USD 1,200 should be considered as an opportunity by

investors to build positions in gold.

Annual Outlook 2019 Reliance Private Client 22

 Currency
2018 will be remembered as the year of the protectionism by US, tariffs and sanctions were
imposed on several countries, witnessing some EM currencies weaken significantly.
Also, the key reason of USD strength was the growing divergence between the Fed and
other central banks. The USD became the highest yielder in G10 as the Fed delivered three
25bps hikes on Mar, Jun and Sep 2018. Nevertheless, it was a challenging year for EMs
including INR.

s
sia

ine

nd
m
sia
an
rea
a
ia

na
e

ila
in

pp

lay
iw
on
Ind

Ch

t
Ko

a
Vie
illi

Ta

Ma
Ind

Th
Ph
0.1%

-2.1% -2.1%
-3.0%
-4.1%
-5.1%
-5.2%
-5.7%

-8.5%
Source: Bloomberg

The Indian rupee depreciated by 8.5% from 63.9 to 69.8 against the US dollar in CY18
(average for CY18 stood at 68.4 vs. 65.1 for CY17). During the year, the rupee peaked out at
74.4 in Oct 2018 largely led by external factors. Post that oil prices have fallen and FX
intervention by the RBI rendered some respite to the rupee.

While CAD in FY19 is likely to be under 2.5% of GDP, if oil averages USD 70/b over the next 2
years, the CAD could narrow to a slightly closer to 2% of GDP in FY20, driven by softer
crude prices. In a ballpark manner, every USD 10/bbl increase in oil prices will raise the CAD
by 40 bps, widen the fiscal deficit by 20-30 bps, add 30 bps to inflation and lower growth
by 10 bps.

90 INRUSD Crude (USD/bbl)

85

80

75

70

65

60

55

50
018

8
8

8
8
8
018

018

8
8

018
8

201
201

201
201
201

201
201
201

2
2

2
Apr

Sep
May

Aug
Jul
Jun
Mar

Oct

Dec
Feb

Nov
Jan

Source: Bloomberg

Annual Outlook 2019 Reliance Private Client 23

 Currency
CAD as a % of GDP

4q14

4q16
3q14

4q15
2q14

4q17
3q16
2q16

3q18
2q18
3q15
2q15

3q17
2q17
1q14

1q16

1q18
1q15

1q17
- 0.5 - 0.6- 0.7
- 0.8
- 1.0
- 1.2 - 1.1 - 1.1 - 1.1
- 1.4 - 1.3 - 1.2 - 1.3 - 1.4
- 1.5
- 1.7 - 1.9 - 1.9
- 2.4

To our reckoning, the most important factor for the INR’s outlook now is the external
environment. Even if there are positive fundamentals – let us assume, growth surprises
positively and inflation is tamed, twin deficits and FX reserves adequacy are at
comfortable levels, these would be insufficient to counter the external conditions unless
the Fed is seen pausing and the broad USD is no longer on an uptick and sentiment
towards EM improves.

As of now, markets are factoring in no further rate increases by the US Fed in CY19 even as
the FOMC expects two rate hikes (50bps in CY19) followed by one or more rate increase
(25bps) in CY20. Also the US bond yield curve has flattened significantly. This reflects
growing consensus about the US economy moving into the late phase of the current
economic cycle, which will restrict the Fed’s ability to hike rates.

Going forward, back home, our view is that the RBI does not intervene to strongly defend
specific levels in USD-INR. Instead, we found that its intervention has always been more
with foreigner’s portfolio flows. RBI upheld its commitment to inflation targeting and
made it clear that it will not use interest rates to defend the rupee.

Having said that, capital flows may be at risk in CY19 given the uncertainty in DM monetary
policy (especially the US Fed’s). It is also critical that the RBI governor signals policy
continuity and investors’ concerns about India’s fiscal consolidation/reforms as the
election cycles goes into full swing.

Also after the depreciation through CY18, the INR is relatively closer to its LTA and is
therefore less vulnerable.

140 80
We expect INR to trade with a depreciation
75
130
bias in CY2019. However, the extent of 70
REER 10Y average
depreciation is unlikely to be as sharp as 120
65

seen in CY2018 and likely to moderate 110 60

55
relative to 2018. 100
50
90
45

80 40
Nov 06 Nov 08 Nov 10 Nov 12 Nov 14 Nov 16 Nov 18

36-country REER USD/INR, rhs

Annual Outlook 2019 Reliance Private Client 24

Investment
Strategy
 Equity

We continue to advocate a staggered investment approach towards equities as we start

the New Year. We would recommend allocating substantial portion of your equity portfolio
before the election event, leaving a marginal 10% - 20% allocation to be done post the
elections (in event of an unstable coalition at the Centre).

We would suggest being tactically overweight on large cap companies while maintaining
neutral allocation to mid/small caps in a year where visibility of earnings is still clouded.
Our internal estimates of EPS growth for FY19 and FY20 have been sobered down. Thus,
sticking to investment companies that are market leaders, have better shock absorption
capabilities and beneficiaries of a more formal economy should advisable.

For investors with existing equity portfolios, rebalancing basis asset allocation is
recommended. For new money that is parked for equity allocation, we would suggest a
staggered investment via mutual funds (large cap and multi cap) over a 6m horizon. In
event of sharp market corrections (upwards of 5% in a short span), we recommend
investing 25% of the earmarked equity monies on that day.

Selective ideas in equities could be participated in via PMS / AIF strategies that are
predominantly invested in 15- 20 select stock ideas. A market cap agnostic approach is
preferred here as well.

Direct equity investors could find opportunity in sectors / stocks that are a part of our
model portfolio.

Annual Outlook 2019 Reliance Private Client 26

 Fixed
Income
We don't see a secular rally in bonds as various global and domestic developments would
continue to influence rates

We recommend debt Investors to:

1. Avoid fresh allocation to duration trade / book profits on their existing allocations to
longer end.
2. Opportunities at short end of the curve as banking liquidity is being well managed by
RBI OMOs.
3. Pick strategies combining allocation to 1-3 years duration basket, with exposure to a mix
of quality credits.
4. Actively look at building yield in the debt portfolio: a) Credit accrual funds focusing on
judicious mix of credit quality b) 3 year FMPs and preference shares with higher yields, c)
Yield enhancement Structured Products. d) Direct bonds

The table below is a broad framework of the type of debt investments that can be looked at
for different levels of 10yr G-Sec:

Period Investment ideas Range of Range of 3Y

10Y G-Sec AAA rated paper

Jan 2019 to Ultra shorter duration 7.20% - 7.30% 8.10% - 8.50%

March 2019 funds
Shorter duration funds

Apr 2019 to Shorter duration funds 7.30% - 7.45% 8.25% - 8.70%

June 2019 Money market bonds
Commercial papers

Jul 2019 to AAA rated medium 7.50% - 7.75% 8.40% - 8.80%

Sep 2019 duration funds
AAA rated bonds
AA+ rated bonds

Oct 2019 to Credit funds 7.70% - 7.80% 8.50% - 9.00%

Dec 2019 AIFs
AAA rated medium
duration funds
High yield funds
Perpetual bond

Annual Outlook 2019 Reliance Private Client 27

 High Yield
Credit
The high yield credit space was till some time concentrated only on the Real Estate
Segment. The NCDs of RE Companies were in vogue & have been quoted across the length
& breadth of the High Yield space. The same has now shifted to the Social Impact Sectors,
where the Debt funding is taking new sectors where the Investors are finding if not the
similar high yields but certainly, better credit & value for money. Some of the key Social
Impact sectors we currently see a case for High yield credits Investment include:

Vehicle Finance:

The domestic Commercial Vehicle (CV) industry maintained its strong growth momentum
in 6MFY2019 with 38% growth in sales on a YoY basis. Demand for HCVs specifically is
expected to pick up owing to Infrastructure: Allocation of INR 5.97 lakh crore for infra
spending in FY 2019. Whereas LCVs is expected to benefit over the near term owing to
Demand from consumption-driven sectors, E-commerce and Express Cargo focused
logistic companies. Demand for Tractors to increase due to Governments renewed thrust
towards improving the rural economy, via measures such as doubling farm income by
2022, increasing spend towards irrigation.

The total NBFC credit to this segment stood at about INR. 1.7 trillion as on June 30, 2018,
registering a growth of about 24%, on a YoY basis. This is the highest growth registered in
the last 4-5 years, driven by growth in new vehicle sales and healthy used CV financing
trend. NBFC credit to the new CV segment registered a 25% YoY growth, while the used CV
segment grew at a healthy pace of about 23% in June 2018. Used CV growth was boosted
by the modest credit growth during FY2017 because of demonetisation and improved
realisation on used CV sales post implementation of BSIV from April 2017. Used CV
financing is largely extended by NBFCs and they earn a healthy yield of 15-20% (average)
per annum.

This is where Investors come in to finance CV Financing NBFCs at high yield credits

Fintech Lending

Fintechs’ are organizations combining innovative business models and emerging

technologies to enable, enhance, and disrupt insurance, payments, lending, remittances
and investments globally and in India. Fintech lending in India is primarily focused on
unsecured business loans and unsecured consumer loans segment.

Fintech Lending companies are broadly categorized as below:

Peer-To-Peer or P2P lending: NBFC-P2Ps which connect borrowers to retail investors

Marketplace: Platforms which connect borrowers to institutional investors while offering

full stack services or part services for enabling lending

Direct Lenders: NBFCs lending from their own balance-sheet or co-lending with or
originating loans for other institutional lenders

Annual Outlook 2019 Reliance Private Client 28

 High Yield
Credit
Products Offered by Fintech SME lending companies

Product Loan Tenure Yield Amortization

Unsecured business Rs. 50K - 1Cr 3-48 months 14%-30% Fortnightly/

loan Monthly

Merchant cash Rs. 10K-1Cr 3-24 months 20%-40% Daily/Fortnightly/

advance Monthly

Pay-Later Rs. 1L-25L Up to 90 days 14%-18% Bullet

Invoice finance Rs. 1L-25L Up to 90 days 14%-18% Bullet, Monthly

Since, the yields are upwards of 14% ,this is where Investors come in to invest in NCDs of
Fintech SME lending companies at high yield credits

Small Bank Finance & MFI Sectors

KEY MARKET TRENDS:

1. Strong Growth: After clocking muted growth in FY2017, the sector grew to INR 1.46 Lakh
crore at the end of September 2018 (excluding SHG Bank Linkage Program) recording a
growth of 50% over a portfolio of INR 0.97 crore at the end of September 2017 (Source:
Equifax).

2. Increasing Competition: Several new entrants have entered the sector. Despite
conversion of eight MFIs to SFBs, the total number of MFIs has increased from 71 to 97
between September 2016 and September 2018. Increased competition has led to renewed
focus on geographical expansion into newer, untapped territories.

3. Product Diversification: To improve stickiness of good borrowers and to cater to their

growing needs, MFIs have started offering a variety of products including individual loans,
tailor-made to suit borrowers’ requirements.

4. Equity attracted by the sector: MFIs have received equity infusion of around INR 5,000
crore in last two years. Marquee investors such as Asian Development Bank, Warburg
Pincus, Oman India Joint Investment Fund, Kedaara Capital and large among others have
actively invested in MFIs.

5. Strategic tie ups (between large NBFCs, Banks and MFIs): Large MFIs seeking inorganic
growth and expansion or smaller MFIs taking this route for tapping into synergies and
scaling up operations, are tying up with large NBFCs, Banks and MFIs through equity stake
and BC partnerships.

6. Geographic Spread: MFIs have started expanding their outreach to East & North East
India. Another significant trend has been the gradual expansion of North-based MFIs into
Southern states which were considered to be saturated geographies. It is interesting to
note that MFIs are still able to cater to first time borrowers as they move into deep rural
regions in these saturated urban geographies.

Annual Outlook 2019 Reliance Private Client 29

 Real Estate

Going forward the market looks stabilized with reforms such as RERA and expected
reduction in the GST for buyers. Economic growth and influence of new reform are
favoring Commercial & Retail sector, with advance commitment and low vacancy rate
commercial office space will continue to dominate the market. As per JLL in some of the
leading market such as Bangalore, Hyderabad, Pune & Chennai the vacancy rate is
between 4%-9% and we estimate that it’s expected to witness interim shortage of A grade
office space for 2019-20.

Further Leasing activity is expected to grow by 11-15% q-o-q basis with cities such as
Bangalore, Hyderabad, Mumbai & NCR contributing to the majority of the pie. We estimate
demand from Co-Working, Fintech start-ups, IT and BFSI companies with a very less
demand & supply gap the rental values are expected to raise.

Warehousing & Co-working Space will emerge as the potential asset class in Commercial
Sector for 2019-20. With automation, digitalization & GST implementation has positive
impact in warehousing business attracting attention of growing private equity investment
from both international & domestic market. The JLL report say that absorption rate for Co-
working space has been almost double in 2018 and it is likely to drive the demand in office
markets to a higher level.

There has been a niche emerging market for Student Housing in the sector since last 4-5
years. With an increasing number of migrant students, the demand for organized student
housing is the need of the hour. With major operators in Bangalore, Mumbai & Pune, the
focus is driving towards other cities such as NCR, Dehradun, Manipal & Indore. As per JLL
given that the demand is high and rising, the student population in the higher education
space is poised to increase by another 5 mn, to 40 mn students, by 2020 along with the
fact that there is a clear need for professionally managed entities to operate in this sector,
the space looks quite appealing and each operator aspires to increase supply to well over
double the existing capacity in the next three years. The investor has the potential to earn
much higher from student housing sector between 8%-12% yields.

The residential sector is on the verge of revival stage since mid-2018. As per Knight Frank
report there has been increase in the number of new launches by 46% and 17% y-o-y
reduction in the unsold inventory of the developer. This demonstrations that residential
market seems to be regaining from its tremor of Demonetization, RERA, GST and other
new reforms. Market has seen positive increase of in sales for H1 2018 as developers being
price sensitive and offering indirect discounts. The affordable segment for Low & Mid-
income segment seems to have maximum demand for the year across three key markets:
Delhi, Mumbai and Bengaluru. Most of these projects will be in the outskirts of city limits
and emerging locations especially in Tier-2 and Tier-3 cities. One can expect further price
correction in terms of high end & luxury segment residential properties which lack
momentum in the current market.

Student housing is the hot opportunity emerging in commercial sector for 2019.
Mid segment properties would be fast moving in the Residential sector

Annual Outlook 2019 Reliance Private Client 30

 Suggested
Asset
Allocation

Aggressive Balanced Conservative

Asset Class SA TA SA TA SA TA

Equity 60% 60% 35% 35% 10.0% 10.0%

Large / Multi
20% 30.0% 15.0% 15.0% 0.0% 0.0%
Cap

Mid / Small 40.0% 30.0% 5.0% 0.0% 0.0% 0.0%

Cap

Hybrid 0.0% 0.0% 15.0% 20.0% 10.0% 10.0%

Fixed Income 10.0% 10.0% 50.0% 50.0% 80.0% 80.0%

Liquid /
0.0% 0.0% 5.0% 5.0% 5.0% 5.0%
Arbitrage

Accrual
5.0% 10.0% 35.0% 40.0% 60.0% 65.0%
Credit

Dynamic /
5.0% 0.0% 0.0% 0.0% 0.0% 0.0%
HTM

Equity 0.0% 0.0% 10.0% 5.0% 15.0% 10.0%

Savings

Alternate 30.0% 30.0% 15.0% 15.0% 10.0% 10.0%

Listed &
Unlisted 10.0% 10.0% 0.0% 0.0% 0.0% 0.0%
Equity

High 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%

Yielding

Long-Short 10.0% 10.0% 5.0% 0.0% 10.0% 10.0%

SA: Strategic allocation

TA: Tactical allocation

Annual Outlook 2019 Reliance Private Client 31

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Annual Outlook 2019 Reliance Private Client 32