Early Warning & Signals Through Charts

NETRA April 2022

 What To Own? Lenders or Borrowers?
13 The supply squeeze enabled metal companies to make
outsized gains at lower output in a goldilocks scenario.
11 This happened at a time when bank credit growth was
The ratio of NSE Bank Index to NSE Metal weak and consumption demand was de-growing. 114%
Index, or the ratio of lenders to borrowers is 9
143%
now at multi year lows. When economic 7
growth recovers & supply disruptions are
about to end, OWN Lenders, NOT borrowers. 5
58% +233% ???
Interestingly this ratio has bottomed out at 3
Banks to Metals Ratio
time when the yield curve was very steep and
RBI was about to embark on an interest rate 1 NSEBANK Index / NSEMET Index
hike journey. 4

Why? 3
Because when credit growth flows back into
the system the banking profitability rises 2
incrementally faster than that for metal 1
companies which are already at a cyclical high.
It’s that time again now. Advantage Lenders. 0

-1

-2

Source: Bloomberg on 31st March 2022 India Gsec 10 Yr Yield - Repo Rate
Indian Banking Sector – The Time Is Ripe

The health of the Indian banking sector

has improved from the forgettable years of 39 Operating Profit Growth YoY (%) For Banks
2017 to 2020. Bad loans are at a record
low, provision coverage high, and capital 33
well above regulatory requirements.
Growth aided by Balance sheet growth to
Credit growth is also now on the mend. lower credit costs lead the next leg of growth
The latest numbers pegged the banking 24
credit growth at 8.7% year on year. 22 21
20 20
18 17
This number is likely to improve to double 15 16
digit growth in next few months. At the 14 14
12 12
same time the universe of banks that we 11
track is showing a strong uptick in PPOP
(Pre-provisioning operating profits). This is 5
likely to aid profitability for the responsible 4
lenders.

A good trend ahead for the banking sector.

FY22E

FY23E

FY24E
FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21
Source: Company Reports, DSP as of March 2022
Healthcare Sector’s Discount to Market At An Extreme
22.0 100%

Healthcare sector has been in focus 20.0 80%

because of the improving fundamentals
and margin of safety in valuations. 18.0
60%
At this time, the EV/EBITDA for the sector
has improved to near peak levels seen in 16.0
2015 go-go years. The sector is trading at 40%
huge discount to the market. 14.0
Over the next few years its likely that the 20%
uptick in sales flows through to the 12.0
bottom line as margins improve. A good
stock selection process can add a decent 10.0 0%
alpha for long term investors.

Opportunities galore in the healthcare 8.0 -20%

sector.

BSE Healthcare EV/EBITDA BSE Sensex EV/EBITDA Premium of BSE Healthcare over Sensex (RHS)

Source: DSP Sectoral Compass, Published March 2022

Mutual Fund Purchase of Equities Offsetting FII Selling

Mutual Funds (USD Bn) FII Equity (USD Bn)

Mutual Fund purchase of Indian equities
has offset very large and rapid selling by 29
FIIs in 2022. 25 23
What’s interesting is that FIIs have sold 19 20
18 18 18
$15bn in the first 3 months of 2022. 16
Mutual Fund purchase of equities have 14
been able to balance this to some extent, 11 11 11
considerably reducing wild swings in 9 8 8 9
7 7 7
markets 5 4 5 4
3 3 3 3
1 0 0 0
This trend has been getting stronger over
time and is here to stay. Domestic -1 0 0 -1
financialization of savings is a megatrend -3 -4
which is still in its infancy. -5
-7
When FII & DII both turn buyers, for a Biggest FII outflow of $15bn in just 3 months. Previous
short span of time, Nifty valuation -13 largest outflow was $13bn in full calendar year -15
multiples expand aggressively.
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
YTD

Source: Bloomberg; Data as on 30th March 2022

Is The Next Crisis Hiding In Plain Sight or Is This The Peak For Rates?
12
Every time US 10 Yr Treasury yield has Will yields rise past this strong trend line?
touched the trend line drawn on the chart They haven’t been able to over the years.
10 Mexican
on the right, a crisis ensued.
Tequila Crisis Asian Financial
In most instances, higher bond yields are Crisis
not the cause of the crisis. But more often 8 Tech bubble
than not, the crisis tipping point is triggered Global financial Commodity
by higher rates hitting those who are overly crisis crash / Yuan
indebted or are struggling already. 6 Depreciation
PIIGS Crisis
Is another crisis hiding in plain sight? Can
US economy absorb interest rates at higher EM Slowdown
or these levels? 4
US Treasury 10 Yr Bond Yield
?
While there is no way to know, it is
important to be careful & analyze every 2
major change in markets & economy with
caution. This is a red flag.
On the contrary if rates peak here, it will be 0
a good opportunity to lock-in yields globally.

Source: CMIE, SIAM Data as on 31st Jan 2022

US Yield Curve – Canary In The Coal Mine?
10 4.0
9 US 10 Yr – 2 Yr Bond yield spread is close to turning negative. In the past it
The yield curve is about to invert. Is another has been a decent indicator of impending recession but not an exact one.
recession coming? 8
3.0
7
US 10-2 Yr bond yield spread has been able
6
to lead many recession readings. Yield curve
inversion implies that the bond markets see 5
4
? 2.0
a massive slowdown in growth and therefore
long term rates fall or rise at a slower pace 3
1.0
versus the short term rates. 2
This happens when central banks raise short 1
term rates and the bond market sees that as 0 0.0
a risk to economic growth. This isn’t an exact -1
indicator because there are many factors -2
which can change the shape of the curve. -1.0
-3 False signal
At this time slower growth appears to be -4
taking hold with not many signs of recession. -5 -2.0

Nov-11
Nov-77

Aug-90

Nov-94

Aug-07
Feb-82

Jan-92

Sep-97
Feb-99

Jan-09

Sep-14
Feb-16
Jun-76

Jun-93

Dec-01

Jun-10
Sep-80

Dec-84

Dec-18
Apr-79

Jul-83

May-86
Oct-87
Mar-89

Apr-96

Jul-00

May-03
Oct-04
Mar-06

Apr-13

Jul-17

May-20
Oct-21
Curve inversion also coincides with peak
interest rates
US GDP Growth (yoy %, 6 months Lag) LHS
US 10 - 2 Bond Yield Spread (Yield Curve) RHS
Source: Bloomberg, 31st March 2022
World Equity Markets & Money Printing Are Still Best Friends

60%
When Central Banks expand their balance World equity markets are still moving broadly in line
sheets, equity markets enjoy a buoyant 50% with the change in G4 central banks balance sheets.
period. The most likely reason is that
expansionary & easy monetary policy has 40%
been able to increase the price to earnings
ratio for stocks in addition to aiding better 30%
economic growth.
20%
Over the last 6 months, the G4 central
banks have taken a U-turn. US Fed, Bank of 10%
England have started to raise rates & have
ended their quantitative easing programs. 0%
In the next 12 months most central banks
are likely to raise rates. Can the world -10%
equity markets ‘decouple’ from this
relationship? -20%

Feb-19
Feb-10

Feb-11

Feb-12

Feb-13

Feb-14

Feb-15

Feb-16

Feb-17

Feb-18

Feb-20

Feb-21

Feb-22
Aug-10

Aug-11

Aug-12

Aug-13

Aug-14

Aug-15

Aug-16

Aug-17

Aug-18

Aug-19

Aug-20

Aug-21
Seems difficult. Expect consolidation in
world equities in 2022.
G4 Central Bank Balance Sheet (yoy, %) MSCI World Index (yoy,%)

Source: Bloomberg; Data as on 31st Mar 2022

Freight Rates Indicate That Peak Inflation Is Behind Us
40% 10

The Cass Freight Index (shipments) peaked 30% Freight index has peaked 8
Movement in Freight rates lead
in late 2021 & has seen a steady decline. and has now subsided.
inflation by a lead of 6 months
Freight rates lead inflation by about 6 20% 6
months. This indicates that inflation
readings in US & most parts of the world
should begin to see a gradual decline over 10% 4
the next 6 months.
Due to the Russia-Ukraine war the Cass 0% 2
Freight Index has again jumped as per the
agency. However the jump hasn’t been -10% 0
steep and there are clear signs that the
rate of acceleration is slowing.
-20% -2
Lower inflation, if it materializes, can have
a soothing impact on global bond markets
which are reeling under pressure from -30% -4
hawkish central banks.
Lock-in the yields!

Cass Freight Index (yoy, %) Advanced by 6 months LHS US CPI Inflation (YOY,%) RHS

Source: St Louis Fed, Feb 2022

Why Markets Have Ignored The Russia-Ukraine Crisis
USD FRA-OIS Spread 3M – The “Funding Stress” Indicator
200
Current spread between U.S three-month Global financial crisis
forward rate agreement & three-month 180
overnight index swap rate is the FRA-OIS 79
Spread. It is a funding stress indicator. 160
Rising spreads indicate that banks are unable 140 37
to raise funds at rates closer to overnight
rates. This means that there is a 120 15
counterparty risk which banks don’t want to
take. This happens when there is risk of 100 Magnified
default by one or more financial entities &
banks ask for higher rates to price in this risk. 80
Yuan depreciation
This spread had risen considerably when Greece debt crisis
60
Russia invaded Ukraine. Markets hate the
probability of default. 40
But this spread has cooled off considerably 20
and equity markets globally are now trading
above the pre-conflict levels. 0
Mar-09

Mar-12

Mar-15

Mar-18

Mar-21
Dec-09

Dec-12

Dec-15

Dec-18

Dec-21
Jun-08

Sep-10

Jun-11

Sep-13

Jun-14

Sep-16

Jun-17

Sep-19

Jun-20
Source: Bloomberg; Data as on 30th March 2022
Have US Fed Actions Altered The Gold to Crude Oil Ratio?
9000 90
COVID Oil crash
Gold to Crude Oil ratio highlights the
part of the cycle we are in. When the 8000 77.0 80
ratio is at a bottom it is usually around
the peak of the economic growth cycle 7000 70
or near a supply side disruption in the US Fed’s balance sheet expansion
Oil market. 6000 60
has subsequently created higher
Gold to Crude Oil ratio lows for Gold to Crude Oil ratio.
What is important to note is that over 5000 50
the last decade the Gold to Crude Oil was in a broad range of Are we at an extreme now?
ratio has repeatedly formed higher lows. 4000 30 to 10 for a long time.
40
33.0 32.2
We see this as a reflection of
3000 27.6 30
debasement of fiat currencies which has 23.9
a positive impact on Gold prices over 19.8
the longer term. 2000 20

The question is has Gold to Crude Oil

16.3 17.9 ?
1000 11.2 12.2 10
10.3
ratio bottomed? 6.6
0 0
We think the probability is high. This is

Aug-01
Nov-88

Nov-05
Sep-91
Feb-93

May-97

Sep-08
Feb-10

May-14

Mar-17
Jun-87

Jun-04

Jun-21
Apr-90

Jul-94

Apr-07

Jul-11
Mar-83
Aug-84

Dec-95

Oct-98
Mar-00

Dec-12

Oct-15

Aug-18
Jan-86

Jan-03

Jan-20
positive for Gold relative to Crude oil.

US Federal Reserve Balance Sheet (USD Bn) (LHS) Gold to Crude Oil Ratio (RHS)
Source: Bloomberg as on 31st March 2022
US - The Erstwhile Biggest Crude Oil Importer Is Now A Net Exporter

3400 US was the largest importer of crude oil for decades.

3200 It’s still the largest consumer of crude oil at 21.7 million barrels/day.
3000 But over the last 8 years it has moved from a net importer to net exporter.
Many are surprised that a conflict
which has sent the world on the edge 2800
of a world war hasn’t taken Oil prices 2600
to even a new life high. 2400
2200
The reason is the change in foreign 2000
trade of energy by United States. It 1800
has begun to produce so much 1600
energy that the global energy balance 1400
has shifted. 1200
1000
If US increases its production further 800 Rebased to
and Russia Ukraine conflict is resolved 600 100 with 1949
quickly, the Oil market’s U-Turn will 400 as start date
be a sight to behold. 200
0
-200
1955

2000

2012
1949
1952

1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997

2003
2006
2009

2015
2018
2021
Crude Oil Imports Crude Oil Exports

Source: EIA DOE 31st March 2022

Take Less, Invest More

A Rupee
invested today
is more than
a Rupee later.

Image Source: https://thequotes.me/2021/04/25/the-more-you-take-the-less-you-have/

Disclaimer

In this material DSP Investment Managers Pvt. Ltd. (the AMC) has used information that is publicly available, including information
developed in-house. Information gathered and used in this material is believed to be from reliable sources. The AMC however does not
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Schemes of the DSP Mutual Fund. The data/statistics are given to explain general market trends in the securities market, it should not be
construed as any research report/research recommendation. We have included statements / opinions / recommendations in this
document, which contain words, or phrases such as “will”, “expect”, “should”, “believe” and similar expressions or variations of such
expressions that are “forward looking statements”. Actual results may differ materially from those suggested by the forward looking
statements due to risk or uncertainties associated with our expectations with respect to, but not to, exposure to market risks, general
economic and political conditions in India and other countries globally, which have an impact on our services and / or investments, the
monetary and interest policies of India, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity
prices or other rates or prices etc.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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