Market Outlook - assetmanagement.kotak.com · Market Outlook December 2017 1. Equity Markets 2. Key...

Market Outlook December 2017

1

Equity Markets

2

Key Events

3

• Sovereign Rating Upgrade: India’s improving growth outlook and structural reforms agenda got a boost with

Moody’s upgrading India’s local and foreign currency rating to Baa2, a notch above Baa3 earlier. Moody’s

cited reforms such as GST, measures to address the banking system NPL, Aadhaar-enabled direct benefit

transfer etc.

• The Q2 GDP print came in at 6.3% reversing the decelerating trend. The recovery was led by manufacturing

which saw a smart rebound to 7%. In terms of expenditure, both private and govt consumption growth

remained weak but investments i.e: GFCF (Gross fixed Capital Formation) growth improved to 4.7%. Net

exports were up marginally as well

• India’s rank improving by 30 places in World Bank’s Ease of Doing Business Survey supporting the view of

transitions being underway in the economy

• The Central Cabinet approved an ordinance approving an amendment to the Insolvency and Bankruptcy

Code to prevent wilful defaulters from bidding for stressed assets.

• FIIs finally turned into large net buyers once again with $2.8bn of buying in November; taking the YTD net

buying to $8.6bn. DIIs remained buyers to the tune of $1.4bn in November; which took the DII YTD tally to

a staggering ~$12.8bn. Mutual Funds once again drove the inflows with $1.6bn being poured-in; while

Insurers were small net sellers of $220mn.

• Capital market activity swelled in Nov-17, with some sizeable IPOs like HDFC Life and block trades like that

in Bharti Airtel.

Sensex’s And Nifty’s Performance During Nov Month (%)

4 Source: Bloomberg, Kotak Institutional Equities

Moody's UpgradeFirst change to India's ratings in more than a decade

5

Movements in India’s ratings by three major Rating Agencies

Source: Bloomberg, Credit Suisse estimates, MOSL

Portfolio flows improved in 2003-04 after ratings upgrade

Moody's Upgrade

stalls the unwarranted self-reinforcing bond yield spike that was in progress

6

Term premium, or gap between repo and 10yr yield was high

High FPI Bond holdings acted as an overhang for INR

Source: Bloomberg, NSDL Credit Suisse estimates

Big GST Relief: Tax cut on 178 items, only 50 still in 28% slab

7

GST Collections Worries

8

CGST shortfall staying even post IGST settlements

Lower IGST cause for GST collections down 10% MoM

Source: CLSA, Ministry of Finance, * IGST number for Oct is derived as shown in Fig 1

IGST collections vs settlement against CGST and SGST

Calculation Of Monthly CGST Breakeven Rate Vs Current Collections

9 Source: CLSA, Ministry of Finance, Budget Documents

GST Tax Rate Cuts Raise Questions On The Fiscal

10 Source: CLSA, Ministry of Finance

Central Government Fiscal Deficit as % of GDP

Economy Rebounds:

GDP growth rate rises to 6.3% in September quarter

11 Source: CGA, Ministry of Statistics & Programme Implementation, Ministry of Commerce & Industry

Growth Normalisation Underway . . .

12 Source: CLSA,CMIE, SEBI, RBI, total credit includes bank credit, corporate bonds and

commercial paper

INR Should Remain Stable Against US$

13 Source: CLSA, Bloomberg

P/E Multiples Have Risen Globally

14 Source: Bloomberg, Credit Suisse estimates

India's P/E

No major expansion in PE Premium 2013 onwards

15

High PE, But On Low Profitability Base

Source: Bloomberg, CMIE, ACE Equity, MOSPI, CLSA

Domestic Investor Flow: A Key Support DMFs Continue to Buy for 16th Consecutive Month

17

MF Flows in Markets: Inflows Persists (US$ mn)

Insurance Flows: Turn Sellers (US$ mn)

Flows in MFs (October): Third-highest Monthly Equity Inflows

Domestic Mutual Funds AUM (October): Equity AUM Up MoM

Source: Morgan Stanley Research, CDSL, BSE, SEBI ,AMFI

Rising populism: Enter election mode

18 Source: CACP, Ministry of Agriculture, Election Commission of India, CLSA

Asset Sales to Reset Corporate Governance Culture?

19

Market Performance

20

*As on 30 Nov 2017, Source: Axis Capital, Bloomberg

BSE Sectoral Indices

Strong Performance By Majority Sectors Over The Last 1 Year

Exporters lagging in returns

21

6.3 1.2

(3.8)

0.2

(5.6)

0.6

(0.8) (2.3) (1.2)

1.8 3.6

(2.0)

90.8

34.3 33.1 31.4 30.3 27.9 25.1

16.5 14.4 12.4 8.9

(11.1)(20)

0

20

40

60

80

100

Realty Bankex Oil & Gas CapitalGoods

Metals FMCG Auto PSU Power Tech IT Services Healthcare

(%)

1m return % 1 yr return %

*As on 30 Nov 2017, Source: Bloomberg

Performance Across Market Cap -

Strong Performance Down the Capitalisation Curve

22

(1.1)

1.6 3.6

24.3

33.5

47.8

6.0

17.1 17.8

11.7

19.6 19.6

5.9 9.5

6.6

(10)

0

10

20

30

40

50

60

Nifty Nifty Midcap S&P BSE Smallcap

1m returns 1y returns 3 yr CAGR 5 yr CAGR 10 yr CAGR

In p

erce

nt

Most Global Markets Had Strong Showing In The Last Year

23 * As on 30 Nov 2017, Source: Bloomberg. Performance data in local currency

(0.2)

6.1

8.0

14.3

15.6

16.3

16.6

17.0

17.4

18.2

18.3

22.4

24.1

24.3

24.8

26.9

28.0

1.8

(1.7)

(2.2)

(2.2)

(0.9)

(3.1)

(0.3)

(2.8)

(2.4)

1.8

0.8

(1.6)

3.2

(1.1)

(1.9)

3.8

3.3

(10) 0 10 20 30

Russia (MICEX)

Malaysia (KLCI - FTSE)

UK (FTSE 100)

Taiwan (TSWE)

Indonesia (JCI)

Brazil (IBOV)

China (HSCEI)

EURO (Euro Stoxx 50)

France (CACS 40)

Singapore (Straits)

Swiss (SMI)

Germany (DAX)

Japan (Nikkei 225)

India (Nifty)

Korea (Kospi)

US (Dow Jones)

HK (HSI)

1M 1Yr

Valuations

24

IT and Power at lower end of valuations, other sectors moving towards upper end of valuation zone

Source: Axis Capital, Bloomberg Note: * Since April-2005

Sensex sectoral long-term valuation snapshot: Forward PE*

Stock Picking Will Be Critical

*As on 30 Nov 2017

25

0

10

20

30

40

50

60

70

80

Auto BFSI Engg FMCG IT Metals Oil Pharma Power Telecom Sensex

0

10

20

30

40

50

60

Auto BFSI Engg FMCG IT Services Metals Oil & Gas Pharma Power Telecom Sensex

-1 SD +1 SD Current Max Min

Top Quartile

Current

Lower Quartile

Min

Max

26

Focus Themes & Key Sectors

Unorganised to Organised

Banks, Home Building, Retailing, Auto components

Increased government

spending

Capital goods, rural sector, farm implements, construction, cement

Transmission of interest

rates

Infrastructure, asset owners, construction, metals, power, utilities

Clean-Green India

Gas, capital goods, renewable power

Physical to financial savings

Insurance, banks, capital market companies

P/E Multiple CY17/FY18 of Indices

Source: Internal Estimates , Bloomberg

* For India & Japan Fiscal year is FY18 while others it is CY17

Indian Valuation In A Global Perspective

27

9.2

12.1

12.1

14.0

14.3

14.6

15.2

17.1

17.7

21.7

22.7

6 10 14 18 22 26

Korea (Kospi)

Brazil (IBOV)

HK (HSI)

UK (FTSE 100)

Singapore (Straits)

Malaysia (KLCI - FTSE)

Thailand (SET)

Japan (Nikkei 225)

US (Dow Jones)

US (Nasdaq)

India (Sensex)

(x)

*Source : NSE, BSE, SEBI, Internal calculation

Data updated till Nov 2017

Strong purchase by FII’s and Mutual Funds in November

Net Cash Market Purchase

28

Category (Rs cr) Nov - Month CY17 CY-16 CY-15

DII 9,243 82,691 37,125 66,816

MF 10,669 108,845 48,005 71,562

Clients 424 (18,459) (336) (9,795)

NRI (74) (453) (714) (317)

Proprietary 407 2,517 464 1,191

Insurance, Banks & Insurance (1,425) (26,154) (10,880) (4,746)

FII 19,784 56,291 18,783 18,356

Flows to equities

Domestic Flows May Sustain Into Equity Funds In FY 18

• Low FD Return

• Uncertain real

estate

environment &

Lower time limit

for LTCG

29

• Mature investor

base

understanding

the benefits of

compounding

of equities as

asset class

• SIP as a tool to

counter

volatility

Hope In Earnings Recovery For FY-18/19

Source: Internal Calculation30

1,351 1,332 1,350

1,461

1,670

FY15 FY16 FY17 FY18E FY19E

FY93-97 FY98-03 FY05-09 FY10-17 FY18-19e

Se

ns

ex

‘EP

S’

Se

ns

ex

P/E

Past performance is not a reliable indicator of expected future performance

Markets Consolidating As It Awaits Economy To Take Off

25

Key Variables & Their Impact On Equities

Key Variables Short -term

Medium -term

Remarks

Economy GST to impact near-term activity especially informal

segment

Corporate EarningsImproving operating leverage, falling interest costs and

improvement in working capital can accelerate

earnings, but a bit back-ended. Key is improvement in

capacity utilisation

FII FlowIndia stands out among global asset classes with

prospects of strong long term growth.

DII FlowFocus on improving financial savings of households

Supply of paperHigher disinvestment target and repair of leveraged

balance sheet to create supply in markets.

Interest Rates Transmission

Fall in interest rates to help revive demand and reduce

stress for companies with significant debt. Market

expecting better transmission of rates.

Policy/Reform Initiative

GST – landmark reform implemented, can result in

higher tax compliance

32

33

12-month forward Sensex P/B (x) India’s Market Cap to GDP (%)

12-month forward Sensex P/E (x)

Markets Fairly Valued Few Indicators Like PE Indicate Over-valuation, While Other Composite Indicators Like

P/B Or Market Cap To GDP Suggest Valuations Still at fair value range

1.0

2.0

3.0

4.0

5.0

6.0

7.0

No

v-9

1N

ov-

92

No

v-9

3N

ov-

94

No

v-9

5N

ov-

96

No

v-9

7N

ov-

98

No

v-9

9N

ov-

00

No

v-0

1N

ov-

02

No

v-0

3N

ov-

04

No

v-0

5N

ov-

06

No

v-0

7N

ov-

08

No

v-0

9N

ov-

10

No

v-1

1N

ov-

12

No

v-1

3N

ov-

14

No

v-1

5N

ov-

16

No

v-1

7

Sensex P/B (x) - LHS

0

25

50

75

100

FY0

4

FY0

5

FY0

6

FY0

7

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8E

Average of 74% for the period

12000

15000

18000

21000

24000

27000

30000

33000

36000

39000

No

v-1

4

De

c-14

Jan

-15

Feb

-15

Ma

r-15

Ap

r-1

5

Ma

y-1

5

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

No

v-1

5

De

c-15

Jan

-16

Feb

-16

Ma

r-16

Ap

r-1

6

Ma

y-1

6

Jun

-16

Jul-

16

Au

g-1

6

Sep

-16

Oct

-16

No

v-1

6

De

c-16

Jan

-17

Feb

-17

Ma

r-17

Ap

r-1

7

Ma

y-1

7

Jun

-17

Jul-

17

Au

g-1

7

Sep

-17

Oct

-17

No

v-1

7

Cheap 8x - 10x

Attractive 10x - 13x

Fair 13x - 17x

Fair Value Plus 17x - 20x

Stretched 20x - 24x

While Valuations Not Cheap, Patience to be key as we await earnings to

pick up

34

Corporate earnings, especially of domestic oriented companies showing improving

trend

While equities may still be out-performing other

alternate asset classes, moderate return

expectations

Use intermittent volatility to

increase equity exposure

Risk 1 – Delay in NPL resolution

35

NPL RATIOS YET TO COME DOWN AND RESOLUTION MAY GET DELAYED

Bank recap details & roadmap would give further clarity

Source: RBI, CLSA

Risk 2 – Rise in equity issuance impacting market liquidity

36

A POTENTIAL RISE IN EQUITY ISSUANCE MIGHT IMPACT MARKET LIQUIDITY

But Low returns in traditional avenues and increasing awareness continues to drive money to capital markets

Source: Bloomberg, CLSA

Risk 3 – Populist measures

37

Government may turn populist

• While the current government has been disciplined fiscally, as it has focussed incrementalspending on capex and/or fiscal deficit reduction, the risk of rising profligacy cannot be ruledout as we head towards the May ’19 general elections. One example of this is the rise infarm loan waivers in the past few months, partly driven by low agri product prices and weakmonsoons in 2014- 15.

• The government has already readied its armour to take the fight against corruption to thenext level with the law on benami property. This law can be used to provisionally attachbenami properties and eventually confiscated. The act can help to improve transparency inproperty ownership but can cause economic disruption if used indiscriminately. A bigcrackdown under the benami property law may yield political gains as seen with thedemonetisation move. …though the probability of the same is low

Risk 4 – Continuity Of Reforms?

38

Stable government continues

General Elections

2019

2nd generation of reforms such as Labour,ease of doing business etc.

Reforms part 2

39

Risk 5 – US Fed Rate Hike & Other Geo Political Risks

India has been relatively resilient to US rate hikes & geo political risks in the

past

Source: Bloomberg, BNP Paribas

Key Recommendations

Key theme Remarks

Large Cap – play on buying sectoral leaders that

benefit from improving investment climateKotak 50

Diversified/Multicap – focus on sectors that are likely to

benefit the most across market cap

Kotak Select Focus /

Kotak Opportunities Fund

Infrastructure revival – “True-to-label” fund – recent

thrust of government to revive the infrastructure theme

Kotak Infrastructure & Economic

Reforms Fund

Through SIP in Midcap oriented scheme Kotak Emerging Equities Fund

ELSS – Equity allocation with ability to reduce tax

outgoKotak Tax Saver Fund

Balanced – benefit from debt and equity allocation Kotak Balanced Fund

We recommend investors to invest through SIP with a 5 years horizon.

40

Strategy For Investments In The Current Scenario

41

1- Kumbhkaran

(Invest & forget)

Or

2- Asset Allocation

Lumpsum Lumpsum Leverage

STP/ Lumpsum SIPPartial Profit

Booking

STPPartial Profit

BookingTake Profit

Home

OverweightNeutralUnderweight

Below Fair Value

Fair Value

Above Fair ValueMar

ket

Val

uat

ion

Investor Stance

DEBT MARKETS

42

How Nov 2017 Unfolded

Macro Data:

• The government's fiscal deficit during the first seven months (April-October) of the current fiscal was Rs 5.25

lakh crore, or 96.1% of the budgeted target for the current fiscal year that ends in March 2018

• Inflation :

– Consumer prices in October rose 3.58 % over the same month last year, on the back of rising food and

fuel prices. CPI inflation in September was revised to 3.28 %

– Wholesale inflation picked up in October to a six-month high to 3.59% in October driven by faster rises in

prices of food and fuel products.

• Manufacturing activity improved in November to its highest level since October 2016 on the back of growth in

new orders and output. The Nikkei India Manufacturing Purchasing Managers’ Index recorded a value of 52.6

in November, up from 50.3 in October

• Eight core sectors grew at a slower pace of 4.7% in October, chiefly due to subdued performance of cement,

steel and refinery segments.

• The country’s Index of Industrial Production rose 3.8 % in September, compared with the revised 4.5 % in

August (a nine-month high) and 5.7 % in September last year

• The RBI cancelled a bond sale via open market operation worth Rs 10,000 crore scheduled, citing “evolving

liquidity conditions

43

44

How Nov 2017 Unfolded

Trade Data :

India’s merchandise exports declined for the first time in 14 months in October as exporters struggled with a

liquidity crunch because of delayed refunds under the goods and services tax (GST) regime

– Exports fell 1.1% in October to $23.1 billion (against $28.6 billion in September,2017) while imports

expanded at the slowest pace in 10 months at 7.6% to $37.1 billion (against $37.6 billion in

September)

– India’s trade deficit in the month was $14 billion (against $9 billion in September)

India’s Rating:

– Global rating agency Moody’s upgraded India’s sovereign bond rating for the first time in nearly 14

years. It lifted the India’s rating to Baa2 from Baa3, changed its rating outlook to stable from positive

as “risks to its credit profile were broadly balanced

– Global rating agency Standard and Poor on Friday retained India’s sovereign rating at BBB- with a

stable outlook

GST:

– The GST Council reduced rates on 210 items of which 180 were in the top 28 per cent bracket.

– A uniform 5 per cent tax was prescribed for all restaurants, both AC and non-AC

Disinvestment

45 Source : India Budgetget.in

With the government retaining Rs145bn ofinflows received for its Bharat 22 ETF saledone, the disinvestment proceeds for theyear have reached a record Rs525bnalready.

Visible pipeline for divestment includes thec.Rs320bn to be received if the ONGC –HPCL deal goes through taking the total toc.Rs840-850bn.

This implies high likelihood ofdivestments crossing the Rs725bntarget.

• Historically, there tends be a shortfall between divestment target and actual achievement (e.g. Rs462bn achieved in FY17 vs. Rs565bn budget) and as such there is some cushion built here.

• However, this year the fiscal has been seeing multiple stresses (lower RBI dividend, telecom revenues, fuel duty cuts and likely GST shortfall) which have created a bit of a scare on the same. To that extent, beating the divestment target will be a relief.

Positive Real Interest Rates to Stimulate Financial Savings

46

• Earlier, negative real rates fueled inflation in physical assets as people chased assets

such as real estate and gold till 2014.

• With real rates in the positive territory now, money may move from physical to financial

assets.

Note: Monthly 10 year Gilt Yield taken as average of their respective month. Source: Bloomberg

3.28

-3

-2

-1

0

1

2

3

4

5

6

Feb

-12

Ap

r-1

2

Jun

-12

Au

g-1

2

Oct

-12

Dec

-12

Feb

-13

Ap

r-1

3

Jun

-13

Au

g-1

3

Oct

-13

Dec

-13

Feb

-14

Ap

r-1

4

Jun

-14

Au

g-1

4

Oct

-14

Dec

-14

Feb

-15

Ap

r-1

5

Jun

-15

Au

g-1

5

Oct

-15

Dec

-15

Feb

-16

Ap

r-1

6

Jun

-16

Au

g-1

6

Oct

-16

Dec

-16

Feb

-17

Ap

r-1

7

Jun

-17

Au

g-1

7

Oct

-17

Real Interest Rate (%)

CPI Inflation: Way below RBI’s Target

Source: MOSPI

• The CPI inflation hardened to a seven-month high 3.58% in October 2017 (+4.2% in October 2016) from3.3% in September 2017 (+4.4% in September 2016; partly reflecting the base effect and on the back ofrising food and fuel prices.

• The core-CPI inflation remained steady at 4.6% in October 2017, in line with the print in September 2017.On an MoM basis, the core-CPI sub-index increased by 0.5% in October 2017, similar to the rise in October 2016. The core-CPI inflation exceeded the headline CPI inflation for the fourteenth month in a row, although the wedge between the two narrowed mildly in October 2017.

47

3.58%

4.6%

0%

2%

4%

6%

8%

10%

12%

Au

g-1

2

Oct

-12

Dec

-12

Feb

-13

Ap

r-1

3

Jun

-13

Au

g-1

3

Oct

-13

Dec

-13

Feb

-14

Ap

r-1

4

Jun

-14

Au

g-1

4

Oct

-14

Dec

-14

Feb

-15

Ap

r-1

5

Jun

-15

Au

g-1

5

Oct

-15

Dec

-15

Feb

-16

Ap

r-1

6

Jun

-16

Au

g-1

6

Oct

-16

Dec

-16

Feb

-17

Ap

r-1

7

Jun

-17

Au

g-1

7

Oct

-17

CPI Core CPI

CPI Inflation To Remain Anchored Below ~ 4.5-5 % Considering All

Scenarios

Source: MOSPI

48

Crude Prices Firming up

Source:Bloomberg

as on 30th Nov 2017

• Crude Oil prices have inched up to $63.57 from $61.37 in the previous month.

• Given the geo political and other factors, oil prices have risen however its still not in alarming zone

• Commodities in general react negatively to strong dollar and therefore the scope for a sharp rally is very limited

49

63.57

40

45

50

55

60

65

70

Oct

-16

No

v-1

6

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-1

7

May

-17

Jun

-17

Jul-

17

Au

g-1

7

Sep

-17

Oct

-17

No

v-1

7

Brent Crude(USD)

50 Source: WSJ Market Data Group(oil price), the companies (forecasts)

Oil Prices Expected To Be Range Bound

• Credit growth continues to falter due to lack of large-ticket project funding and corporates

moving increasingly to bond markets which has seen significant monetary transmission.

Credit Growth Moderates This Month

Source: Bloomberg, Data as on 30th Nov 201751

64

66

68

70

72

74

76

78

80

6000000

6200000

6400000

6600000

6800000

7000000

7200000

7400000

7600000

7800000

8000000

8200000N

ov-

15

Dec

-15

Jan

-16

Feb

-16

Mar

-16

Ap

r-1

6

May

-16

Jun

-16

Jul-

16

Au

g-1

6

Sep

-16

Oct

-16

No

v-1

6

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-1

7

May

-17

Jun

-17

Jul-

17

Au

g-1

7

Sep

-17

Oct

-17

No

v-1

7

Credit Growth (Weekly Data)

Current Credit/ Deposit Ratio is ~73% (RHS)

Commercial Credit by Banks = Rs 79.58 lakh Crore (LHS)

in c

rore

sIn

Percen

t

$ 400.74 Billion

340

350

360

370

380

390

400

410

Dec

-15

Jan

-16

Feb

-16

Mar

-16

Ap

r-1

6

May

-16

Jun

-16

Jul-

16

Au

g-1

6

Sep

-16

Oct

-16

No

v-16

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-1

7

May

-17

Jun

-17

Jul-

17

Au

g-1

7

Sep

-17

Oct

-17

No

v-17

India Forex Reserves(USD)

USD

Bill

ion

India Foreign Exchange Reserves – Stability Is Key

• India continues to attract capital flow resulting in healthy foreign exchange reserves.

• Indian foreign exchange reserves have grown by $ 40.44 billion in CY17 till date, indicating rising

foreign investor interest, and stronger rupee.

Source: Bloomberg52

Data as on 1st Dec 2017

-4000

-3000

-2000

-1000

0

1000

2000

3000

4000

5000

6000

Feb

-10

May

-10

Au

g-1

0

No

v-1

0

Feb

-11

May

-11

Au

g-1

1

No

v-1

1

Feb

-12

May

-12

Au

g-1

2

No

v-1

2

Feb

-13

May

-13

Au

g-1

3

No

v-1

3

Feb

-14

May

-14

Au

g-1

4

No

v-1

4

Feb

-15

May

-15

Au

g-1

5

No

v-1

5

Feb

-16

May

-16

Au

g-1

6

No

v-1

6

Feb

-17

May

-17

Au

g-1

7

No

v-1

7

Total Liquidity

Total Liquidity in INR bn

The Game Changer

53

Total liquidity has come down to Rs. 1.8 lakh crores on account of tax payments. We expect it to remainpositive in the medium term. This is over and above 1 lac cr parked in MSS maturing March-2018; anddepending on government’s tax collection and its spending; it keeps oscillating between 20-70,000 cr

From Liquidity Positive to close to neutral levels

The Liquidity to Remain Positive

Source: Internal Calculations, Data as of 30th Nov 2017

5

5.5

6

6.5

7

7.5

No

v-1

6

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-1

7

May

-17

Jun

-17

Jul-

17

Au

g-1

7

Sep

-17

Oct

-17

No

v-1

7

Repo Rate Overnight Rate (MIBOR %)

Repo Rate in the last 1 year

RBI has managed to keep overnight rate close to the repo rate.

Source:Bloomberg

Date Repo Reverse Repo MSF SLFTotal Systemic

Liquidity

Government

Balances

30th Nov 2017 -297 1013.04 0.00 -17.89 698.15 266.30

Amount in Rs. billion.

Active Liquidity Management

As of 30th Nov 2017

54

Yield Curve (M-o-M Analysis)

• The key worry for the market has been the fiscal slippage and OMO bond supply which has lead to bear flattening of the curve

• With cancelation of OMO and rating upgrade, there was brief rally. However the fiscal worry is not allowing the market to

retrace

• The yield in the 5-10 yr space has gone up more than the 14yr maturity.

• The 10 year benchmark was the worse performer, as the market is awaiting for the new benchmark to come.

Source: Bloomberg

55

6

6.5

7

7.5

8

3M 6M 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 17Y

I180 INR India Sovereign Curve Last YTM I180 INR India Sovereign Curve 1/11/17 YTM

Front End Belly and Long

-5

5

15

25

3M 6M 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 17Y 28Y 30Y 35Y 40Y

YTM (M-o-M Change)

India-US 10 Year Gilt- Narrowing Spreads Have More Legs To Run

56

The spreads will continue to compress in medium term due to narrowing inflation

differentials and rating upgrade

India-US 10 Year & CPI Spreads

Narrowing CPI spread makes Indian bonds attractive. Therefore Indian bonds are

increasingly attractive and will attract FII flows

57 Note: 10 year Gilt Yield taken as average of their respective month . Data as of Oct 2017 since CPI data is till Oct . Source: Bloomberg

-2

0

2

4

6

8

10

12

Feb

-12

Ap

r-1

2

Jun

-12

Au

g-1

2

Oct

-12

Dec

-12

Feb

-13

Ap

r-1

3

Jun

-13

Au

g-1

3

Oct

-13

Dec

-13

Feb

-14

Ap

r-1

4

Jun

-14

Au

g-1

4

Oct

-14

Dec

-14

Feb

-15

Ap

r-1

5

Jun

-15

Au

g-1

5

Oct

-15

Dec

-15

Feb

-16

Ap

r-1

6

Jun

-16

Au

g-1

6

Oct

-16

Dec

-16

Feb

-17

Ap

r-1

7

Jun

-17

Au

g-1

7

Oct

-17

India-US CPI Spread India-US Gilt Spread

Global Bond Yields Remain Volatile

58 Data as of 30th Nov 2017. Source: Bloomberg

• Global bonds to remain range bound • Fed is likely to hike rate by 25bp but will remain dovish and the 10yr UST is likely to remain around 2.40%• US has passed the tax plan which is likely to strengthen the dollar and therefore commodities

particularly oil are likely to remain under control

-0.5

0

0.5

1

1.5

2

2.5

3

No

v-1

6

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-1

7

May

-17

Jun

-17

Jul-

17

Au

g-1

7

Sep

-17

Oct

-17

No

v-1

7

10 Years Gilt of Select Countries

US 10 Year

UK 10 Year

Germany 10 Year

Japan 10 Year

Key Variables & their Impact On Interest Rates in 2017

Key Variables Short - term (3-6 month)

Medium – term (6month – 2 years)

Inflation

Rupee

Credit Demand

Government Borrowing

RBI Policy

Global Event Risk

Corporate bond Spread

Debt FII flow

Liquidity

denotes fall in interest rates

59

Debt Outlook

• The RBI has made the future course of interest rates dependent on inflation trajectory and GDP growth

• The government is running fiscal, with no room for error. Therefore market will remain on the tenterhooks.

This will keep the bond yields range bound till the clarity emerges either way

• CPI data was around market expectation of 3.50% while the Core was at 4.6%. However, we expect the

CPI to be around 4.5% by March-2018. This is close to the RBI target

• While we agree that the CPI is rising; but it is not at alarming level. The market is running way ahead,

despite the fact that the real rates remain high vis-à-vis the 10 yr bond yields (even after assuming 4.5% full

year inflation)

• The GDP data was neutral however it will be extremely difficult to achieve RBI target of 6.7% GDP for the

full year without any fiscal or monetary support. The RBI is likely to acknowledge this in the MPC

• The 10 yr benchmark is on the way out. Therefore we need to watch 6.68 G Sec 2031(security) which will

trade in the band of 7%-7.15% in the near term

• In nut shell all eyes on the RBI MPC and fiscal clarity

– we believe fiscal will be maintained at 3.2% however clarity will emerge by end of December

– we expect RBI to be neutral and market has priced in potential negatives

• The corporate bond 18-36 month yields are expected to remain stable and the curve will remain steep.

60

Key Recommendations

Segment Scheme Rationale

Accrual

PlayKotak Income Opportunities Fund / Kotak Medium

Term Fund Investment for

higher accrual

Asset Allocation Kotak Monthly Income Plan Investment for

asset allocation

Short Term

Parking of

Funds

Kotak Treasury Advantage Fund / Kotak Low Duration

Fund / Kotak Corporate Debt Fund

Kotak Equity Arbitrage Fund Higher post tax

return

Duration Play

Kotak Mahindra Bond Scheme Investment for

longer maturities

Kotak Bond Short Term/ Kotak Flexi Debt SchemeInvestment for

shorter

maturities

61

Why Accrual Funds ?

• India is one of the fastest growing economy in the world and this will translate into revenue and

profitability for India Inc. Commodity & oil price decline has reduced input cost and increased

margin support

• Kotak AMC has strong fundamental processes in place to manage and mitigate credit risk

• Kotak AMC does not invest below A category rating. Our robust monitoring ensures that we do not

take exposure even in AA & A ratings from sensitive sectors

• AAA rate firms have never ever defaulted. The risk of default of AA is only 0.03% and of A is only

0.63%. Not Just that, the AAA continue to hold their rating 97% of times, AA around 92% of times,

and A around 88% of times

• With efficiently managed credit risk, yields on accrual funds are attractive even on risk-

adjusted basis.

Ratings CRISIL AAA CRISIL AA CRISIL A CRISIL BBB CRISIL BB CRISIL B CRISIL C CRISIL D

CRISIL AAA 97.28% 2.72% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

CRISIL AA 1.41% 92.26% 4.78% 0.58% 0.19% 0.03% 0.02% 0.03%

CRISIL A 0.00% 3.31% 87.79% 5.95% 1.88% 0.15% 0.30% 0.63%

One year average transition rates : between 1988 and 2014

62

Story in Accruals

• The Fund Manager focuses on generating income from credit allocation rather than duration calls.

• Accruals funds generate performance by purchasing high yielding assets with relatively short

duration.

• This provides investor with a relatively high yield with low NAV volatility

• Investors with 18-36 months horizon can look at investing in Accrual Funds

• Accrual funds like Kotak Income Opportunities / Kotak Medium term provide retail investors the

potential to obtain high yields in the present condition.

63

Need to Watch Out for Opportunities

in Hybrid Space

64

Particulars Nifty Level Net Assets in Rs Debt Equity

Start in Kotak MIP with ~ 20% equity exposure 10000 10 8.5 1.5

Equity markets drop by 15% (represented by Nifty 50) 8500 9.78 8.50 1.28

Shift to Kotak Equity Savings Fund which has ~ 25% unhedged

equity 8500 9.78 8.31 1.47


Shift to Kotak Balance with ~65% equity 7225 9.56 3.34 6.21


Shift to Equity fund with ~100% equity such as Kotak Select Focus 6141 8.62 0 8.62

Equity markets go up by 20% (represented by Nifty 50) 7370 10.35

Shift Back to Kotak MIP with ~20% equity exposure 7370 10 7.93 2.07

Why Kotak Monthly Income Plan- Growing Through Asset Allocation

The above illustration is only to explain how various types of funds can be considered for asset allocation in various equity market scenarios. This should not be

construed as an advice and indication of performance of the mentioned funds. The level of equity allocations mentioned are as per current scenario and only an

approximation. The exact allocation to equity in various funds would be different and as per the asset allocation provided in the SID of each fund.

65

Tactical Asset Allocation Through MIP

Kotak Monthly Income Plan can be used as a de-risking strategy

o The scheme invests upto 20% in equity & equity related instruments & rest in

debt instruments

o Thus, an investor could consider Kotak MIP as a starting point for a moderate

exposure to equity and use it as de-risking strategy by shifting into funds with

higher equity allocations as valuations become attractive

o The same has been explained below with an illustration

Whom is the Fund Ideal for?

Investors seeking regular income over short term

Investors seeking income through fixed income securities and marginal gains

from equities

Investors with 1-3 year investment horizon

Those who are unwilling to assume the full equity risk

Those who have low appetite for credit risk

66

Kotak MIP Performance*

Consistency In Growth

67

Past performance may or may not sustain in the future

* Less than 1 year Simple Annualized returns, Greater than or Equal to 1 year Compound Annualized returns. . Performance as of 31st Oct 2017

10.4

11.1

9.689.93

8.5

9

9.5

10

10.5

11

11.5

3 Years 5 Years

Kotak Monthly Income Plan Performance (%)

Kotak Monthly Income Plan - Reg - Growth CRISIL MIP Blended Index

Kotak Balance – Performance

Growth and Stability Together

68

Source: ICRA. Past performance may or may not sustain in the future. Scheme in inception since 29th Nov 1999. Performance

as of 31st Oct 2017

* Less than 1 year Absolute returns, Greater than or Equal to 1 year Compound Annualized returns

10.66

13.62

8.56

11.89

0

2

4

6

8

10

12

14

16

3 Years 5 Years

Kotak Balance Fund Performance (%)

Kotak Balance - Dividend CRISIL Balanced Fund - Aggressive Index

Have You Noticed The Regular Dividends In Kotak Balance ?

* After payment of the

dividend, the per Unit

NAV falls to the extent of

the payout and statutory

levy (if applicable)

^Past performance may

or may not be sustained

in the future. Dividends

are subject to

distributable surplus

Inception Date:

November 25, 1999

All dividends are on face

value of Rs.10 per unit

69

Record Date Rupees Per Unit Dividend Yield

27-Nov-17 0.14 0.82%

25-Oct-17 0.11 0.66%

28-Sept-17 0.11 0.65%

28-Aug-17 0.11 0.67%

25-July-17 0.12 0.70%

27-June-17 0.11 0.65%

25-May-17 0.11 0.65%

25-Apr- 17 0.11 0.66%

27-Mar- 17 0.11 0.67%

27-Feb-17 0.11 0.69%

25-Jan-17 0.11 0.69%

26-Dec-16 0.11 0.69%

01-Dec-16 0.11 0.69%

26-Oct-16 0.08 0.49%

27-Sep-16 0.08 0.49%

25- Aug-16 0.08 0.50%

25-Jul-16 0.08 0.50%

27-Jun-16 0.08 0.53%

25-May-16 0.07 0.48%

25-Apr-16 0.07 0.5%

70

Performance (%) as on 31st October, 2017

Scheme Inception date is 25/11/1999. Mr. Abhishek Bisen has been managing the fund since 15/04/2008. Mr. Pankaj Tibrewal has been managing the fund since 25/08/2015.

Different plans have different expense structure. The performance details provided herein are of regular plan. ^Past performance may or may not be sustained in future.*All payouts during the

period have been reinvested in the units of the scheme at the then prevailing NAV. Returns > = 1 year: CAGR (Compounded Annualised Growth Rate). N.A stands for data not available. Note:

Point to Point (PTP) Returns in INR shows the value of 10,000/- investment made at inception. Source: ICRA MFI Explorer. # Name of Scheme Benchmark. ## Name of Additional

Benchmark.Please refer slide 76 for top 3 and bottom 3 schemes managed by & Mr. Abhishek Bisen.`

Scheme Inception date is 02/12/2003. Mr. Abhishek Bisen has been managing the fund since 01/04/2008. Mr. Devender Singhal has been managing the fund since 25/08/2015

71

Other Funds Managed by Mr. Pankaj Tiberwal and Abhishek Bisen

Mr. Pankaj Tibrewal manages 3 funds of Kotak Mutual fund.

Kotak Emerging Equity - Growth, *Name of the Benchmark - S&P BSE MidSmallCap, Scheme Inception date is 30/03/2007. Mr. Pankaj Tibrewal has been

managing the fund since 27/05/2010.

Kotak Midcap - Growth, *Name of the Benchmark - Nifty Free Float Midcap 100, Scheme Inception date is 24/02/2005. Mr. Pankaj Tibrewal has been

managing the fund since 21/01/2010. Different plans have different expense structure. The performance details provided herein are of regular plan

^Past performance may or may not be sustained in future.*All payouts during the period have been reinvested in the units of the scheme at the then

prevailing NAV. Returns > = 1 year: CAGR (Compounded Annualised Growth Rate). N.A stands for data not available. Source: ICRA MFI Explorer.

Top 3 Funds Managed by Mr. Abhishek Bisen

Bottom 3 Funds Managed by Mr. Abhishek Bisen

Performance (%) as on 31st October, 2017 Source: ICRA

Why Kotak Mutual Fund Is Different From Others

72

We are Managing Your Trust First and Money second

We are your Partner

Disciplined Process

Risk adjusted Return

Believer in Warren Buffets Philosophy

Funds are like Kids. Don’t have more than what we

can manage

Readily accessible for Knowledge and Service

The information contained in this (document) is extracted from different public sources. Allreasonable care has been taken to ensure that the information contained herein is notmisleading or untrue at the time of publication. This is for the information of the person towhom it is provided without any liability whatsoever on the part of Kotak Mahindra AssetManagement Co Ltd or any associated companies or any employee thereof.We are notsoliciting any action based on this material and is for general information only. Mutual Fundinvestments are subject to market risks, read all scheme related documents carefully.

Disclaimers & Risk Factors

About the scheme:

73

Name of the Scheme This product is suitable for investors who are seeking* Riskometer

Kotak Mahindra 50 Unit Scheme• long term capital growth• Investment in portfolio of predominantly equity & equity related

securities

Kotak Select Focus Fund • long term capital growth• Investment in portfolio of predominantly equity & equity related

securities generally focused on a few selected sectors

Kotak Emerging Equity Scheme• long term capital growth• Investment in equity & equity related securities predominantly in

mid & small cap companies.

Kotak Balance Fund

• Long term capital growth• Investment in equity & equity related securities balanced with

income generation by investing in debt & money market instruments

Kotak Opportunities• long term capital growth• Investment in portfolio of predominantly equity & equity related

securities

Kotak Gilt Investment• income over a long investment horizon• Investments in sovereign securities issued by the Central and/or

State Government(s) and / or reverse repos in such securities.

Kotak Bond• income over a long investment horizon

investment in debt & money market securities

Kotak Medium Term Fund

• Income over a medium term investment horizon• Investment in debt, government securities & money market

instruments with a portfolio weighted average maturitybetween 3-7 years

Kotak Low Duration Fund (Formerly known as PineBridgeIndia Short Term Fund)

• Regular Income over short term

• Income by focusing on low duration securities

* Investors should consult their financial advisers if in doubt about whether the product is suitable for them

Product Labeling

74


Kotak Equity Arbitrage Scheme• income from arbitrage opportunities in the equity market• investment in arbitrage opportunities in the cash & derivatives

segment of the equity market.

Kotak Income Opportunities Fund

• Income over a medium term investment horizon• Investment in debt & money market securities

Kotak Treasury Advantage Scheme

• Income over a short term investment horizon• investment in debt & money market securities

Kotak Infrastructure & Economic Reform Fund

(formerly known as “PineBridge Infrastructure & Economic Reform Fund”)

• long term capital growth• long term capital appreciation by investing in equity and equity

related instruments of companies contributing to infrastructure and economic development of India

Kotak Tax saver Fund • Long term capital growth with a 3 year lock in• Investment in portfolio of predominantly equity & equity related

securities

* Investors should consult their financial advisers if in doubt about whether the product is suitable for them

Product Labeling

75

76


Kotak Monthly Income Plan

• income & capital growth over a long term horizon

• investment in a portfolio of debt instruments with a moderate exposure in equity & equity related instruments

Kotak Banking andPSU Debt Fund

• income over a short to medium term investment horizon• •Investment in debt & money market securities of PSUs, Banks &

government securities

Product Labeling

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