SOUND BALANCE SHEETS, HEALTHY CASH FLOWS, AND ESG REMAIN KEY

GLOBAL MACROS

� Macro uncertainty likely to persist as we head into the US presidential elections in 2020: Global macros are likely to remain volatile given that two of the largest global economies are still at loggerheads over trade pacts. With the US heading into a crucial presidential election year in 2020, political rhetoric could take centre stage. This is bound to keep global growth fairly tepid – IMF predicts it at 3% (the lowest since the financial crisis a decade ago).

� Middle East geopolitics remains volatile and unpredictable: Given the heightened state of political tensions in the Middle East, any untoward development could disturb the current demand-supply scenario for crude oil and consequently oil prices. Any resolution of these issues augurs well for large oil importing economies like India.

� Climate agreements and ESG themes to pick up pace: Rising awareness about climate change and ESG amongst global institutional investors could become more of a norm. Any company that can embrace these changes is likely to benefit in the long term.

DOMESTIC MACROS

� Path of structural reforms continues from the Central Government:

Post elections, the sharp GDP slowdown for Q1FY20 and the weaker tax collections led to economics receiving increased attention. To counter this slow activity, without compromising the structural reform path, the Government has brought about some key changes like (a) Corporate tax cuts; (b) rolling back recently implemented surcharge on FPIs and domestic investors; (c) frontloading Public sector bank recapitalization to the extent of INR 700 bn; (d) Expedited GST refund to MSMEs; and (e) Remission of Duties or Taxes on Export Products (RoDTEP) – addressing WTO concerns on export subsidies.

� The pivot towards investment activity is encouraging: Amongst all these moves undertaken by the Central Government, what really is notable for us is the importance being ascribed to manufacturing as an activity, especially at a time when global supply chains are exploring moving their base away from China. This is very important for the manufacturing sector given the multiplier effect it has, especially from a job creation perspective. This coupled with the commissioning of the critical phase 1 of Dedicated Freight Corridor (DFC) could position India as a favourable investment destination. We have already seen some initial signs with project announcements from the likes of electronic majors such as Apple, Samsung, Vivo etc. We believe this can gain traction particularly if States can follow through with some crucial labour reforms, regulation and commercial policy fronts (considering this is in the domain of States in our policy structure).

� Stress on financial sector seems to be easing but at a slow pace and in an organized way: Companies into real estate project financing and the ones with weaker liability franchise have borne the maximum brunt of confidence crisis in the last one year. While these businesses have been shrinking their balance sheets in an orderly manner, it might take them a while to come out of woods. This has definitely affected the segments to which they have been lending, despite seemingly a lack of systemic risk (limited to these specific companies). We believe the best possible solution could be to get strategic capital infusion and aggressive sell down of the performing liquid assets.

� Privatisation now a focus area: As against the recent practice of selling stake to other PSUs and/or through ETFs, the Government is now exploring divestment of stakes to strategic investors. Besides providing proceeds, this could also improve the depressed valuations for stakes in residual companies.

� High ticket consumption has slowed: The above macro changes have meant that the key funding avenues for the real estate developers (supply side issue) and the consumers in case of autos, has led to a combination of weak sentiment, regulatory changes in the sector and negative feedback loop. While the government is providing temporary relief in pushing back some of the incremental regulations, any new demand side incentives could obviously provide impetus.

� Investment activity is likely to improve gradually: Until these changes are felt on the ground, one does not see a broad based investment climate

25 OCTOBER 2019

EQUITY OUTLOOK - DIWALI SAMVAT 2076 TAKING THE RIGHT TURNS TO NAVIGATE THE GROWTH SLOWDOWN

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improvement - given capacity utilization levels for various sectors in the economy are still below 80% as per last OBICUS survey of the RBI (Sep 2019). However, we do see capex growth in sectors that can see import substitution, technology changes and efficiency gains.

� Rainfall above long term average: Cumulative rainfall was above long-term average, however spatial distribution has been varied with lots of pockets seeing floods. While this has impacted kharif production, the near term strengthening of prices and the improved prospects for the rabi season (given better water reservoir storage levels) augur well.

MICRO

� Execution is key: Feedback from various industry sources suggest that small and medium enterprises are under a lot of stress. This and lower corporate taxes are likely to favour the large players, particularly the more nimble footed. At the same time, if organized players are not nimble enough, we could see a case for the unorganized sector to gain, as during a slowdown phase one typically witnesses customers down trading.

� Earnings recovery is not likely to be broad based: Under such circumstances of low growth and low inflation, we see that companies that can gain volume market share on a sustainable basis without putting pressure on the balance sheet can flourish. Earnings recovery to that extent can be very disparate within same sectors.

� Valuation gap though could narrow if some structural changes are undertaken: Year to date market movement has been fairly narrow with bias towards high growth and quality space, but we see it at crossroads

now. We are seeing some visible changes particularly in the public sector space with good business franchise or leaders in smaller industries. These companies are largely in the value space. One could see some marked re-rating if business delivery and cash generation sustains along with visibility on strategic divestment.

OUR POSITIONING

� We continue to focus on identifying companies that fit our BMV framework – Companies with sound Business fundamentals that can deliver superior and sustainable earnings growth coupled with healthy cash flows and low leverage, run by capable Managements and are available at reasonable/fair Valuation.

� In this context, we remain overweight on private sector banks, insurance, cement and select pockets of consumption. On consumption, we like paints, movie exhibitors which continue to garner healthy volume growth despite cyclical consumption slowdown. We also like select industrial companies that have healthy balance sheet and execution / technological leadership. Meanwhile, we are underweight energy and IT sectors.

PERFORMANCE – WHAT HAS WORKED?

� Our focus continues to be on identifying long term structural growth companies which could deliver sustainable earnings growth. Household’s balance sheet is the strongest as compared to that of Corporates and Government; and in a slowing growth environment, companies that are focused on the households could continue to deliver relatively better growth.

� Within financials sector, our focus is on retail oriented strong liability franchises like large private banks and insurance companies have contributed to performance. Similarly, despite expensive valuations, select consumer staples companies which have the ability to deliver volume growth profitably and generate healthy cash flows, have aided the portfolio. Our focus on bottom-up industrial companies with strong balance sheet, healthy cash flows and technological advantage also played in our favour. We have avoided Autos within consumer discretionary as high ticket consumption seems to have slowed down and regulatory changes added to woes. Again in materials, our preference for domestic focused cement and paint companies over global commodities i.e. metals has worked. Retail, multiplexes and select utilities where growth continued to be strong due to increase in penetration were other key contributors.

� As indicated by the high frequency indicators the economy may take few quarters to accelerate growth. The government’s measures to bring back private sector capital investments could benefit some of the Business to Consumption (B2C) related companies focused on category penetration and market share gains through superior business models. In a slowing global economy and low inflation environment, high levered companies and deep cyclicals are spaces we are currently avoiding.

PERFORMANCE UPDATE

Past performance may or may not be sustained in future and should not be used as a basis of comparison with other investments. Returns do not take into account the load, if any. Different plans shall have a different expense structure. Returns provided above are for distributor/regular plan-growth option. Data source: MFI. Data as on Sep 30, 2019. For detailed performance of the schemes, the fund manager details and managing since details and performance of other schemes managed by fund managers, please refer page 3-5

15.4

6.3 8.13.7

13.9

4.4 1.9

-2.5

10.94.4

23.1

4.4

BNP Paribas

Large Cap Fund

Nifty 50 TRI*

BNP Paribas Multi

Cap Fund

Nifty 500 TRI*

BNP Paribas Long

Term Equity Fund

Nifty 200 TRI*

BNP Paribas Mid

Cap Fund

Nifty Midcap 150

TRI*

BNP Paribas

Focused 25 Equity

Fund

Nifty 200 TRI*

BNP Paribas India

Consumption Fund

Nifty 200 TRI*

Last 1 year CAGR (%)

3

*Point to Point (PTP) Returns in INR show the value of 10,000/- invested. **TRI – Total return Index

Past performance may or may not be sustained in future and should not be used as a basis of comparison with other investments. Returns do not take into account the load, if any. Different plans shall have a different expense structure. Returns provided above are for distributor/regular plan-growth option. Where scheme performance for last 3 and 5 years is not available, the same has not been shown. BNP Paribas Dynamic Equity Fund is managed by Mr. Karthikraj Lakshmanan & Mr. Abhijeet Dey (for equity portion) and Mr. Mayank Prakash (for Debt portion). However, as BNP Paribas Dynamic Equity Fund is a new scheme and yet to complete 1 year since its inception date on March 8, 2019, performance details have not been shown. BNP Paribas Conservative Hybrid Fund, the Debt Portion of Portfolio is managed by Mr. Mayank Prakash and Equity portion managed by Mr. Karthikraj Lakshmanan & Mr. Abhijeet Dey.

Kindly refer to the table on page 4 for fund managers and managing since details.

7

4

*Point to Point (PTP) Returns in INR show the value of 10,000/- invested.

Past performance may or may not be sustained in future and should not be used as a basis of comparison with other investments. Returns do not take into account the load, if any. Different plans shall have a different expense structure. Returns provided above are for distributor/regular plan-growth option. #The inception date of BNP Paribas Short Term Fund is 13-Sep-2004. However, since there was no continuous NAV history available for this plan prior to 13-Apr-2009, the point to point return may not be the true representation of the performance of the scheme. Hence the returns since 23-Apr-2009 have been considered for calculating performance for the since inception. ^The inception date of BNP Paribas Corporate Bond Fund is 08-Nov-2008. However, since there was no continuous NAV history available for this plan prior to 10-May-2010, the point to point return from since inception may not be the true representation of the performance of the scheme. Hence the returns since 10-May-2010 have been considered for calculating performance for the since inception. BNP Paribas Overnight Fund is managed by Mr. Vikram Pamnani and Mr. Mayank Prakash. However, as BNP Paribas Overnight Fund is a new scheme and yet to complete 1 year since

its inception date on 12-Apr-2019 performance details have not been shown.

Scheme Name Fund Manager & Managing Since details

BNP Paribas Large Cap Fund & BNP Paribas Long Term Equity Fund

Mr. Karthikraj Lakshmanan (managing fund since October 07, 2016) and Mr. Abhijeet Dey (managing fund since November 16, 2016)

BNP Paribas Multi Cap Fund & BNP Paribas Mid Cap Fund

Mr. Abhijeet Dey (managing fund since October 07, 2016) and Mr. Karthikraj Lakshmanan (managing fund since November 16, 2016)

BNP Paribas Focused 25 Equity Fund Mr. Abhijeet Dey (managing fund since October 6, 2017) & Mr. Karthikraj Lakshmanan (managing fund since October 6, 2017)

BNP Paribas Arbitrage Fund Mr. Karthikraj Lakshmanan (for Equity Portfolio) (managing fund since December 28, 2016) and Mr. Mayank Prakash (for Fixed Income Portfolio) (managing fund since December 28, 2016)

BNP Paribas India Consumption Fund Mr. Karthikraj Lakshmanan and Mr. Abhijeet Dey (managing fund since September 07, 2018) (for Equity portion) and Mr. Mayank Prakash (managing fund since September 07, 2018) (for Debt Portion)

BNP Paribas Dynamic Equity Fund Mr. Karthikraj Lakshmanan and Mr. Abhijeet Dey (managing fund since March 08, 2019) (for Equity portion) and Mr. Mayank Prakash (managing fund since March 08, 2019) (for Debt Portion)

BNP Paribas Substantial Equity Hybrid Fund Mr. Karthikraj Lakshmanan (for Equity Portfolio) (managing fund since April 7, 2017) and Mr. Mayank Prakash (for Fixed Income Portfolio) (managing fund since April 7, 2017)

BNP Paribas Conservative Hybrid Fund For Debt portion: Mr. Mayank Prakash (managing fund since August 23, 2017) For Equity Portion: Mr. Karthikraj Lakshmanan (managing fund since October 07, 2016) and Mr. Abhijeet Dey (managing fund since November 16, 2016)

BNP Paribas Flexi Debt Fund

Mr. Mayank Prakash (managing fund since August 23, 2017) and Mr. Vikram Pamnani (managing fund since December 27, 2017) BNP Paribas Corporate Bond Fund

BNP Paribas Medium Term Fund

BNP Paribas Short Term Fund Mr. Mayank Prakash (managing fund since September 21, 2015) and Mr. Vikram Pamnani (managing fund since December 27, 2017)

BNP Paribas Overnight Fund Mr. Vikram Pamnani (managing fund since 12-Apr-2019) and Mr. Mayank Prakash (managing fund since 12-Apr-2019)

BNP Paribas Liquid Fund Mr. Vikram Pamnani (managing fund since 27-Dec-2017) and Mr. Mayank Prakash (managing fund since 21-Sep-2015)

BNP Paribas Low Duration Fund Mr. Vikram Pamnani (managing fund since 27-Dec-2017) and Mr. Mayank Prakash (managing fund since 23-Aug-2017)

5

DISCLAIMER The sector(s) mentioned herein do not constitute any recommendation of the same and BNP Paribas Mutual Fund may or may not have any future position in these sector(s). The material contained herein has been obtained from publicly available information, internally developed data and other sources believed to be reliable, but BNP Paribas Asset Management India Private Limited (BNPPAMIPL) makes no representation that it is accurate or complete. BNPPAMIPL has no obligation to tell the recipient when opinions or information given herein change. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. This information is meant for general reading purpose only and is not meant to serve as a professional guide for the readers. Except for the historical information contained herein, statements in this publication, which contain words or phrases such as 'will', 'would', etc., and similar expressions or variations of such expressions may constitute 'forward-looking statements'. These forward-looking statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those suggested by the forward-looking statements. BNPPAMIPL undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date thereof. The words like believe/belief are independent perception of the Fund Manager and do not construe as opinion or advise. This information is not intended to be an offer to sell or a solicitation for the purchase or sale of any financial product or instrument. The information should not be construed as an investment advice and investors are requested to consult their investment advisor and arrive at an informed investment decision before making any investments. The Trustee, Asset Management Company, Mutual Fund, their directors, officers or their employees shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages arising out of the information contained in this document.

____________________________________________________________________________________________________ BNP Paribas Asset Management India Pvt. Ltd.

Corporate Identity Number (CIN): U65991MH2003PTC142972 Regd. Off.: BNP Paribas House, 1 North Avenue, Maker Maxity, Bandra Kurla Complex,

Bandra (East), Mumbai - 400 051 - India. Toll Free: 1800 102 2595 Fax: +91 (22) 6196 4294 E-mail: customer.care@bnpparibasmf.in Website: www.bnpparibasmf.in

____________________________________________________________________________________________________

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

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