Market Outlook. December- 2018

Transcription

1 Market Outlook December

2 Equity Market Outlook December 2018

3 From Mughal-e-Azam Valuation Oil Global Factors Credit Squeeze Politics Flows Fundamentals 3

4 To Om Shanti Om Kehte hain agar kisi cheez ko dil se chaho to poori kainath use tumse milane ki koshish mein lag jaati hai "When you really desire something from the heart and soul, all the universe conspires you to achieve it" 4

5 4-Sep Sep Sep Sep-18 2-Oct-18 9-Oct Oct Oct Oct-18 6-Nov Nov Nov Nov-18 4-Dec-18 Crude Oil Price Is Falling $/barrel Brent Crude Price Source: Bloomberg 5

6 4-Sep Sep Sep Sep-18 2-Oct-18 9-Oct Oct Oct Oct-18 6-Nov Nov Nov Nov-18 4-Dec-18 Rupee Appreciating INR/USD INR vis-à-vis Dollar Source: Bloomberg 6

7 4-Sep Sep Sep Sep-18 2-Oct-18 9-Oct Oct Oct Oct-18 6-Nov Nov Nov Nov-18 4-Dec-18 Gilt Yields Softening year Gilt Yield % Source: Bloomberg 7

8 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 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Inflation Falling 10.0% 9.0% Consumer Price Index 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 3.3% 1.0% Source: Bloomberg 8

9 RBI & Govt. On Same Page 9

10 Tariff War Truce 10

11 FED Rates Below Neutral 11

12 Structural Tailwind: Non-Performing Loans (NPL) Close To Peaking 14 NPLs Peaking Out Gross NPL ratio - System 10.4 Gross NPL ratio - CLSA covered Source:CLSA FY 14 FY 15 FY 16 FY 17 FY 18 Jun-18 Sep-18 A/CL 12

13 FIIs Back In Buying Action Source:MoneyControl 13

14 Institutional Holdings Analysis As a % of India Market Cap Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Sep-18 FPIs 19.70% 20% 19.20% 19.70% 18.50% 19.10% 18.80% Insurance Company 7.10% 7.30% 7.20% 7% 6.50% 6.50% 6.60% MFs 4.30% 4.50% 4.80% 5.30% 5.90% 6.40% 6.40% FDI Investments 4.80% 4.80% 4.80% 4.80% 4.90% 5.30% 5.20% Foreign Depository 2.40% 2.40% 2.30% 2.30% 2% 2.10% 2.20% Other Institutions 3.20% 3.10% 3.30% 3.30% 3.70% 4.00% 3.60% Institutional Investment 41.40% 42.10% 41.60% 42.40% 41.50% 43.30% 42.90% Continuous flow in MFs has led to a systemic rise in MF share of total investment from 4.3% of 6.4% Source: I-Sec, Quarterly Update 14

15 Who Is Mr Market Promoters And FII Have Sold From Mar 2014 To Sep 2018 PROMOTERS Net Sold 227,260 Cr LIC Net Bought 61,467 Cr DII Net Bought 316, 545 Cr FII Net Sold 155,179 Cr Source: Motilal Oswal 15

16 The Big Picture DII Have Seen Significant Buying From Mar 2014 To Sep 2018 DII-Ex LIC Mar ,611Cr Fresh flow MTM Gain 388,108 Cr DII-Ex LIC Sep ,264 Cr 316,545Cr over 23 quarters Source: Motilal Oswal 16

17 FII Flows Across Debt And Equity Source: Bloomberg, Axis Capital 17

18 HOWEVER, SOME NEAR TERM CHALLENGES REMAIN 18

19 However, Near-term Growth Getting Impacted Leading To Earnings Cuts % YOY 30 Earnings Surges Postponed 27 As Downgrades Have Persisted Earnings growth, actual/cl Consensus earnings growth Source : Bloomberg, CLSA -4 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19E FY 20E 19

20 Longer Term Trends Of Earnings Cuts Continues Trend In Nifty Earnings At The Beginning Of Fiscal Year And Actual Earnings FY10 was the last year seeing earnings upgrade; since then Nifty earnings have been revised downwards by 9ppts every year Source: CLSA; beginning of the year is assumed as early June once previous fiscal results are declared, *current earnings growth estimate 20

21 Growth Momentum Seeing Some Weakness In Near-term PV Sales Have Slowed Down Fuel Consumption Responded To Price Hikes Source : Bloomberg, CLSA 21

22 Growth Momentum Seeing Some Weakness In Near-term Rural Wage Growth Has Been Weak For Sometime Steel Consumption Growth Has Held Up Well Source : Bloomberg, CLSA 22

23 Leading To GST Collections Still Lower Than Budgeted (Rs. Bn) GST Collection Source: PIB, IIFL Research 23

24 2018 Has Been A Very Difficult Year Globally Very Few Asset Classes Have Given Even Positive $ Returns Percentage of Assets with a Negative Total Return in USD (Left) and Local Currency (right) Terms Source: Deutsche Bank, Bloomberg Finance LP, GFD 24

25 Capacity Utilization Inched Modestly Higher; Will It Sustain? Capacity Utilization: 76.1%; Long Term Peak: 83.2%; Long Term Trough: 71% Source: RBI, Morgan Stanley Research 25

26 MARKET PERFORMANCE 26

27 Performance Across Market Cap - Midcaps and Smallcaps corrected sharply during month In percent (5) (10) (15) (20) (25) (12.0) (20.9) Nifty Nifty Midcap S&P BSE Smallcap 1m returns 1y returns 3 yr CAGR 5 yr CAGR 10 yr CAGR *As on 30 th November 2018, Source: Axis Capital, Bloomberg, Past Performance may or may not sustain in the future 27

28 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Divergence In Market Performance YTD 120 NIFTY Midcap 100 NIFTY Smallcap 100 NSE Nifty Source: Bloomberg, Data from 1 st Jan 18 to 30th Nov 18 28

29 Market Snapshot Updated Dec-07 May-13 Nov-18 Dec-07 May-13 Nov-18 Macro Indicators 10-Yrear Govt Bond Yield Capacity Utilisation (Jun-18) 91.7% 71.6% (Jun-13) 73.8% India 7.8% 7.2% 7.6% Credit Growth (as on Oct 2018) 22.0% 14.4% 14.8% USA 4.0% 2.1% 3.0% ROE Nifty 50 (Nov 18) 25.5% 17.1% (Mar-13) 12.8% Japan 1.5% 0.9% 0.1% Net FII Flows (12M - Rs. Cr - Oct) 71, ,110-41,656 Europe 4.3% 1.5% 0.3% IIP Sep % 1.0% 4.5% China 4.5% 3.4% 3.4% GDP Growth (Jun - Sep 18) 9.6% 6.4% 7.1% Dec-07 May-13 Nov-18 Dec-07 May-13 Nov-18 Valuations Returns of Nifty 50 (CAGR) Trailing P/E Nifty Last 1 Yr Return 54.8% 21.6% 6.4% Trailing P/B Nifty Last 2 Yr Return 47.1% 3.8% 15.0% Last 3 Yr Return 43.4% 5.6% 11.1% Source: Bloomberg, Axis Capital 29

30 Small & Mid Cap - Back to the Past Nifty 50 Index Nifty Mid Cap Index Nifty Small Cap Index Nov-18 10,877 17,504 6,216 Apr-17 9,136 17,796 7,319 Sept-16 8,952 15,745 6,368 Source: Bloomberg, As on 30 th Nov

31 There Is Carnage In Small And Mid Cap Drawdown from 52 Week High No. of Stocks % of Top 1000 stocks Less than 10% 74 7% Between 10% and 20% % Between 20% and 30% % Between 30% and 50% % More than 50% % Median Correction from 52 Week High by Market Cap Top 10-11% 10 to % 100 to % 500 to % Overall : Top % Drawdown from 52 Week High Nifty % Nifty Midcap % Nifty Smallcap % Source: Bloomberg, As of 30 th Nov

32 VALUATIONS 32

33 Nov-11 May-1 2 Nov-12 May-1 3 Nov-13 May-1 4 Nov-14 May-1 5 Nov-15 May-1 6 Nov-16 May-1 7 Nov-17 May-1 8 Nov-18 Midcap Valuations Now Approaching Parity with Large Caps 12 Month Forward PE (x) NIFTY Midcap 100 Nifty Source: Axis Capital, As on 30 tht Nov

34 Midcaps Relative Valuations vs Nifty Has Corrected Back To 2014 Lows 1.5 (7 DMA) Midcaps Relative Valuations vs Nifty *2014 lows Beginning of the midcap bull market Nifty Midcap 12m forward PE Relative to Nifty 12m forward PE Average 0.9 Midcap relative valuation v/s Nifty back to 2014 zone when this leg of midcap bull run had begun 0.8 Jan-14 Jul-14 Feb-15 Aug-15 Mar-16 Sep-16 Apr-17 Oct-17 May-18 Nov-18 Source: Bloomberg 34

35 Smallcaps Relative Valuations vs Nifty Has Also Corrected Back To 2014 & 2016 Lows (7 DMA) Smallcaps Relative Valuations vs Nifty Nifty Smallcap 12 month forward PE relative to Nifty 12 month forward PE Average Smallcap relative valuation v/s Nifty - Back to 2014 & 2016 zone which is a strong support zone 0.5 Jan-14 Jul-14 Feb-15 Aug-15 Mar-16 Sep-16 Apr-17 Oct-17 May-18 Nov-18 Source: Bloomberg 35

36 Nov-05 Divergence Between NIFTY & Midcap Is At Historical Extreme Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 Nov-18 Rolling 1yr return difference between NIFTY and NIFTY Midcap 100 Average: 4% -17% -18% -11% -16% -17% Source:Goldman Sachs 36

37 After Such Divergence, Midcaps Have Outperformed Nifty By 16% Over The Next Year 5% 9% 16% Next 6months Next 9months Next 12months Source:Goldman Sachs 37

38 1-yr Relative Performance Of NIFTY vs Smallcap 100 Is Stark At 33% Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 Nov-18 Rolling 1yr return difference between NIFTY and NIFTY Smallcap 100 Average: 3% -34% -24% -33% Source:Goldman Sachs 38

39 After Such Divergence, Smallcaps Have Outperformed Nifty By 33% Over The Next Year 14% 25% 33% Source:Goldman Sachs Next 6months Next 9months Next 12months 39

40 Bright Sunshine After Dark Night Midcap Performance Year Current Yr Return Next 1-yr Return Next 3-yr CAGR Return % 24% 55% % 99% 18% % 39% 27% %?? Source:Goldman Sachs 40

41 Bright Sunshine After Dark Night Smallcap Performance Year Current Yr Return Next 1-yr Return Next 3-yr CAGR Return % 107% 17% % 37% 25% %?? Source:Goldman Sachs 41

42 Nov-91 Nov-92 Nov-93 Nov-94 Nov-95 Nov-96 Nov-97 Nov-98 Nov-99 Nov-00 Nov-01 Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 Nov Sensex Above Fair Value Plus Range 12-month Forward Sensex P/B (X) India s Market Cap to GDP (%) Sensex P/B (x) - LHS Average of 78% for the period Average of 78% of the period Source: Axis Capital 42

43 Indian Markets Higher Than Most Peers On Valuation P/E Multiple CY18/FY19 of Indices Japan (Nikkei 225) India (Sensex) HK (HSI) Thailand (SET) China (HSCEI) Singapore (Straits) Korea (Kospi) Malaysia (KLCI - FTSE) US (Nasdaq) Brazil (IBOV) US (Dow Jones) UK (FTSE 100) (x) Source: Axis Capital, Bloomberg * For India & Japan Fiscal year is FY19 while others it is CY18 43

44 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 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec- 17 Jan-18 Feb-18 Mar- 18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Sensex Above Fair Value Plus Range 12-month Forward Sensex P/E (X) Stretched 20x - 24x Fair Value Plus 17x - 20x Fair 13x - 17x Attractive 10x - 13x Cheap 8x - 10x Source: Axis Capital 44

45 Domestic Flows Into Equities Remain Stable Equity buying by domestic investors supporting markets Net Investments by FIIs, DIIs and MFs in the Cash Market (US$mn) USD m FPIs DIIs MFs CY ,810 6,039 1,625 CY2008 (12,173) 16,940 3,325 CY ,639 5,334 (1,169) CY ,322 (4,750) (6,052) CY2011 (512) 5,943 1,273 CY ,548 (10,859) (3,880) CY ,987 (13,042) (3,602) CY ,162 (4,999) 3,915 CY2015 3,275 10,201 11,071 CY2016 2,902 5,434 7,092 CY2017 7,716 14,042 18,324 CY2018 (4,867) 15,665 17,009 Jan-18 2, ,418 Feb-18 (1,931) 2,758 2,504 Mar-18 2,057 1,029 1,424 Apr-18 (983) 1,295 1,718 May-18 (1,427) 2,224 2,013 Jun-18 (377) 2,085 1,312 Jul Aug-18 (278) Sep-18 (1,314) 1,725 1,608 Oct-18 (3,752) 3,534 3,257 Nov FIIs net sellers CYTD done DIIs net buyers CYTD Notes: (a) DII -Domestic Institutional Investors (Includes Bank, DFIs, Insurance, New Pension Scheme and MF). (b) All data is till 30 Nov, Source: Bloomberg, Axis Capital 45

46 While Valuations Not Cheap, Patience To Be Key As We Await For Earnings To Pick Up Further While equities may still be out-performing other alternate asset classes, moderate return expectations Corporate earnings, especially of domestic oriented companies showing improving trend Use intermittent volatility to increase equity exposure 46

47 Key Variables & Their Impact On Equities Key Variables Short - term Medium term Remarks Economy GST to impact near-term activity especially informal segment Corporate Earnings Improving 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 Flow India stands out among global asset classes with prospects of strong long term growth. DII Flow Growth in FII flows to moderate Supply of paper Higher disinvestment target and repair of leveraged balance sheet to create supply in markets. Policy/Reform Initiative Election heavy year can dampen near term outlook for meaningful reform Signify Growth 47

48 Avoid Self Destructive Investor Behavior 15.00% 10.00% 5.00% Nifty 50 vs. Average Fund Investor Return (Oct Aug 2018) 12.24% The "Investor Behaviour" Penalty 6.48% Individuals who cannot master their emotions are ill-suited to profit from the investment process - Benjamin Graham 0.00% Nifty 50 Average Fund Investor Return Source: Internal Calculations of NJ 48

49 Strategy For Investments In The Current Scenario 1- Kumbhkaran (Invest & forget) Or 2- Asset Allocation 49

50 Kotak Balanced Advantage Fund An All Weather Fund That Gives You Freedom From Managing Equity & Debt Allocation Manually Be it a first time investor, a market timer or a long term investor, here is a fund that can help meet everyone s need Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully. 50

51 31-Aug-18 7-Sep Sep Sep Sep-18 5-Oct Oct Oct Oct-18 2-Nov-18 9-Nov Nov Nov Nov-18 Kotak Balanced Advantage Fund Asset Allocation Nifty Index KBAF It s Automatic KBAF Net Equity Nifty 50 TRI Source: Internal 51

52 Key Recommendations Key theme Dynamic Equity Allocation Freedom from managing equity debt allocation manually Large Cap play on buying sectoral leaders that benefit from improving investment climate Balance of IQ and EQ Diversified/Multicap focus on sectors that are likely to benefit the most across market cap Multicap Large and Midcap 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 Opportunities in smallcap segment Balanced benefit from equity & debt allocation Remarks Kotak Balance Advantage Fund (KBAF) Kotak Bluechip Fund (Erstwhile Kotak 50) Kotak India EQ Contra Fund (Erstwhile Kotak Classic Equity) Kotak Standard Multicap Fund (Erstwhile Kotak Select Focus) Kotak Equity Opportunities Fund (Erstwhile Kotak Opportunities Fund) Kotak Infrastructure & Economic Reforms Fund Kotak Emerging Equities Fund Kotak Tax Saver Fund Kotak Smallcap Fund Kotak Equity Hybrid Fund (Erstwhile Kotak Balanced Fund) We recommend investors to invest through SIP with a 5 years horizon. 52

53 Debt Market Outlook December

54 How November 2018 Unfolded India s GDP growth eased to a 3 quarter low 7.1% in Q2 FY2019 from 8.2% in Q1 FY2019 relative to 6.3% recorded in Q2FY2018 Consumer Inflation eases to 3.31% in October, slowest pace in 13 months. The benchmark yield fell by ~24 basis points at 7.61% in Nov due to correction in crude oil prices and rupee appreciation Brent crude plunged ~20-22% in November, settling at $58.44, for weakest month in over 10 years GDP Growth % Eases CPI Softens Yield Declines Brent Crude Drops India s Trade Deficit Widens to $17.13bn even as exports bounce back. Imports rose 17.6% while exports rose 17.86% in Oct 18 Rupee gains 5.5% in November ending the session at per US dollar on drop in crude prices, speculative positioning etc RBI conducted OMO purchases worth Rs.500bn in Nov. It will pump in another set of liquidity in December by infusing Rs 400bn. MPC voted for pause in repo rate at 6.50%, stance kept the same as calibrated tightening in its Monetary Policy Review on 5 th Dec 2018 Trade Deficit Widens Appreciating Rupee RBI Infuses Liquidity Repo Rate Unchanged Data as of November 2018, Source: News Media, ICRA 54

55 Decline In 10 Year Gilt Yield Due To RBI Intervention And Fall In Crude Price 1-Nov 2-Nov 3-Nov 4-Nov 5-Nov 6-Nov 7-Nov 8-Nov 9-Nov 10-Nov 11-Nov 12-Nov 13-Nov 14-Nov 15-Nov 16-Nov 17-Nov 18-Nov 19-Nov 20-Nov 21-Nov 22-Nov 23-Nov 24-Nov 25-Nov 26-Nov 27-Nov 28-Nov 29-Nov 30-Nov 1-Dec 2-Dec 3-Dec 4-Dec 5-Dec % Crude Oil plunged ~20-22% in Nov 18 RBI conducted Rs.500bn worth OMO in Nov Year Gilt Nov % 55

56 Yield Curve Bull Flattening Aggressive OMO Purchases lead to flattening of the curve. Going forward we expect parallel shift depending on the Oil prices and OMO purchases INR India Sovereign Curve 5/12/2018 (Current) INR India Sovereign Curve 10/31/18 3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 13Y 15Y 17Y 27Y 30Y 40Y YTM M-O-M Analysis M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 13Y 15Y 17Y 27Y 30Y 56 40Y Source: Bloomberg. As on 5 th Dec 2018

57 What Is Driving The Widening In Current Account Deficit From The Low Point Of FY2017? Source: CEIC, Morgan Stanley Research, *Morgan Stanley Estimates, Oct 18 57

58 FACTORS IMPACTING THE MARKETS 58

59 CPI Inflation: Remained Below MPC s Medium-Term Target Of 4% For Third Month In A Row 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 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct % 10.0% 8.0% 6.0% RBI Projections one which drives the policy RBI has lowered 1 st half 2020 inflation from 4.8% to % band 6.10% 4.0% 2.0% CPI Core CPI 3.30% 0.0% The CPI inflation corrected to a 13-month low 3.3% in October 2018 (+3.6% in October 2017) from 3.7% in September 2018 The core-cpi inflation hardened to a three-month high 6.1% in October 2018 from 5.7% in September 2018, led by miscellaneous items and pan, tobacco and intoxicants The inflation for food and beverages recorded a disinflation of 0.1% in October 2018, after a gap of fifteen months, partly reflecting the base effect The urban CPI inflation moderated to 4.0% in October 2018 from 4.3% in September 2018 The rural CPI inflation softened to 2.8% in October 2018 from 3.3% in September 2018 Source: MOSPI, ICRA Source: MOSPI, ICRA 59

60 Corporate Bond Spreads Continue To Remain High We Saw Parallel Movement In Rates Last Month (20 dma, bps) AAA Gilt (5 Yr) Source: Bloomberg, IIFL 60

61 1-Aug-18 8-Aug Aug Aug Aug-18 5-Sep Sep Sep Sep-18 3-Oct Oct Oct Oct Oct-18 7-Nov Nov Nov Nov-18 5-Dec-18 Banking System Liquidity Improving Total Liquidity in INR bn (250.00) (500.00) (750.00) (1,000.00) (1,250.00) (1,500.00) Banking Liquidity (56.24) RBI has managed to keep overnight rate close to the repo rate. RBI has announced 40k OMO for the month of Dec-18. Post policy conference, Viral Archarya mentioned that OMO may continue till March-19 Source: RBI, As on 4 th Dec

62 Bank Lending Offtake Picking Up 92 Lakh Crore % Bank Credit has jumped nearly 15% YOY Commercial Credit by Banks = Rs lakh Crore (LHS) Current Credit/ Deposit Ratio is ~77.05% (RHS) Deposit growth has also improved, but lags credit growth by more than 5ppt Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Source: Bloomberg, Data as on 30 th Nov

63 % Positive Real Interest Rates to Stimulate Financial Savings Nov-18 Aug-18 May-18 Feb-18 Nov-17 Aug-17 May-17 Feb-17 Nov-16 Aug-16 May-16 Feb-16 Nov-15 Aug-15 May-15 Feb-15 Nov-14 Aug-14 May-14 Feb-14 Nov-13 Aug-13 May-13 Feb-13 Nov-12 Aug-12 May-12 Earlier, negative real rates fueled inflation in physical assets as people chased assets such as real estate and gold till This can lead to healthy banks deposits and therefore lending to the formal sector Note: Monthly 10 year Gilt Yield taken as average of their respective month. Nov-18 CPI is assumed to be same as Oct-18 and Real Interest rate is calculated. Source: Bloomberg 63

64 YIELD & ITS METRICS 64

65 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 % Global Bond Yields US bond yields have trended lower, given the growth concern, concern on missing inflation target and debate around the neutral fund rate US 10 Year UK 10 Year Germany 10 Year Source: Bloomberg, As of 30 th Nov Japan 10 Year Nov-18

66 Spreads Between 10 Year & Repo -10 year bond yield spread over repo similar to the 2013 rate hike cycle Mar-07 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Nov-17 Mar-18 Jul-18 Nov year bond yield spread over repo similar to the 2013 rate hike cycle % % Yr Gilt (LHS) Repo (LHS) Spread (RHS) Source: Bloomberg, Citi Research: As on 30 th Nov

67 Inflation Adjusted Yields In India Is Attractive % India-US CPI and Yield Spread Narrowing CPI spreads and widening bond spreads make Indian fixed income attractive therefore risk of sharp outflow due to rates differential is unlikely 8 6 India-US Gilt Spread India-US CPI Spread 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 Note: 10 year Gilt Yield taken as average of their respective month. Data as of Nov 2018 (Nov 2018 CPI is assumed to be same as Oct Source: Bloomberg 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 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul Sep-18 Nov-18

68 Key Variables & Their Impact On Interest Rates In 2018 Key Variables Inflation Rupee Credit Demand Government Borrowing RBI Policy Global Event Risk Corporate bond Spread Debt FII flow Liquidity Short Term (3-6 months) Medium Term (6months 2 years) denotes fall in interest rates 68

69 Debt Outlook Long End Suddenly all the problems seem to be vanishing. Crude has fallen and INR is stabilizing. Further, while RBI has maintained the hawkish guidance, but would be doing aggressive OMO Purchases of bonds. Gilt has moved in advance and is coming to a neutral level of 7.25% which means it is pricing neither a hike nor a cut. RBI has highlighted that in case the upside risk to inflation does not materialize the case for easing may open up. Gilt yield curve which was pricing aggressive tightening is very close to the neutral zone. Further move will depend on rate cut expectation building - if at all any space opens up in future. RBI has become more aggressive on OMO s and has conducted Rs 50,000 Cr OMO in Nov and has announced Rs40,000 Cr additional support for the month of Dec. The have also said that OMO is likely to continue till march However, it all is dependent on the liquidity situation. The credit spreads have widened and we believe it offers attractive risk-reward tradeoff We prefer to be overweight on spread assets over gilt. We believe that credit accrual funds and duration fund which are over weight on corporate bonds, are likely to out perform over the medium term We have tactically increased the duration across, since the sharp sudden fall in oil prices and OMO purchase has changed the 10 yr trajectory. However other factors such as election risks has kept us on the side-lines. 69

70 Debt Outlook Short End Short term rates have come down as expectation of rate hikes has reduced over the course of last 1 month due to falling crude oil prices However the curve is steep. We expect that yield curve may flatten from now till March end due to year end supply pressures Earlier NBFC were running ALM mismatch and were issuing large amount of commercial paper. Post the recent refinance crisis faced by NBFC, they are correcting their ALM by issuing lesser amount of commercial papers and higher amount of NCD. We expect NBFC yield curve to remain steep in the near term. 70

71 Key Recommendations Segment Scheme Rationale Accrual Play Asset Allocation Short Term Parking of Funds Kotak Credit Risk Fund (Erstwhile Kotak Income Opportunities Fund) / Kotak Medium Term Fund Kotak Monthly Income Plan Kotak Savings Fund (Erstwhile Kotak Treasury Advantage Fund) / Kotak Low Duration Fund / Kotak Corporate Bond Fund Kotak Equity Arbitrage Fund Investment for higher accrual Investment for asset allocation Parking of surplus cash Higher post tax return Duration Play Kotak Bond (Erstwhile Kotak Mahindra Bond Unit Scheme 99) Kotak Bond Short Term Investment for longer maturities Investment for shorter maturities 71

72 Why Accrual Funds? Default Risk - Very Low - CRISIL s average 1 year transition rates for long term ratings between 2007 and 2017 Ratings AAA AA A BBB BB B C D AAA 97.78% 2.22% 0% 0% 0% 0% 0% 0% AA 1.19% 95.27% 3.04% 0.47% 0.16% 0.03% 0.02% 0.02% A % 91.70% 4.97% 0.27% 0.03% 0.05% 0.22% The probability of default of AAA rated firms are very low AAA continue to hold its rating 97.78% of times, AA around 95.27% of times, A holds the rating around 91.70% of times Our Comments 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 Moreover, to protect our interests, we ensure guarantee / mortgage / collateral etc. where required We look to invest in assets that have wide market acceptance This ensures that: 1. Our credit risk is lower than perceived 2. That we capture value with limited risk *Unrated papers that we invest in is generally very low and has implied credit risk which is moderate to low 72

73 Concerns Regarding NBFCs Refinance May be Abating Post IL&FS, investors were concerned that NBFCs may find it difficult to refinance and they would likely default Two months have passed and most of the NBFCs have been able to refinance their maturities Most of the NBFCs have also decided to reduce their short term borrowings as % of total borrowings We were always confident that there was no issue in the NBFCs credit as this was largely a liability side problem rather than an asset side problem With the recent drop in gilt yields due to falling crude and global bond yields, the credit spreads have widened This has made credit spreads a good investment opportunities from our perspective. 73

74 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 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. 74

75 75

76 Stay Updated! Follow us on Equity Market Outlook Product Video Debt Market Outlook Investor Education Monetary Policy Update Equity Market Outlook Market Scenario 76

77 77

78 Want To Do Financial Planning, But Confused?? Sharpen your Financial Planning skills!! Kotak Mutual Fund launches its first Video Learning Module on Financial Planning for IFA s Now Learn Anywhere Anytime!!! If you are empanelled with Kotak AMC & have updated your mobile number & id, follow the process mentioned ahead. 78

79 Process For ProStart Video Learning Login Go to Click on SIGN-UP. Enter ARN (only number). Click SUBMIT OTP is generated Enter OTP number Generate New Password which has minimum 8 characters (1 Caps, 1 Number, 1 Special Character. Message: USER ALREADY EXISTS Click on LOGIN. Enter User Id ( ARN-xxxx format). Click on FORGET PASSWORD. OTP is generated Click on LOGIN. Enter User Id (ARN-xxxx format). Enter PASSWORD. Select Module and Language. Select Video to view. Enter OTP number In case you are still unable to access videos kindly send a message or to or kmamc.trainingqueries@kotak.com, mention your Name, ARN number & mobile number. 79

80 Topics Covered In The Module CASE STUDY -2 CHILD MARRIAGE PLANNING INTRODUCTORY VIDEO TIME VALUE OF MONEY BASICS CASE STUDY -4 RETIREMENT PLANNING CASE STUDY -6 RETURNS CALCULATIONS CASE STUDY -3 RETIREMENT PLANNING CASE STUDY -1 CHILD EDUCATION PLANNING CASE STUDY -7 FULL CASE STUDY CASE STUDY -5 ANNUAL VACATION PLANNING FINANCIAL PLANNING CONCEPTS 80

81 WHATS MORE!! AVAILABLE IN 2 LANGUAGES: ENGLISH & HINDI GET A COPY OF EXCEL CALCULATORS ON COMPLETION OF MODULE VIWERSHIP HAS CROSSED LOGIN NOW & START LEARNING 81

82 Get Your Business On The Go Through Distributor Initiated Transaction Step 1 Step 2 Step 3 Step 4 Enter Your Mobile Verify Via OTP Select Type of Transaction Trigger Transaction for your Investor 1. Existing Investors Lumpsum SIP STP SWP Redemption Switch 2. First Time Investors Type of Transactions: Lumpsum SIP Zero Balance Folio 82

83 Go Digital Make your Digital Footprint 990 Distributors on Go Digital & Counting 83

84 ANNEXURES 84

85 Performance of Sensex and Nifty Indices Source: Source: Bloomberg, Bloomberg, Kotak Institutional Kotak Institutional Equites 85

86 Key Events November 2018 The Monetary Policy Committee (MPC) kept repo rate unchanged at 6.5%. It also left LAF corridor unchanged, leaving reverse repo and MSF at 6.25% and 6.75% respectively Sep IIP growth slipped to 4.5% due to slower expansion in mining (0.2%) pulling down overall industrial growth. Manufacturing was up 4.6% while electricity generation rose 8.2%. Capital goods production slowed to 5.8%. Positive growth in 17 of the 23 industry groups in the manufacturing sector The soft patch in CPI continued with the Oct print declining further to 3.3%, marking 4 straight months of deceleration. Core inflation remained elevated at 5.8%. WPI also hit 4-month high of 5.28% reflecting the impact of pass-through of higher commodity prices and INR depreciation. Food prices witnessed softening with deflation at 1.49% in Oct. Oct trade deficit reverted to trend breaching US$17bn despite strong growth in exports (17.9% YoY) and lower gold imports (US$ 1.7bn vs US$ 2.6bn prev), offset by higher oil and cap goods imports (16.3% YoY). In imports, electronic goods (+32% YoY), base metals (+30%) were leaders while in exports, pharma (+13%) and textiles (+22%) revived from Sep. Assembly polls went underway in MP and Mizoram with reported record voter turnout of 75% with results to be declared on Dec 11. Rajasthan, Chattisgarh and Telagana will also head into election in early Dec. Indian equities recovered from Oct lows (Nifty +5%) as crude falling ~22% over the month stoked the bullish sentiment, driving INR up. FIIs turned buyers after 3 months of selling albeit of a smaller quantum, while DII buying slowed significantly with Insurance companies turning net sellers. 86

87 Sensex P/E Sensex EPS Earnings Growth Visibility Is Key FY93-97 FY98-03 FY05-09 FY10-17 FY18-20e Source : Internal Calculation, Past performance is not a reliable indicator of expected future performance 87

88 Disclaimers & Disclosures 88

89 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. 89

90 Product Labeling * Investors should consult their financial advisers if in doubt about whether the product is suitable for them 90

91 Product Labeling * Investors should consult their financial advisers if in doubt about whether the product is suitable for them 91

92 Product Labeling * Investors should consult their financial advisers if in doubt about whether the product is suitable for them 92