Market Outlook May 2017

Transcription

1 Market Outlook May

2 EQUITY MARKETS 2

3 How April 2017 Unfolded -Key Events of April 17 IMF said India will be the fastest growing economy in the world in and will be a key driver for global growth. Retaining its growth forecast of 7.2% for India for the fiscal year 2018, the IMF, in its World Economic Outlook, also estimated that India would grow at 7.7% in US launched strikes against Syrian airbase and spoke about escalating tensions with North Korea, signalling potential geo-political risks RBI s mildly hawkish stance in Apr monetary policy meet surprised the markets especially in the context of appreciating currency and dovish Fed. RBI firmed up its inflation projection to 5% for 2HFY18 (was 4.5-5% earlier). Central banker hiked the reverse repo by 25bps, signalling a shift to single policy window contrary to expectation of SDF(Standing Deposit Facility) launch The Indian Met Department forecasts normal monsoon this year in an initial assessment. The monsoon is likely to be 96% of LPA for the 2nd straight year with fair distribution pan India. IIP came in at 4 month low, contracting 1.2% in Feb vs 2.7% growth in Jan partly led by decline in manufacturing and lower demand in capital & consumer goods. Manufacturing which constitutes 75% of the index recorded a 2% decline in Feb as Capital goods declined by 3.4% while consumer goods shrank by 5.6%. Mining recorded 3.3%

4 How April 2017 Unfolded -Key Events of April 17 Trade deficit widened to a 4 month high in Mar to $10.44bn vs $8.9bn in Feb, led by surge in gold imports despite pickup in exports. Exports reported strong growth (28%yoy) aided by pickup in textiles, gems & jewellery, engineering goods and petroleum. Imports rose sharply (+45% yoy) led by spike in gold imports (~330%yoy) and also low base Markets continued to move up in March by 1.4% (Nifty) due global risk-on sentiment and flows from domestic investors. Initial report card of earnings released by corporate India paints a mixed picture with domestic oriented companies reporting inline results while export oriented sectors continued to report challenging quarters 4

5 5 Assessing Market Valuation

6 Having Scaled 30k, What Next? Time to Sell? Can returns be made from these levels also??? 6

7 Almost 30% Of BSE500 Stocks Trade More Than 40x Trailing Earnings Source: CMIE, IIFL Research 7

8 EV/EBITDA Close To Historical Peak Levels For Markets BSE 100 Index This spike in the EV/EBITDA was driven by cuts in EBITDA Estimates during GFC(Global Financial Crisis) Hence can be treated as a one - off This is the GFC Peak 8 Source: Bloomberg

9 Historical P/B Ratio Well Below 2007, 2010 Peaks BSE 100 Index Significantly away from peak, Currently at 2.73 peak levels, currently at 2.5% While EV/EBITDA, P/E etc suggest valuation approaching 2007 levels, other metrics like Price to Book are significantly away from peak given the backdrop of depressed earnings growth in last few years 9 Source: Bloomberg

10 Price/Earnings - Still Away From Bubble Zone BSE 100 Index 10 Source: Bloomberg

11 Despite High Valuations, Liquidity Still Some Time Away From Highs! Demand (defined as DII + FII over last 12 months as % of market cap) is still 30% away from recent highs from where it cools off Supply (defined as IPO,QIP, rights etc over last 12 months as % of market cap) is close to all time lows!! Need to see significant signs of supply before one characterizes sentiment even remotely close to bubble zone!! 11 Source: Bloomberg

12 Interest Rate Regime In Different From Still away from peak levels, currently at 2.5% Trends suggest when Difference between Earnings yield and 10 Yr yield is at peak at 3.25% levels 1 Yr Forward Nifty returns has corrected sharply 12 Difference between earnings yield and Gilt yield almost 25% away from levels where markets have corrected in the past Source: Bloomberg

13 Earnings Backdrop Very Different In 2017 Compared To 2007 FY14-17E : Negative Growth After 21% CAGR earnings growth (FY01-08) Sensex was trading at 1 Yr forward 23x P/E suggesting market extrapolating on continued strength in cycle After negative earnings growth (FY14-17) Sensex is trading at 1 Yr forward 19x P/E, suggesting depressed earnings cycle so far 13 Source: Motilal Oswal

14 It Is Not Only India Globally Also Earnings Have Stagnated In the Last 3 Years And Expected To Bounce Sharply! Source : CLSA, Bloomberg 14

15 While Valuations Not Cheap, Market Not In A Bubble Zone While equities may still be outperforming other alternate asset classes, moderate return expectations Corporate earnings, especially of domestic oriented companies already showing improving trend Use intermittent volatility to increase equity exposure 15

16 16 Policy Thrust Continues

17 Big Thrust For Affordable Housing Two drivers of housing upturn ¹Affordability refers to houses costing Rs3.0m

18 18 Huge Latent Demand For Housing In India

19 Housing has deep sectoral/macro links 19 Note: Industry size data based on CLSA estimates for housing led demand in each building materials sub-sector. Light electricals include switchgears/switches, fans, lightings & fixtures and water heaters. ¹ Volume. Source: MoSPI, Ministry of Commerce, RBI, Ministry of Steel, Ace Equity, CLSA

20 20 Market performance

21 Strong Performance By Majority Sectors Over The Last 1 Year Exporters lagging in returns BSE Sectoral Indices (10) (20) (%) 43.9 (4.2) Oil & Gas PSU Metals Realty Capital Goods (1.9)(3.6) (5.6) (7.2) (11.0) (15.1) Bankex Power Auto FMCG Healthcare Tech IT Services 1m return % 1 yr return % 21 *As on 30 April 2017 Source: Axis Capital, Bloomberg

22 Performance Across Market Cap - Strong performance down the capitalisation curve Nifty Nifty Midcap S&P BSE Smallcap 9.0 1m returns 1y returns 3 yr CAGR 5 yr CAGR 10 yr CAGR *As on 30 April 2017, Source: Bloomberg 22

23 Indian Markets Among Top Performer In Terms Of 1yr Return Germany (DAX) Brazil (IBOV) France (CACS 40) India (Nifty) Taiwan (TSWE) US (Dow Jones) EURO (Euro Stoxx 50) Indonesia (JCI) HK (HSI) UK (FTSE 100) Japan (Nikkei 225) China (HSCEI) Singapore (Straits) Swiss (SMI) Korea (Kospi) Malaysia (KLCI - FTSE) Russia (MICEX) (1.6) (0.5) M 1Yr (10) Source: Bloomberg. Performance data * As on 30 April

24 Focus Themes & Key Sectors Unorganised to Organised Banks, Home Building, Retailing, Auto components Increased government spending Transmission of interest rates Capital goods, rural sector, farm implements, construction, cement Infrastructure, asset owners, construction, metals, power, utilities Clean-Green India Gas, capital goods, renewable power Physical to financial savings Insurance, banks, capital market companies 24

25 25 Valuations

26 Stock Picking Will Be Critical Sensex sectoral long-term valuation snapshot: Forward PE* Max Top Quartile Current Lower Quartile 0 10 Auto BFSI Engg FMCG IT Metals Oil Pharma Power Telecom Sensex Source: Axis Capital, Bloomberg Note: * Since April Min IT and Power at lower end of valuations, other sectors moving towards upper end of valuation zone 26 *As on 30 April 2017

27 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Large Caps at a Discount -More Bang For The Buck! Key Indices: Forward P/E Trailing PB (X) Sensex CNX Midcap BSE Sensex PB (x) BSE Midcap PB (x) Source: Axis Capital, Bloomberg Trailing ROE (%) 36.0 BSE Sensex ROE (%) BSE Midcap RO E (%) *As on 30 April 2017

28 Indian Valuation In A Global Perspective P/E Multiple CY17 of Indices US (Nasdaq) India (Sensex) US (Dow Jones) Malaysia (KLCI - FTSE) Japan (Nikkei 225) Thailand (SET) Singapore (Straits) UK (FTSE 100) HK (HSI) Brazil (IBOV) Korea (Kospi) China (HSCEI) (x) Source: Axis Capital, Bloomberg * For India & Japan Fiscal year is FY18 while others it is CY17 28

29 Net Cash Market Purchase Category (Rs cr) Apr - Month CY17 CY-16 CY-15 DII 9,247 1,289 37,125 66,816 MF 9,918 11,280 48,005 71,562 Insurance, Banks & Insurance (670) (9,991) (10,880) (4,746) FII (1,095) 44,804 18,783 18,356 Clients 612 (14,246) (336) (9,795) NRI (908) (99) (714) (317) Proprietary ,191 Strong purchase by DII in April 29 *Source : NSE, BSE, SEBI, Internal calculation FII & MF data updated upto 30 April 2017

30 Domestic Flows May Sustain Into Equity Funds In 2017 Low FD Return Uncertain real estate environment & Lower time limit for LTCG Gold potentially impacted by drop in import duties/us Fed rate hikes Mature investor base understanding the benefits of compounding of equities as asset class SIP as a tool to counter volatility Flows to equities 30

31 But Based On Hope In Earnings Recovery For FY-18/19 Rather Than Greed Sensex Earnings growth of 13.0 % in FY16-19E 1,904 1,572 1,351 1,324 1,309 FY15 FY16 FY17 E FY18 E FY19 E Source: Motilal Oswal 31

32 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Sensex P/E FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E Mar-17 Mar-18 Mar-19 FY18E FY19E Sensex EPS ,024 1,111 1,180 1,330 1,351 1,324 1,309 1,572 1,904 Markets Consolidating As It Awaits Economy To Take Off FY93-FY16: 13% CAGR FY03-08: 25% CAGR FY08-17: 5% CAGR FY17-19E: 21% CAGR FY93-96: 45% CAGR FY96-03: 1% CAGR Sensex P/E (x) Sensex CAGR 14% Sensex CAGR -1% Sensex CAGR 39% Average of 15.3x Sensex CAGR -1% Source: MOSL FY93-97 FY98-03 FY05-09 FY10-17 FY18-19e Past performance is not a reliable indicator of expected future performance

33 Key Variables & Their Impact On Equities Key Variables Short - term Economy Corporate Earnings FII Flow DII Flow Supply of paper Medium - term Remarks Demonitisation to impact near-term growth but by March 17 normalcy to return. Improving operating leverage, falling interest costs and improvement in working capital can accelerate earnings, but a bit back-ended (FY18). Key is improvement in capacity utilisation India stands out among global asset classes with prospects of strong long term growth. Our tax policy has spooked FII couple off times. Budget FY 18 should reassure them. Focus on improving financial savings of households Higher disinvestment target and repair of leveraged balance sheet to create supply in markets. Interest Rates Transmission Policy/Reform Initiative Fall in interest rates to help revive demand and reduce stress for companies with significant debt. Market expecting better transmission of rates. GST is key reform for government to focus on; if it gets passed, can provide a significant fillip 33

34 Apr-14 May-14 Jun-14 Jul-14 Jul-14 Aug-14 Sep-14 Oct-14 Dec-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 Asset Allocation This asset allocation guide helps you to determine the suggested equity exposure at different valuations levels based on the Sensex Stretched 18x-20x Fair Value Plus 16-18x Fair 12x-16x Attractive 10x-12x Cheap 9x-10x Valuation levels of the Sensex based on rolling 12month fwd EPS estimate of 1600 Market Cheap Attractive Fair Fair Value Plus Stretched Bubble Over Invested Neutral + Neutral Neutral - Under Invested Exit Equity Allocaion 80% - 90% 65% - 75% 50% 35% - 45% 15%- 25% 5% - 10% Suggested equity allocation (Assuming 50% equity allocation as neutral) 34

35 Strategy For Investment in 2017 Assuming an agnostic perspective on risk, the following recommendations can be prescribed:- Around half the money in SIP with 5 year horizon The rest of the corpus can be placed aside for event related volatility, such as: US fed raising interest rates India Quarterly Earnings European Banking Crisis China Slow down GST Roll Out In the absence of significant event risk, one can look at fresh issuance opportunities with attractive valuations in IPO, OFS and FPO Any IPO in which NBFC are providing leveraged financing for applications might be a good bet for retail application 35

36 Strategy To Participate In A Market Pendulum FEAR Opportunistic buying at these levels may improve short term return potential GREED 36

37 Sensex bagger over 40 years! But not without its share of ups and downs! Date of Mkt Peak Date of Mkt Trough % Return Duration (days) Market Peak Market Trough S&P Sensex index Values, Source: ICRA

38 Key Recommendations Key theme Remarks Large Cap play on buying sectoral leaders that benefit from improving investment climate Kotak 50 Diversified/Multicap focus on sectors that are likely to benefit the most across market cap Infrastructure revival True-to-label fund recent thrust of government to revive the infrastructure theme Through SIP in Midcap oriented scheme ELSS Equity allocation with ability to reduce tax outgo Balanced benefit from debt and equity allocation Kotak Select Focus Kotak Infrastructure & Economic Reforms Fund Kotak Emerging Equities Fund Kotak Tax Saver Fund Kotak Balanced Fund We recommend investors to invest through SIP with a 5 years horizon. 38

39 DEBT MARKETS 39

40 Market Outlook May

41 How April 2017 Unfolded -Key Events Of The Month The Reserve Bank of India kept its repo rate at 6.25% (unchanged) while it raised the reverse repo rate to 6%. The Central banker continues to guard against any potential flare-up in inflation and an uncertain global economic environment. India's manufacturing sector expanded at the quickest pace in five months in March, driven by stronger rises in output and new business. Nikkei manufacturing Purchasing Managers' Index climbed to 52.5 in March from 50.7 in the previous month. India's wholesale prices rose by lower-than-expected 5.70% year-on-year in March, compared with a 0.45 fall a year ago, dragged down by easing fuel prices. India's retail inflation rate rose to 3.81 percent in March from February's 3.65%, mirroring a revival in household spending after months of waning demand triggered by a demonetisation-induced cash crunch. India s trade deficit widened to a four-month high of $10.44 billion in March following a surge in merchandise imports. Merchandise exports last month grew 28% to $29.23 billion while Imports surged 45.25% on year to $39.67 billion in March. India s industrial output slipped to a four-month low, contracting 1.2% in February, mainly on account of decline 41 in the manufacturing sector and lower offtake of capital as well as consumer goods.

42 How April 2017 Unfolded -Key Events Of The Month Keeping its extravagant electoral promise, Uttar Pradesh's government approved a Rs 36,359-crore farm loan waiver for 2.15 crore farmers in the state. Petrol, diesel prices set to change daily from May 1. State-owned fuel retailers will launch a pilot for daily price revision in five select cities (Puducherry, Vizag in Andhra Pradesh, Udaipur in Rajasthan, Jamshedpur in Jharkhand and Chandigarh) and gradually extend it to other parts of the country. IMF said India will be the fastest growing economy in the world in and will be a key driver for global growth, retaining its growth forecast of 7.2% for India for the fiscal year 2018 On the monsoon front, the India Meteorological Department said monsoon seasonal rainfall is likely to be 96% of the long period average with an error of 5%. Forecast assessment suggests 38% of probability for near normal monsoon rainfall RERA or The Real Estate (Regulation Development) Act, 2016 has come into effect from 1st May The Act would regulate the real estate sector that involves over 76,000 companies and is expected to trigger a new era of transparency and efficiency for both the buyers and developers. 42

43 Interest Rate Outlook Why RBI Kept rates unchanged in the last monetary policy? Inflation forecast Growth Outlook US Federal Reserve Action RBI is targeting the medium term CPI objective of 4%. The Central banker is expecting an uptick in inflation by middle of FY18 While growth in FY17 may moderate, RBI expects the GVA growth rate for FY18 to recover sharply to 7.4%. (Kotak MF estimates FY18E growth of 7%) The central banker is expecting normalisation in interest rates of major economies(read US Fed). For this reason, RBI wants to maintain neutral policy stance to take corrective measures when necessary 43

44 Nov-98 Mar-99 Jul-99 Nov-99 Mar-00 Jul-00 Nov-00 Mar-01 Jul-01 Nov-01 Mar-02 Jul-02 Nov-02 Mar-03 Jul-03 Nov-03 Mar-04 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 Gilt Yields in Policy Perspective NDA 1( 1998 to 2004) NDA 2 (2014 to date) As of 28 th April 2017, Source Bloomberg Remember Prime Minister Vajpayee did 5.6% - 6% loans and how it gave a boost every middle class, low-income person had the desire to own a house of his own : Piyush Goyal, Minister, GOI. 44

45 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 Positive Real Interest Rates to Stimulate Financial Savings Real Rates 3.15% Earlier, negative real rates fueled inflation in physical assets as people chased assets such as real estate and gold till With real rates in the positive territory now, money should move from physical to financial assets. 45

46 10 Year Gilt Yield in April 7 India 10 year Yield Apr 8-Apr 13-Apr 18-Apr 23-Apr 28-Apr 10 year benchmark bond yield spiked as RBI announced 1 lakh cr 364 day T-bill under MSS and talk of a pre-emptive 25 bps rate hike to contain inflation by one of the MPC member in the minutes of the meeting FII pumped in ~4 bn USD in the Gilt and corporate bonds adding to INR strength The old benchmark spike in yield confirms that market is pricing in a new benchmark any time soon and market positioning is relatively light 46

47 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 CPI Marginally Rises To 3.8% In Mar % Source: MOSPI 10.00% 8.00% CPI Core CPI 6.00% 4.9% 4.00% 2.00% 3.81% 0.00% The CPI inflation edged up to 3.8% in March 2017 (+4.8% in March 2016) from 3.7% in February 2017 (+5.3% in February 2016). Inflation for fuel & light, clothing & footwear, housing, and food & beverages rose on a sequential basis in March 2017, the inflation for pan, tobacco & intoxicants moderated and that for miscellaneous goods inflation remained unchanged. Moreover, the inflation related to fuel & light increased sharply to 5.6% in March 2017 from 3.9% in February 2017 The core-cpi inflation edged up to 4.9% in March 2017 from 4.8% in February The uptick in core CPI inflation was led by higher inflation for transport & communication, housing and clothing & footwear. Notably, the core-cpi inflation exceeded headline CPI inflation for the seventh month in a row. 47

48 Crude Prices Remain Range Bound -Brent Crude Oil Prices (USD) Brent Crude (USD) May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr as on 28 th April 2017 Source:Bloomberg Crude Oil prices have remained range bound during the month If oil remains between 50-60$ a barrel, then it will be inline with the budgetary expectations. Though lower will be good (and vice versa) 48

49 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 Credit Growth Moderates This Month Credit Growth (Weekly Data) Commercial Credit by Banks = Rs 76 lakh Crore (LHS) 7.63 M Current Credit/ Deposit Ratio is ~72% (RHS) Source: Bloomberg, Data as on 28 th April 2017 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. 49

50 Higher Gilt Demand Likely In The Long Term Long Term Moderation in CPI and CAD will lead to higher household savings Resultant higher bank deposit growth will lead to higher Gilt demand Demonetisation has accelerated deposit growth in the banking system 5 0 FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 CPI(%) CAD (% GDP) Large deposits will be withdrawn by public and we expect that about 15-20% will stay back and will keep system flush with liquidity Bank Credit Growth % Subdued Credit growth will also favor higher Gilt demand FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 Source:RBI

51 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 India Foreign Exchange Reserves Stability Is Key India Foreign Exchange Reserve ($ US Billion) $ Billion Source: Bloomberg, Data as on 28 th April 2017, Source: Bloomberg India continues to attract capital flow resulting in healthy foreign exchange reserves. 51

52 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 The Game Changer Total Liquidity in INR bn Total Liquidity From liquidity deficit to liquidity Positive Source: Internal Calculations Cash withdrawals post removal of withdrawal restrictions have remained lower than expected Many bankers expect liquidity glut to continue for a few more months RBI has reduced the pressure on overnight rates by conducting MSS and long term LAF 52

53 in percentage Active Liquidity Management -Liquidity Scenario Repo Rate In the Last 1 year Repo Rate Overnight Rate(MIBOR %) As of 28 th April 2017 Apr-17 Mar-17 Feb-17 Feb-17 Jan-17 Dec-16 Dec-16 Nov-16 Oct-16 Oct-16 Sep-16 Aug-16 Aug-16 Jul-16 Jun-16 May-16 May-16 Apr-16 Mar-16 Mar-16 Feb-16 Jan-16 Jan-16 Amount in Rs. billion. Date Repo Reverse Repo MSF SLF Total Systemic Liquidity Source:Bloomberg Government Balances 28 th April , , In the month of April 50,000 cr liquidity was taken out of the system through Cash Management Bill(CMB) of 1 year and remaining crore will be taken out in the month of May. 53

54 Yield Curve (M-o-M Analysis) 8 Source: Bloomberg INR India Sovereign Curve Last Mid YTM INR India Sovereign Curve 01/04/17 Mid YTM 3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 10Y 11Y 12Y 13Y 14Y 17Y 18Y 19Y 25Y 28Y 29Y 30Y 35Y 39Y YTM (M-o-M Change) 3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 10Y 11Y 12Y 13Y 14Y 17Y 18Y 19Y 25Y 28Y 29Y 30Y 35Y 39Y The curve became flatter with long bonds being least impacted (risk adjusted) and is likely to remain the same till clarity emerges on monetary policy We expect belly of the curve to perform better vis-à-vis the 10yr benchmark. The 20-30yr segment will keep underperforming as the Gilt/SDL supply is absorbed in H1 High SDL supply will keep the 30 yr bonds yield high and the spreads will remain high

55 India-US 10 Year Gilt Spreads have widened creating space for reversion The spreads have widened to above historical average. The market has sold off in fear of unforeseen, which may not materialize 55

56 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 India-US 10 Year & CPI Spreads Source: Bloomberg Spread 10 year yield India - US Spread CPI India - US Narrowing CPI spread makes Indian bonds attractive and therefore creates space for Indian Gilt yields to fall. But as the RBI waits for the H2 data, it may not happen in a hurry 56

57 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 End of Easy Money Globally? Year Gilts of Select Countries US Election results US 10 Year UK 10 year Germany 10 year Japan 10 year Global bond yields rose in line with rising inflation in US & Europe. However, the yields have eased recently 57

58 Fed Rate Hike Probability Historical Analysis of Meeting Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 The Fed Fund Futures are indicating a status quo in May 2017 but will be data dependent 58

59 Is India s Country Rating Under-rated? 59 India with Better Debt Ratio and Growth Profile is evidently under-rated. Apparently moody rating agencies have shown some poor standards in ratings.

60 Key Variables & their Impact On Interest Rates in 2017 Key Variables Inflation Rupee Credit Demand Government Borrowing Short - term (3-6 month) Medium term (6month 2 years) RBI Policy Global Event Risk Corporate bond Spread Debt FII flow Liquidity denotes fall in interest rates 60

61 Debt Outlook 61 The month of April witnessed hardening of the sovereign yield curve. The key reason behind the same was the RBI announcing Rs 1 lakh cr 364 day Tbill under MSS; and talk of a pre-emptive 25 bps rate hike by one of the MPC member in the minutes of the meeting to contain inflation IMD has predicted a normal monsoon and if the prediction goes right it will subside the fear of spike in headline inflation. Near term headline CPI is likely to fall due to base effect and is likely to remain low for next 2-3 readings. In medium term, the timing of HRA revision will play an important role as this alone may spike the headline inflation by bps, however this volatility will be overlooked by the RBI The RBI has pushed the easing rates cycle by at least 6 months as the RBI wants to see the headline inflation at 4% in H2 FY 2018 before they move ahead The 10yr benchmark yield rose to ~6.96%. We are expecting that a new benchmark paper may be announced any time during May-June. The 10 yr gilt is likely to remain at around 7% mark in near term The 10yr US treasury saw a low of 2.16% during the month of April as the market is not convinced on the reflation trade and the clarity on the tax reform is yet to be seen. The US 10 yr closed at 2.29% and is expected to trade in the narrow range in the near term

62 Debt Outlook The BJP government continued to perform well in the local municipal election in new Delhi which augurs well and indicates a stable and long mandate for the central government The chase of carry has squeezed the credit spread and made sovereign cheap and therefore duration should not be completely ignored despite being volatile Long terms yields will be volatile in the near term but this spike should be taken as an opportunity by the long term investors Short term rates have spiked by about 15-25bps as the surplus liquidity was mopped by MSS and long term LAF. This spike should be used as a buying opportunity as the liquidity overhang is likely to remain in the medium term Low overnight rates will pull down liquid fund returns towards % by end of this quarter. This may make the ultra and short term funds more attractive since they have a portfolio yield of % The curve is likely to remain steep till we have clarity on monetary policy stance/sdf. Therefore long term investors will be rewarded suitably on a risk adjusted basis. 62

63 Key Recommendations Segment Scheme Rationale Accrual Play Kotak 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 Kotak Bond Short Term/ Kotak Flexi Debt Scheme Investment for longer maturities Investment for shorter maturities 63

64 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 inaa & A ratings from sensitive sectors One year average transition rates : between 1988 and 2014 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% 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 riskadjusted basis. 64

65 Story in Accruals Accruals funds generate performance by purchasing high yielding assets Corporates have alternative in NBFCs for funding. But such corporates would need to provide high collateral in keeping with the RBI guidelines shares. regarding loan against Thus, creditable and quality corporates has to shell out high rates to attract capital Retail Investors can consider accrual funds like Kotak Income Opportunities / Kotak Medium term to gain from the potential high yields in the market. 65

66 Need to Watch Out for Opportunities in Hybrid Space 66

67 Kotak MIP Performance* Consistency In Growth Kotak Monthly Income Plan Performance (%) Year 3 Years 5 Years Kotak Monthly Income Plan - Reg - Growth Crisil MIP Blended Index * Less than 1 year Simple Annualized returns, Greater than or Equal to 1 year Compound Annualized returns.. Performance as of 31 st March 2017 Past performance may or may not sustain in the future 67

68 Why Kotak Monthly Income Plan - Growing Through Asset Allocation Particulars Nifty Level Net Assets in Rs Debt Equity Start in Kotak MIP with ~ 20% equity exposure Equity markets drop by 15% (represented by Nifty 50) Shift to Kotak Equity Savings Fund which has ~ 25% unhedged equity Equity markets drop by 15% (represented by Nifty 50) Shift to Kotak Balance with ~65% equity Equity markets drop by 15% (represented by Nifty 50) Shift to Equity fund with ~100% equity such as Kotak Select Focus Equity markets go up by 20% (represented by Nifty 50) Shift Back to Kotak MIP with ~20% equity exposure 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. 68

69 Tactical Asset Allocation Through MIP - Growing Through Asset Allocation 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 69 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

70 Have You Noticed The Regular Dividends In Kotak Balance? 70 Record Date Rupees Per Unit Dividend Yield 25-Apr % 27-Mar % 27-Feb % 25-Jan % 26-Dec % 01-Dec % 26-Oct % 27-Sep % 25- Aug % 25-Jul % 27-Jun % 25-May % 25-Apr % 29-Mar % 25-Feb % 27-Jan % 15-Dec % 28-Sep % 25-Mar % 24-Sep % 25-Mar % 30-Sep % 25-Mar % 27-Sep % 26-Mar % 27-Sep % 28-Mar % 29-Sep % 25-Mar % 25-Sep % 25-Mar % * 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

71 Kotak Balance Performance Growth and Stability Together Kotak Balance Fund Performance (%) Year 3 Years 5 Years Kotak Balance - Dividend CRISIL Balanced Fund - Aggressive Index Source: ICRA. Past performance may or may not sustain in the future. Scheme in inception since 29th Nov Performance as of 31 st March 2017 * Less than 1 year Absolute returns, Greater than or Equal to 1 year Compound Annualized returns 71

72 Our Calls in 2016 Our Outlook Date Outcome Overweight Gold 4 th January Gold Rallied by ~22% during Jan- Aug 16 Overweight Duration 2 nd February Approx 75bps rally since 25 th Feb Equity- Buy on dips 22 nd January 10.27% absolute returns in the next 5 month Equity- Buy on dips 29th February 26% absolute returns from 29 th Feb to 31 st Aug 2016

73 Why Kotak Mutual Fund Is Different From Others 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 73

74 Disclaimers & Risk Factors The information contained in this (document) is extracted from different public sources. All reasonable care has been taken to ensure that the information contained herein is not misleading or untrue at the time of publication. This is for the information of the person to whom it is provided without any liability whatsoever on the part of Kotak Mahindra Asset Management Co Ltd or any associated companies or any employee thereof.we are not soliciting any action based on this material and is for general information only. Mutual Fund investments are subject to market risks, read all scheme related documents carefully. About the scheme: 74

75 Performance (%) as on 31st March, 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/ 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 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. `

76 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 76 Performance (%) as on 31st March, 2017 Source: ICRA

77 Product Labeling Name of the Scheme This product is suitable for investors who are seeking* Riskometer Kotak Mahindra 50 Unit Scheme Kotak Select Focus Fund Kotak Emerging Equity Scheme Kotak Balance Fund Kotak Opportunities Kotak Gilt Investment Kotak Bond Kotak Medium Term Fund Kotak Low Duration Fund (Formerly known as PineBridge India Short Term Fund) long term capital growth Investment in portfolio of predominantly equity & equity related securities long term capital growth Investment in portfolio of predominantly equity & equity related securities generally focused on a few selected sectors long term capital growth Investment in equity & equity related securities predominantly in mid & small cap companies. Long term capital growth Investment in equity & equity related securities balanced with income generation by investing in debt & money market instruments long term capital growth Investment in portfolio of predominantly equity & equity related securities 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. income over a long investment horizon investment in debt & money market securities Income over a medium term investment horizon Investment in debt, government securities & money market instruments with a portfolio weighted average maturity between 3-7 years Regular Income over short term Income by focusing on low duration securities 77 * Investors should consult their financial advisers if in doubt about whether the product is suitable for them

78 Product Labeling Name of the Scheme This product is suitable for investors who are seeking* Riskometer Kotak Equity Arbitrage Scheme Kotak Income Opportunities Fund income from arbitrage opportunities in the equity market investment in arbitrage opportunities in the cash & derivatives segment of the equity market. 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 78 * Investors should consult their financial advisers if in doubt about whether the product is suitable for them

79 Product Labeling Name of the Scheme This product is suitable for investors who are seeking* Riskometer 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 and PSU Debt Fund income over a short to medium term investment horizon Investment in debt & money market securities of PSUs, Banks & government securities 79