Master Trust Ltd Management Discussions.

Global economy

One year ago economic activity was accelerating in almost all regions of the world and the global economy was projected to grow at 3.9 percent in 2018 and 2019. One year later, much has changed: the escalation of US-China trade tensions, macroeconomic stress in Argentina and Turkey, disruptions to the auto sector in Germany, tighter credit policies in China, and financial tightening alongside the normalization of monetary policy in the larger advanced economies have all contributed to a significantly weakened global expansion, especially in the second half of 2018. With this weakness expected to persist into the first half of 2019, the World Economic Outlook (WEO) projects a decline in growth in 2019 for 70 percent of the global economy. Global growth, which peaked at close to 4 percent in 2017, softened to 3.6 percent in 2018, and is projected to decline further to 3.3 percent in 2019. Although a 3.3 percent global expansion is still reasonable, the outlook for many countries is very challenging, with considerable uncertainties in the short term, especially as advanced economy growth rates converge toward their modest long-term potential.

Emerging Economies

In China, necessary domestic regulatory tightening to rein in debt, constrain shadow financial intermediation, and place growth on a sustainable footing contributed to slower domestic investment, particularly in infrastructure. Spending on durable consumption goods also softened, with automobile sales declining in 2018 following the expiration of incentive programs for car purchases. These developments contributed to slower momentum over the year, with further pressure from diminishing export orders as US tariff actions began to take hold in the second half of the year. As a result, Chinas growth declined from 6.8 percent in the first half of 2018 to 6.0 percent in the second half of the year. The resulting weakening in import demand appeared to have impacts on trading partner exports in Asia and Europe.

Elsewhere across emerging market economies, activity moderated as worsening global financial market sentiment in the second half of 2018 compounded country-specific factors. Needed policy tightening to reduce financial and macroeconomic imbalances took effect in Argentina and Turkey; sentiment weakened and sovereign spreads rose in Mexico, following the incoming administrations cancellation of a planned airport for the capital and backtracking on energy and education reforms; and geopolitical tensions contributed to weaker activity in the Middle East.

The Indian Growth Story

Indias economy is set to grow at 7.0 percent in 2019, picking up to 7.2 percent in 2020. The downward revision of 0.3 percentage point for both years reflects a weaker-than-expected outlook for domestic demand.ln the first quarter of 2019, the real GDP in India grew by 5.8 percent, compared to the same quarter of the previous year. As per the data released by Ministry of Statistics and Programme Implementation, the growth in GDP during 2018-19 is estimated at 7.0 percent as compared to the growth rate of 7.2 percent in 2017- 18. GDP at Constant (2011-12) Prices in Q3 of 2018-19 is estimated atRs35.00 lakh crore, as against Rs32.85 lakh crore in Q3 of 2017-18, showing a growth rate of 6.6 percent. GDP growth rates for Q1 and Q2 of 2018-19 at Constant Prices are 8.0 percent and 7.0 percent respectively.

Outlook

The global economic upswing that began around mid-2016 has become broader and stronger. For most countries, current favorable growth rates will not Last. Policymakers should seize this opportunity to bolster growth, make it more durable, and equip their governments better to counter the next downturn. The modest medium-term outlook for the advanced economies (potential output growth rates are estimated in the range of 0.5-1.5 percent for most advanced economies) calls for measures to raise labor force participation rates and productivity growth. These include public investment (coupled with incentives to raise private spending as needed) in infrastructure, lifelong learning and workforce skills, and research and development. Protecting dynamism—by ensuring that competition policy frameworks facilitate new firm entry and curb incumbents abuse of market power—remains vital when a few big firms are cornering increasingly larger market shares across technology, retail, financial services, and other sectors in many advanced economies. The medium-term growth forecast suggests continued strong investment growth in emerging market and developing economies, accounting for more than one-third of their GDP growth. In turn, this robust investment path is predicated on a smooth trajectory for the drivers of capital spending; a gradual tightening in financial conditions (which is particularly relevant to the investment outlook in the emerging market and developing economy group, given the rapid buildup of leverage during years of low interest rates); quick resolution of trade disagreements and subsequent easing of trade tensions; and broader policy actions that help reduce uncertainty. Growth in India is expected to stabilize at just under 7% percent over the medium term, based on continued implementation of structural reforms and easing of infrastructure bottlenecks.

The emerging and Low-income developing countries have also borne the brunt of climate change and potent natural disasters. Lowering the fallout from these events will require adaptation strategies that invest in climate-smart infrastructure, incorporate appropriate technologies and zoning regulations, and deploy well-targed social safety nets. Global trade growth slowed considerably in 2018. The slowdown reflects some payback in the first quarter from very high growth in late 2017 and, subsequently, the impact of increased trade tensions on spending on capital goods (which are heavily traded) and a more general slowdown in global activity.

2018-19

Indian Financial Sector Highlights

• On balance of payments basis (i.e., excluding valuation effects), the foreign exchange reserves decreased by US$ 3.3 billion during 2018-19 as compared to an increase of US$ 43.6 billion during 2017-18. Current Account Deficit (CAD) increased to 2.1 per cent of GDP in 2018-19 from 1.8 per cent in 2017-18 on the back of a widening of the trade deficit. Net FDI inflows at US$ 30.7 billion in 2018-19 were marginally higher than US$ 30.3 billion in 2017-18.

• Association of Mutual Funds in India (AMFI) reported that average assets managed by the mutual fund industry have grown to Rs.24.48 trillion in March 2019. Fiscal year growth of 6% was the slowest in seven years. During the fiscal year 2018-19 equity funds had inflows of Rs.99087 crore, taking total inflows as on 31st March 2018 to Rs.136238 crore.The MF industry had added, on an average, 9.54 lacs SIP accounts each month during the FY 2019-20, with an average SIP size of about Rs 3,000 per SIP account. SIP contribution to the industry surged to Rs 92,693 crore in 2018-19, from Rs 67,190 crore in the preceding fiscal. Debt funds were the biggest drag to industry growth this fiscal, as the category witnessed outflows of Rs 1.25 trillion during the period.

• The overall insurance industry is expected to reach US$ 280 billion by 2020. Life insurance industry in the country is expected grow by 12-15 per cent annually for the next three to five years. Gross premium collected by life insurance companies in India decreased from US$ 94.5 billion in FY18 to US$ 82.8 billion in FY19. In FY19, premium from new life insurance business increased 10.73 per cent year-on-year to Rs2.15 trillion (US$ 30.7 billion). Non-life insurers gross direct premium General insurance companies reported gross direct premium collection of Rs 1.70 lakh crore in the financial year 2018-19, an increase of 13% year-on-year. Under the Pradhan Mantri Suraksha Bima Yojana (PMSBY) as on 31st March, 2019, cumulative gross enrolment reported by Banks subject to verification of eligibility, etc. is over 15.47 crore under PMSBY. A total of 40,749 Claims were registered under PMSBY of which 32,176 have been disbursed. In Union Budget 2020, the government announced possibility of hiking the FDI limit in the insurance companies.

• The Assets Under Management (AUM) of all the Pension Funds combined, i.e. corporate and retail sector,grew from Rs 11,965.80 Crs as on March 31, 2018 to Rs 19,369.80 Crs as on March 31, 2019, registering a growth of approximately 62%. The overall subscriber base of corporate sector grew by nearly 35%, with approximately 1200 new corporates joining the National Pension System (‘NPS) architecture. The retail sector grew by 34%, with total subscriber base crossing 9 lakh as on March 31, 2019, in comparison to 7 lakh subscribers as on March 31, 2018. The PFRDA granted permission for partial withdrawal by the subscribers upto certain permissible limits and subject to meeting of certain criterias for meeting the expenses made by them for skill development/ re- skilling or for any other self-development activities and for establishment of own venture or any other start-ups.

• Micro Units Development & Refinance Agency (MUDRA), which has been set up by Government of India to provide funding to the non-corporate and non-farm sector. These loans are classified as MUDRA loans under PMMY. Under the aegis of PMMY, MUDRA has created three products namely Shishu, Kishore and Tarun to signify the stage of growth / development and funding needs of the beneficiary micro unit / entrepreneur and also provide a reference point for the next phase of graduation / growth. In Financial Year 2018-2019, number of PMMY loans sanctioned was 59870318 and amount disbursed was Rs 311811.38 Crore as against sanctioned-321722.79 crore.

Indian Financial Services Industry

• Indian equity market was among best performers in FY19 despite that this year was marked by several issues starting from high crude oil prices, rupee faltering to new record lows, Liquidity crisis in the non-banking financial companies (NBFC), US-China trade tensions, delay in Brexit breakthrough among others.

• During 2018-19, the primay securities market recorded a total number of issues of 158, from which Rs. 54917 crore were raised as compared to Rs.110360 crore raised through 229 issues during 2017-18. The BSE Sensex rose nearly 17 per cent during in the financial year 2019, while the Nifty50 on the National Stock Exchange increased by 15 per cent during same period. For both the indices, this was the highest growth in any fiscal since FY 2009-10. It was a dismal year for midcap and small cap stocks, BSE Midcap and Small cap indices saw a fall of 3.03% and 11.57%, respectively in FY19 after a stellar run in the previous two fiscals. During 2018-19, the Small and Medium Enterprises (SME) market recorded a total number of issues of 110, from which Rs. 1844 crore were raised as compared to Rs. 2361 crore raised through 156 issues during 2017-18. Foreign portfolio investors (FPIs) net investment, fell from Rs. 144681 crore in FY 18 to Rs.48751 crore in FY19. Global and domestic causes alike have prompted the flows of funds in 2018-19 from the markets and both the equity and debt segments have witnessed outflow.

Indian Broking Industry

• At the industry Level, equity turnover at the exchanges increased to Rs. 2,463 trillion in FY2019 from Rs. 1,733 trillion in FY2018, registering a growth of 42.1%. The Average daily turnover (ADTO) increased to Rs. 9.93 trillion from Rs. 7.04 trillion during the same period, registering a staggering growth of 41%. The market witnessed a sharp fall in Q2 FY2019 post the default of IL&FS and consequent liquidity issues in the system. This was Later coupled with cross-border tensions and political uncertainty before elections. The total cash turnover reported growth in 1=72019, with a total traded volume of Rs. 87 trillion (Rs.83 trillion in FY2017) registering a YoY marginal growth of 4.9%. The cash segment ADTO increased to Rs. 0.35 trillion from Rs. 0.34 trillion in the same period. Flow from Foreign Portfolio Investors (‘FPI) remained weak for majority of FY2019. Plowever, due to strong inflows in the month of February and March of USD 8.3 billion, FPI flows for FY2019 turned positive. Domestic Institutional Investors (‘Dlls) continued to remain Largely positive through FY2019. Domestic institutional investors (Dlls), including mutual funds and insurance firms, were net buyers of shares worth Rs 72,109 crore, which was lower than the Rs114,452 crore in the previous fiscal.

• The derivatives or futures and options (F&O) segment, which witnessed a 43% growth in ADTO in FY2019 as compared to growth of 76% in FY2018. The total turnover for the derivatives segment increased to Rs. 2376.02 trillion in FY2019 (ADTO of 9.58 trillion) from Rs1649.88 trillion (ADTO of 6.71 trillion) in FY2018, registering a growth of 44.01%. The options (ADTO) growth rate remained healthy in FY2019, registering ayear-on-year (YoY) growth of 48%, as against 5.53% and 4.04% for the futures and cash segments respectively. The options segment remains the most active in the derivatives market accounting for 91% of the derivatives turnover in FY2019 (88% in FY 2018), with index options accounting for 86% of the derivatives turnover (82% in FY2018).

• Currency Derivative trading volumes increased to Rs. 159.18 trillion (ADTO of Rs. 0.66 trillion) in FY2019 from Rs. 96 trillion in FY2018 (ADTO of Rs. 0.40 trillion), registering a growth of 66.15%.

• Exchange Traded Funds in India have witnessed a net inflow of Rs. 42,940 crore during FY19. Investors remained bearish on gold exchange-traded funds (ETFs) as they pulled out Rs 411 crore from the instrument in 2018-19, making it the sixth consecutive financial year of outflow whereas there was a net inflow of Rs 43351 crore in other ETFs in FY18.

• Indias commodity derivatives market expanded by about 20% in 2018-19 over 2017-18. The total volume of commodity futures traded by all national commodity exchanges exceeded 246.45 million lots. During FY2019, total value of commodity futures traded by all national commodity exchanges in India was Rs 71.97 lakh crore against Rs 60.09 lakh crore in FY 2018. The Multi Commodity Exchange has witnessed record quarterly average daily turnover in the third quarter of FY2019 ever since the imposition of the Commodities Transaction Tax (CTT) in July 2013. Increased hedging due to volatility in currency and sharp price movements in energy products, especially crude oil, were the key reasons for the higher average daily turnover.To help broaden the commodity derivatives market, regulator Sebis board approved allowing mutual funds and portfolio managers to trade in this segment.

Outlook

While financial year 2018-19 was marked by the return of volatility, FY 2019-20 begins with conversion of most macro tailwinds into headwinds. It is not likely that the world will go into a recession despite a weaker global growth outlook. Plowever, markets will struggle for a stable footing until better economic data emerges from the major economies like US, China, Japan and the EU.If there is any rebound in global growth, Indias exports are likely to benefit. The clear mandate removes the overhang of uncertainty from the markets. This is a significant positive for market sentiment and for attracting global investors. All eyes will now be on the new government and the steps it must take to mend a troubled economy. Despite scope of volatility remaining high, investors can benefit from buying equities for the longterm from a few niche segments that are expected to do well in FY 2019-20 and beyond.