Navigating the Markets in 2018

The Bulls &

Bears Story

2017 - Global inflation and Growth expectations

stabilized

Global inflation trend

• Global growth estimate, for the first time in this decade, were not revised downwards.

• Even though prices of Oil and certain metals have increased, global inflation still trends below prior levels.

2017 - Industrial production improved, specially in

eurozone

Global Industrial production improved to 4% Capacity Utilization in Eurozone remains high

• Global Industrial Production (IP) improved to ~4%, with particular improvement in Eurozone due to domestic factors.

• High Capacity Utilization levels in the Eurozone suggest that the recovery is sustainable

India was among the top performing equity markets

Source: Bloomberg

15.2%17.2%

3.6% 3.2%

7.5%

11.6%

-5.8%

5.1%

24.0%

6.9%

16.2%

35.2%

8.4%11.5%

4.7%

28.6%

DJIA FTSE 100 Nikkei 225 Hang Seng CAC 40 DAX ShanghaiComposite

Nifty

Performance of Global Markets

2016 2017

132 132 134

142

130 130

100

80

90

100

110

120

130

140

150

2011 2012 2013 2014 2015 2016 2017

Ease of doing Business ranking

59 60

71

55

39

0

10

20

30

40

50

60

70

80

2012-13 2013-14 2014-15 2015-16 2016-17

Global competitiveness ranking (out of 138)

47 46

54

35

0

10

20

30

40

50

60

2010 2012 2014 2016

Logistics performance Index Ranking (out of 150)

94 94

85

7679

50

70

90

110

2011 2012 2013 2014 2015 2016 2017

Transparency international's corruption perception ranking

*lowering of the rank indicates improvement; Source: World Bank’ Transparency International; CRISIL report: 3 years of Modi Government

Globally India’s perception is improving

10%

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

8,000.00

10,000.00

12,000.00

14,000.00

16,000.00

18,000.00

20,000.00

Nov-2012 Nov-2013 Nov-2014 Nov-2015 Nov-2016 Nov-2017

Retail loan growth

Personal Loans YoY growth %

0

50,00,000

1,00,00,000

1,50,00,000

2,00,00,000

2,50,00,000

3,00,00,000

2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

Auto sales trends

Two Wheelers total vehicles Passenger Vehicles

Source: RBI, SIAM

India’s Domestic Consumption story continues

5.8

4.8 4.64.1 3.9

3.5

Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17

Fiscal Deficit(%)

2.79 2.79

4.444.8

1.731.32

1.060.67

March-10 March-11 March-12 March-13 March-14 March-15 March-16 March-17

Current Account Deficit

• Constant Fiscal improvement since FY 2012

• Fiscal Deficit targets have been achieved in all

recent fiscal years

• India’s Current Account Deficit has been reducing

incrementally on the back of the lower oil prices of

the last couple of years

• The Current Account Deficit is expected to be 1.5%

of GDP for FY 2018 (Nomura Research)

Source: RBI

India’s macros are also supportive

• Moody’s upgraded India’s Sovereign credit rating to

Baa2, the first rating upgrade in 14 years for India

• Moody's expects India’s progress on economic and

institutional reforms to

• enhance India's high growth potential and its large

and stable financing base for government debt,

• contribute to a gradual decline in the general

government debt burden over the medium term.

• According to Moody’s, while India's high debt burden

remains a constraint on the country's credit profile, the

reforms put in place have reduced the risk of a sharp

increase in debt, even in potential downside scenarios.

Source: Moody’s Global Credit Research

8

Combination of factors led to a Sovereign credit

rating upgrade

Equity Outlook

15.2%

17.2%

3.6%

3.2%

7.5%

11.6%

-5.8%

5.1%

24.0%

6.9%

16.2%

35.2%

8.4%

11.5%

4.7%

28.6%

-10.0% 0.0% 10.0% 20.0% 30.0% 40.0%

DJIA

FTSE 100

Nikkei 225

Hang Seng

CAC 40

DAX

Shanghai Composite

Nifty

Performance of Global Markets

2017 2016

10%

7%

-7%

-14%

-6%

4%

45%

31%

41%

12%

-6%

110%

41%

49%

Auto

Bank

IT

Pharma

Realty

Financial Services

Metal

Performance of Nifty Sectoral Indices

2017 2016

Source: Bloomberg

Globally equities had a good year

8000

8500

9000

9500

10000

10500Ja

n-2

01

7

Feb

-20

17

Mar

-20

17

Ap

r-2

01

7

May

-2

01

7

Jun

-20

17

Jul-

20

17

Au

g-2

01

7

Sep

-20

17

Oct

-20

17

No

v-2

01

7

De

c-2

01

7

Nifty

Fed hiked

rates in

accordance

with market

expectations;

positive

election

No negative announcements in the union budget with respect to Capital Gains.

RBI

identified 12

accounts to

start

bankruptcy

proceedings

Nifty crossed 10,000

mark for the first time

IMF revises

global growth

forecast

upwards;

monsoon on

track ;

increasing

expectations of

rate cut by RBI

in August

PSU Bank

Recapitalization

and policy

announcement on

large infrastructure

projects; strong pick-

up in exportsglobal

metal

rally

Auto/FMCG

sectors showed

improved volume

growth based on

remonetisation;

IIP showed signs

of corporate

revival; Inflation

remained benignQ1 GDP growth

slumped to 5.7%

on the back of

Destocking ahead

of GST and

lingering impact of

demonetization.

June IIP

contracted by

0.1%

Q2 GDP growth at 6.3%,

reversed the decelerating

trend of the last 5 quarters

Source: Bloomberg; Data till 18/12/2017

Flashback 2017 – Nifty returns for the year ~29%

IPOs kept the market buoyant ~ 76,350 Cr raised during the year

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

0

10

20

30

40

50

60

70

80

90

100

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

2013

-14

2014

-15

2015

-16

2016

-17

2017

-18 (till N

ov'1

7)

IPOs - Amount raised and number of issues

Number of Issues Amount in Crs

Source: Prime Database

2017 witnessed the highest mobilization in the last decade.

STRONG REFORM

ORIENTATION OF

INDIAN GOVTStructural reforms

focused on long term

sustainable growth are

being implemented at a

significant pace. Results

can be seen in the rise in

ranks in the “Ease of

Doing Business” Index

and upgrade of India’s

Sovereign Bond Rating

LIKELY STRONG

REVIVAL OF

CORPORATE

EARNINGSWe may be at the cusp of

a business upcycle and

therefore a multi-year

earning recovery. We are

backed in this conviction

by the fact that the

Corporate Earnings to

GDP ratio is at its lows,

accompanies by margin

and ROE contraction.

APPEAL OF EQUITY AS

AN ASSET CLASSThe shift from physical

savings to financial savings

and events such as

demonetization, along with

the fact that equity returns

have been better than

returns of alternatives such

as gold and real estate have

added to the appeal of equity

as an asset class for the

retail investor

Why we are positive on Equities

• Fiscal consolidation

• Low Inflation and Current

account deficit

• Stable rupee

• Measures to boost

investment and

manufacturing growth

such as relaxed FDI

limits, allocating funds for

domestic manufacturing

sector

• Improved access to

electricity

• Restoring financial

health of discoms

through UDAY

• Improved pace of road

construction

• Promoting affordable

housing through

interest subvention

schemes

• Insolvency and

Bankrupcy code

enacted

• Aadhaar Act has

come into force

• Digitisation of

government

processes

• Curtailing black

money

• Capital Infusion into

public sector banks

• Debt laws

strengthened for

speedy resolution

• 100% FDI into Asset

reconstruction

companies

Source: CRISIL report: 3 years of Modi Government

Progress of reforms initiated by the central

government

Actual earnings Vs Consensus estimates at the start of the year

EBITDA and net margins of BSE 500 companiesEx Banks, Finance, Oil and Gas

ROE (%) of BSE 500 companiesEx Banks, Finance, Oil andGas

Source: BloombergSource: Capital Line; Nomura Research

1% 1%

2%

3% 3%

2% 2%

1%

2%

1% 1%

2%

4%

5% 5%

6%

7%

4%

5% 5%

4%

3% 3% 3%

2%

3%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Corporate Earning as % to GDP

We may be at the bottom of the earnings cycle

0%5%10%15%20%25%30%

0

50

100

150

200

250

300

HP

I In

dex

Val

ues

Decline in Growth of housing prices

All India HPI Y-o-Y growth (%)Source: Bloomberg; RBI

Equity a more appealing asset class with superior

returns compared to alternates

-75%

-25%

25%

75%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Gold Vs. Nifty Annual returns

Gold Nifty

nearly stagnant Gold returns

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

50.00%

Equity Debt (including Cash) Alternative Assets Real Eatate

Proportion of total wealth (India) FY 17 Proportion of total wealth (India) FY 16 Proportion of total wealth (Global) FY 16

Gap between India and the World in the proportion of equity in an individual’s total wealth

Source: Karvy Wealth report 2017

• Equity forms about 17% of the wealth of an average Indian Investor, whereas the same is 31% for an

investor anywhere else in the world.

• Alternative assets, of which Gold is a major, portion, forms a much larger share of an average Indian’s

wealth

Equity is still a small portion of individual

wealth in India

Source: Bloomberg

While indices trade at valuations higher than long

term average, there are pockets of value

0

10

20

30

40

50

60

Nifty Midcap 100 Free Float Index

Long Term Average: 18.76

0

5

10

15

20

25

30

NIFTY 50

Long Term Average: 19.14

• We expect overall earnings to recover in 2018, after 4 years of subdued single digit growth.

• The recovery would likely be on the back of normalization in operating conditions after policy levels changes.

• The share of corporate earnings as a % of GDP, EBITDA margins and ROE for corporates being at historic lows, leads us to believe that we are at the bottom of the earnings cycle.

• Higher valuations show that the market is already expecting strong earnings recovery in FY19 and FY20.

• Earnings will be critical as :

• (1) multiples have limited scope to expand from current high levels

• (2) India’s macro-economic position looks weaker off late (in terms of trade deficit, fiscal deficit and inflation) and can deteriorate if global crude prices were to further firm up,

• (3) several state elections in 2018 and

• (4) global central banks’ relatively lesser accommodative stance in the wake of ongoing global economic recovery.

• The superior long term performance of equity as an asset class compared to alternative investments combined with rise in financials savings (as a percentage of total savings) may lead to continued flows into equity markets.

• The year ahead is likely to be a year of careful stock-picking.

The Year Ahead

With the improvement in growth of the global economy, demand for metals is likely toincrease. On the supply side, the capacity cuts in China are likely to have a significantimpact on global supply. This demand-supply situation augurs well for price environmentof metals. We are particularly positive on Aluminum, Alumina, Steel and Zinc

Combination of GST, demonetization and RERA has insured that organized players gain at the cost of unorganized players. Given that this sector is highly unorganized we have a long term positive bias for this sector

Intensity of competition has reduced in this sector due to delayed activity in this sectoruntil recently. Furthermore, Government as well as private capex in this sector are likelyto increase in the coming year. We are particularly positive on roads and Logistics. Onthe Power side, we are positive on transmission and neutral to negative on generationcompanies.

Positive on both PSU and Private lenders. Also positive on retail as well as corporate lenders. Retail loan growth continues to mimic strong growth trend in consumption. Resolution of asset quality issues and recapitalization of PSU banks has now made us positive on corporate lenders

Rise in per capita income and aspiration of the Indian masses has made us positive oncontinuing volume growth in this sector. Government's likely increase in rural spending inthe coming budget is also likely to boost auto consumption

METALS

INFRASTRUCTURE

AUTO

REALTY

BANKS

Sector Outlook – Sectors Positive

Valuations have expanded much over historical averages. Higher growth may nowcome at the cost of quality. Competition is likely to become more intense with PSUBanks resolving Asset quality issues.

Lack of growth visibility. Intensification of competition and regulatory oversight whichhas increased regulatory risk. That said, the sector has underperformed the benchmarkindex for the past 2 years, and the valuation currently seem attractive. We will bemaintaining/increasing exposure to stocks in the pharma sector based on the companyspecific factors.

Volume growth is likely to remain a challenge due to high penetration rates and intense competition. Superlatively high valuations for most stocks in this sector limit the potential for upside

FINANCIAL SERVICES

FMCG

PHARMACEUTICALS

Sectors to watch out for

Sectors Neutral/Negative

Fixed Income Outlook

5.8

6

6.2

6.4

6.6

6.8

7

7.2

7.4

Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17

Data as on 31-12-2017

Positive news and significant

FII interest in Indian debtNeutral/negative news flow and

waning FII interest in Indian debt

Flashback 2017 – the 10 year G-sec Yield went from

6.3 to 7.3

10 year g sec yield- tale of 2 halves

RBI sharply lowered GVA for the year to 6.7% and pegged 2H CPI between 4.2 –4.6%

RBI changed stance from “Accommodative” to “Neutral” and kept the rates unchanged

Banks invested more and more in government bonds post demonetisation

Union Budget indicated net borrowing of 3.48 Lakhs , less than 4.25 Lakhs net borrowing of 2016-17. RBI narrowed the

corridor between repo and reverse repo by 25 bps by keeping the repo rate oonstant but increasing the reverse repo rate by 25 bps

Expectation of a rate cut in the policy meet in August on the back of benign inflation data

RBI maintained status quo on rates but adopted a more dovish stance on the back of softening inflaiton

Q1 GDP growth rate came in at 5.7%, well below the consensus forecast of 6.5%

Concerns of fiscal slippage and likely additional borrowings in the last quarter

-40% -20% 0% 20% 40% 60% 80% 100%

Foreign Currency Bond Issuances

Net FPI debt Investment

Masala Bond Issuances

Total

in USD Billion

Foreign CurrencyBond Issuances

Net FPI debtInvestment

Masala BondIssuances

Total

2016 8 -6.45 1.46 3.01

2017 16.4 22.86 1.8 41.06

Foreign Debt Investment • Foreign fund flows into Indian

debt were at the highest ever in

15 years.

• More than a 10 fold jump in the

amount that Indian companies

raised from foreign investors

• In 2017, total of 41.06 Billion USD

was raised as compared to 3.1

billion USD raised in 2016.

• There was strong FII appetite for

both gilts as well as corporate

paper.

Source: business standard, internal research

Bond markets caught the fancy of foreign investors

• Inflation numbers were subdued in the first half of the calendar year. In the second half, topline inflation number

assumed an upwards trend and started becoming more volatile.

• Within the overall number, Food and Beverages and Fuel and Lighting were the two categories which most

influenced the upward trend in inflation.

• Among individual commodities, Vegetables, Pulses, Cigarettes and Kerosene were responsible for the upwards

movement of the top line inflation number

Source: Bloomberg

Inflation trended up in 2HCY17

-12.00%

-7.00%

-2.00%

3.00%

8.00%

13.00%

18.00%

23.00%CPI and its Components (Month on Month)

Vegetables Pulses and Products Cigarettes Kerosene PDS

• Credit growth of 8% against deposit growth of 3% has led to reduction of system liquidity.

• System liquidity has remained positive right through the year, albeit on a declining trend. Liquidity dipped

briefly into the negative zone in end December.

• The RBI has been sucking out liquidity from the bond markets over the year for the following reasons:

• To tackle the excess system liquidity induced by the demonetization exercise.

• To tackle excess rupee liquidity induced by unprecedented foreign flows into Indian markets.Source: Bloomberg

System liquidity Reduced

-1000

0

1000

2000

3000

4000

5000

6000

6.30

6.50

6.70

6.90

7.10

7.30

7.50

Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17

INR

Bill

ion

Yiel

d (

%)

Liquidity Vs Bond Yield

10 year g-sec yield Liquidity

• The spread between the 10 year G-sec yield and the Repo rate has now become greater than a 100 bps.

• This is due to concerns over additional supply of government papers coming into the markets in 1Q CY 18.

Source: Bloomberg

Fiscal concerns effected the market in 2hCY17

5.4

5.6

5.8

6

6.2

6.4

6.6

6.8

7

7.2

7.4

Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17

YIEL

D IN

%

Spread between 10 year G-Sec and Repo Rate

India 10 Year India Repo Yield

Source: Bloomberg

Corporate bond spreads came down

5

5.5

6

6.5

7

7.5

8

0

50

100

150

200

250

yiel

d in

%

bas

is p

oin

ts

Corporate spread movement

AAA spread Double A spread GIND10YR

• RBI to stay in a extended pause in 2018

• 10 year yield to trade in a range of 7.00 to 7.50%.

• Sovereign bonds to face headwinds due to the evolving fiscal situation.

• Corporate bond spreads may range from stable to rising

• INR likely have a depreciating bias.

• Risk-reward for allocation to the longer end modest

• Preferred positioning - the short to mid end of the curve.

The year ahead

• Global

• The world is moving towards a rising interest rate environment as excess liquidity starts winding down. TheUS raising rates might see some flight of capital from Indian Capital Markets.

• Geopolitical risks are increasingly coming to the fore. It might lead to capital moving towards safer assets

• Oil prices may go up in which case Oil importing nations such as India are likely to get significantlyimpacted.

• Domestic

• Inflation is already on a rising trajectory. If this continues, the RBI might be forced to increase rates whichmay hamper corporate growth.

• A populist budget and excessive government borrowing in 1HCY18 might lead to yields moving furtherNorth

Risks

Expensive Cheap

Valuation

Fundamentals

Deteriorating

Improving

AttractiveAverageAbove Average

Bonds 2017

Bonds 2018Equities 2017

Equities 2018

In a nutshell

Product Recommendations

DHFL Pramerica Large Cap Fund

This True-to-mandate Large Cap fund canbe considered in the current highvaluation market, where the Large Capstocks are more reasonably valued thanMid or Small Cap stocks

DHFL Pramerica Arbitrage Fund

Ideally suited for an investor who wantsto participate in equity in a conservativemanner but wants to benefit from equitytaxation.

Equity Funds

DHFL Pramerica Balanced Advantage Fund

This fund would be suitable forinvestors looking to benefit fromequities but with relatively lower riskcompared to an equity fund.

DHFL Pramerica Equity Income Fund

This fund should be invested in toparticipate in equities conservatively.This may also be used to park fundswhich can be swiftly moved to pureequity when the opportunity presents.

Hybrid Funds

DHFL Pramerica Insta Cash Plus Fund,DHFL Pramerica Ultra Short Term Fund,

DHFL Pramerica Low Duration Fund

Funds Ideally suited for investors who wish topark their funds for short durations.

DHFL Pramerica Credit Opportunities Fund,

Dhfl Pramerica Short Maturity Fund

Short maturity credit focused funds whichshould be part of an investor’s core portfolio.

DHFL Pramerica Dynamic Bond FundTactical allocations can be made towards thisfund in order to benefit from the durationplay.

Fixed Income Funds

Important Disclosures

The information contained herein is provided by DHFL Pramerica Asset Managers Pvt. Ltd. (Formerly known as Pramerica AssetManagers Pvt. Ltd.) (the AMC) on the basis of publicly available information, internally developed data and other third party sourcesbelieved to be reliable. However, the AMC cannot guarantee the accuracy of such information, assure its completeness, or warrantsuch information will not be changed. The information contained herein is current as of the date of issuance* (or such earlier date asreferenced herein) and is subject to change without notice. The AMC has no obligation to update any or all of such information; nordoes the AMC make any express or implied warranties or representations as to its completeness or accuracy. There can be noassurance that any forecast made herein will be actually realized. These materials do not take into account individual investor’sobjectives, needs or circumstances or the suitability of any securities, financial instruments or investment strategies describedherein for particular investor. Hence, each investor is advised to consult his or her own professional investment / tax advisor /consultant for advice in this regard. The information contained herein is provided on the basis of and subject to the explanations,caveats and warnings set out elsewhere herein.

The views of the Fund Manager should not be construed as an advice and investors must make their own investment decisionsregarding investment/ disinvestment in securities market and/or suitability of the fund based on their specific investment objectivesand financial positions and using such independent advisors as they believe necessary.

Pramerica is the brand name used by Prudential Financial, Inc. (“PFI”) of the United States and its affiliates in selectcountries outside of the United States. Neither PFI nor any of the named Pramerica entities are affiliated in any mannerwith Prudential plc, a company incorporated in the United Kingdom.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTSCAREFULLY.

C146/2017-18

Thank You