Market Outlook. April-2019

Transcription

1 Market Outlook April

2 Equity Market Outlook April- 2019

3 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 Dec-18 Jan-19 Feb-19 Mar-19 FII Equity Inflows In March - Highest In Past 2 Years Trend In Monthly FII Flows (Equity) USD mn 4,500 4,768 3,500 3,045 2,500 1, , ,039 2, ,152 (500) (1,500) (2,500) (345) (1,963) (1,657) (833) (1,931) (377) (983) (1,427) (278) (1,314) (75) (3,500) (4,500) (3,752) Source: Axis Capital, SEBI 3

4 As EM Allocations Have Gone Up, India Has Seen Greater Deployment By FII Year-to-date, FII Have Net Bought US$6.6bn In Indian Equities, The Largest Among The EM Asian Markets FII Flows Across The EM Asia Region YTD (US$Bn) India Korea Taiwan Indonesia Philipines Malaysia Thailand 4 Source: Bloomberg

5 The Big Reversal FII Flows! Cumulative FII Equity Flows Before & After Past General Elections In India (US$ Bn) Source: Bloomberg, Goldman Sachs 5

6 FII Inflow As Odds Of Political Stability Improves? Cumulative Fund Flows In Indian Equities (US$Bn) Source: Bloomberg, Goldman Sach 6

7 Weight Of India In Global Funds Has Dropped Significantly Since 2016, First Signs Of Reversal In 2019? AeJ And EM Funds Have Been Paring Their Significant OW Allocations In India India s Allocation In Mutual Funds Globally (UW/OW, bps) Note: Overall mutual funds AUM = US$2trn Global Funds include global & global ex-usa focused funds Source: EPFR, FactSet, MSCI, Goldman Sachs Global Investment Research; AeJ Asia ex Japan; GEM Global Emerging Market 7

8 FII What Are They Fancying In 2019 YTD, FIIs Have Bought Banks, Energy The Most And Sold Industrials, Metals/Mining FII Flow Across Sectors (YTD, US$Mn) Source: SEBI, Goldman Sachs Global Investment Research 8

9 Opinion Polls: Recent Opinion Polls Favours Incumbent NDA Source: Media sources, SSL 9

10 But Is The Return Of Stable Government Already Captured By Recent Outperformance? MSCI India US$ Index Performance Relative To MSCI EM 12M Pre-Election Post-Election Source: RIMES, MSCI Morgan Stanley Research 10

11 From Extreme Risk Aversion Broader Markets Have Bounced Back Very Strong % Of BSE 500 Stocks Trading Above 200DMA FII under-allocation and risk aversion in late 2018 helped a good rally in equities so far, earnings and valuations to determine medium-term outlook Source: RIMES, Morgan Stanley Research 11

12 While Political Sentiments Have Improved, Many High- Frequency Indicators Indicate Slowing Momentum Political Sentiments Improved Auto FMCG Aviation traffic NBFC disbursements Tax collections Balance of Payments 12

13 Driving With Handbrakes On Tight Liquidity Tight Credit High Interest Rates Lack of Transmission IMPACTING CORPORATE INDIA 13

14 Auto In Slow Lane Domestic Passenger Vehicle Sales Declined By 1.1% In Feb 19 Two-wheeler Domestic Sales Declined By 4.2% In Feb 19 Source: Ministry of Commerce and Industry 14

15 Core Industries Cools Off Cement Output Rose By 11% In Jan 19 While Steel Output Growth Dropped To 8.3%. Coal Output Growth Was 1.7% In Jan 19, While Refinery Coal Output Growth Was 1.7% In Jan 19, While Refinery Source: Ministry of Commerce and Industry 15

16 Aviation & Rabi Sowing Down Air Passenger Traffic Growth Decelerated To 57-month Low Of 5.6% Rabi Sowing Is Down 4% Source: GoI, Spark Capital Research 16

17 Skymet Forecast High Chance Of Below Normal Monsoon Source: Skymet Weather Forecast 17

18 GST Collections Perk Up In March Gross Monthly GST Collection Trend Source: CLSA, PIB Ministry of Finance 18

19 But Centre s Expectations Are Too High For FY20 Centre s GST Collections Monthly Trend Source: CLSA, CGA, PIB The Ask Rate For Center's GST Collections (Ex-cess) Is To Rise By 36% YoY 19

20 Tax Shortfall Weighs On Fiscal Tax Collections Of Central Government Expect C.Rs1.3trn+ Tax Shortfall In FY Total Direct Total Indirect Total Tax Revenues FY19(Apr-Feb) FY19 RE FY20 BE Government Tax Collections Were Running 9% Below Targeted Growth Rate One Month Before End Of Fiscal Year The Central Board of Direct Taxes (CBDT) has collected Rs 1,117,416.5 crore (11.17 lakh crore) in total direct taxes in FY , a shortfall of around Rs 83,000 crore or 7.4 percent of the Rs 12 lakh crore collection target. Source: CLSA, CGA, Budget Documents, Ministry of FInance 20

21 Earnings Downgrades Still Dominate Upgrades BSE month Fwd. Earnings Sentiment Source: FactSet, I/B/E/S, MSCI, Goldman Sachs Global Investment Research 21

22 LOOKING BEYOND NEAR-TERM HAZE 22

23 Corporate Profit Is At Lowest Point Nifty-500 Corporate Profit To GDP Ratio Has Touched A 15-year Low Source : Internal Calculations MOSL Research 23

24 Despite Strong GDP Growth Contrast Between Corporate PAT Growth and GDP Growth Source : Internal Calculations MOSL Research 24

25 Capex Cycle Seems To Have Bottomed Out GFCF to GDP ratio On A Tr-4qtr Basis, GFCF To GDP Ratio Is Up 90bps From The Bottom Made In Jun 17 Source: CLSA, MOSPI; GFCF Gross Fixed Capital Formation 25

26 MARKET PERFORMANCE 26

27 Performance Across Market Cap - Midcaps and Smallcaps corrected sharply in last 12 months In percent updated (5) (2.7) (10) (15) (20) (14.4) Nifty Nifty Midcap NSE Small Cap 1m returns 1y returns 3 yr CAGR 5 yr CAGR 10 yr CAGR *As on 29 March 2019, Source: Axis Capital, Bloomberg, Past Performance may or may not sustain in the future 27

28 Small And Mid Cap Still Down From Peaks Despite Recent Pulback Drawdown from 52 Week High No. of Stocks % of Top 1000 stocks Less than 10% % 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 10-5% 10 to % 100 to % 500 to % Overall : Top % Drawdown from 52 Week High Nifty % Nifty Midcap % Nifty Smallcap % Source: Axis Capital, Bloomberg, As on 29 Mar

29 Market Snapshot Dec-07 May-13 Mar-19 Dec-07 May-13 Mar-19 Macro Indicators 10-Yrear Govt Bond Yield Capacity Utilisation (Sep-18) 91.7% 71.6% (Jun-13) 74.8% India 7.8% 7.2% 7.4% Credit Growth (as on Feb-19) 22.0% 14.4% 14.5% USA 4.0% 2.1% 2.4% ROE Nifty 50 (Feb-19) 25.5% 17.1% (Mar-13) 12.7% Japan 1.5% 0.9% -0.1% Net FII Flows (12M - Rs. Cr Mar) 71, , Europe 4.3% 1.5% -0.1% IIP Jan % 1.0% 3.5% China 4.5% 3.4% 3.1% GDP Growth (Oct - Dec18) 9.6% 6.4% 6.6% Dec-07 May-13 Mar-19 Dec-07 May-13 Mar-19 Valuations Trailing P/E Nifty Trailing P/B Nifty Source: Axis Capital, Bloomberg, Returns of Nifty 50 (CAGR) Last 1 Yr Return 54.8% 21.6% 14.9% Last 2 Yr Return 47.1% 3.8% 12.6% Last 3 Yr Return 43.4% 5.6% %

30 VALUATIONS 30

31 Mar-1 2 Sep-1 2 Mar-1 3 Sep-1 3 Mar-1 4 Sep-1 4 Mar-1 5 Sep-1 5 Mar-1 6 Sep-1 6 Mar-1 7 Sep-1 7 Mar-1 8 Sep-1 8 Mar-1 9 Midcap Valuations Still At Discount to Large Caps 12 Month Forward PE (x) NIFTY Midcap 100 Nifty Source: Axis Capital, As on 29 th March

32 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar Sensex Above Fair Value Plus Range month Forward Sensex P/B (X) India s Market Cap to GDP (%) Year Avg: 2.6x Average of 78% for the period Source: Axis Capital 32

33 Indian Markets Higher Than Most Peers On Valuation P/E Multiple CY18/FY19 of Indices India (Sensex) 24.7 US (Nasdaq) 22.4 Malaysia (KLCI - FTSE) US (Dow Jones) Japan (Nikkei 225) Thailand (SET) UK (FTSE 100) Singapore (Straits) Brazil (IBOV) 11.5 HK (HSI) 11.3 Korea (Kospi) China (HSCEI) (x) Source: Axis Capital, Bloomberg * For India & Japan Fiscal year is FY19 while others it is CY18 33

34 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 Dec- 18 Jan-19 Feb-19 Mar- 19 Sensex in Fair Value Plus Range 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 34

35 FII Equity Inflows Highest In Past 2 Years 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 (5,088) 3,915 CY2015 3,275 10,201 11,071 CY2016 2,902 5,434 7,092 CY2017 7,716 14,042 18,324 CY2018 (4,557) 15,900 17,528 CY2019 6,845 (1,763) 216 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 Dec Jan-19 (75) 304 1,013 Feb-19 2,152 (58) 301 Mar-19 4,768 (2,009) (1,097) Net Investments by FIIs, DIIs and MFs in the Cash Market (US$ mn) Notes: (a) DII -Domestic Institutional Investors (Includes Bank, DFIs, Insurance, New Pension Scheme and MF). (b) FII data is till March 28, MF data is till March 29 and DII data is till March 29. Source: Bloomberg, Axis Capital 35

36 While Valuations Not Cheap, Patience To Be Key As We Await For Earnings To Pick Up 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 36

37 Key Variables & Their Impact On Equities Key Variables Short - term Medium term Remarks Economy GST to aid formalization of economy and longer term growth 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 Long runaway of longer term growth in financial channelization of savings 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 37

38 Kotak Balanced Advantage Fund Asset Allocation Nifty Index KBAF It s Automatic KBAF Net Equity Nifty Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Source: Internal 38

39 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. 39

40 Debt Market Outlook April

41 6-Mar-19 7-Mar-19 8-Mar-19 9-Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar-19 1-Apr-19 2-Apr-19 3-Apr Year Gilt - March 2019 % Year Gilt No indication of new OMO announcement by the RBI RBI conducted $5bn worth rupee-dollar swap RBI conducted OMO worth Rs.250bn RBI announced that it would be conducting an auction based Dollar- Rupee swap amounting to US$ 5 billion ource: Bloomberg, 41

42 Repo Rate Reduced! Stance Remains Neutral! Key Rates Measures CRR Unchanged at 4.00% Reverse Repo rate Readjusted at 5.75% Repo Rate Rate cut by 25 bps to 6.0% MSF Rate Readjusted at 6.25% Bank Rate Readjusted at 6.25% SLR Cuts scheduled since Dec-18 to be brought down to 18% by Mid ource: RBI 42

43 Spreads Have Widened Sharply Over Last 1 Year Spreads in Bps Gilt- NBFC AAA (10 Yr) Gilt-NBFC AA (10 Yr) Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 While the risk premium about credit & liquidity transmission in the system may have peaked, but it still remains at relatively higher levels vis-à-vis 1 year ago. In fact the 10 yr maturity of established NBFCs(AA) are still trading at around 350 bps spread over gilt Source: Bloomberg Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 43

44 Attractive Spreads Paving Way For Fresh Flows To Bonds In bps Year Corporate Bond Spread (AA-AAA) From a mean of 45bps, spread is now at ~70bps. This shows that value is emerging in credit space Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Source: Bloomberg 44

45 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 Dec-18 Jan-19 Feb-19 Mar-19 FII Flows Are Back! Trend In Monthly FII Flows (Debt) USD mn 5,000 4,000 3,000 2,000 1,000 0 (1,000) (2,000) 3,977 3,138 2,998 2,893 2, ,757 (191) 357 1,470 (421) (1,123) (1,785) 2, (1,546) (1,461) (1,285) (367) (1,158) (3,000) (2,629) Source: Axis Capital, SEBI 45

46 RBI Injects Rupee Liquidity Through Long Term USD/INR Buy/Sell Swap Auction Central bank bought the targeted $5 billion as part of the long term Dollar/Rupee swap auction with a threeyear tenor Rs 34,561 crore was infused into the Indian banking system. Reserve Bank of India has announced a second such auction on April 23. Impact on the Banking, Debt and Currency Market: The banks receiving the Rupee due to the swap will be able to buy bonds and gilt (usually less than 3- year maturity) without the currency volatility risk. The overall banking system will receive a total liquidity boost of around Rs cr (cumulative of 1 st and 2 nd swap) and may reduce the short term borrowing cost. This may percolate across the curve. The overall forward-premium may fall across the board and may stimulate further demand for debt carry trade in future. We foresee the yields in the shorter end of the curve coming down significantly This swap reduces the need for OMO in the market. Thus the OMO demand for long term bonds may go down. This may cause the long term yields to harden. Overall, we expect further steepening of the yield curve The rally in the short term curve may transmit in bonds and gilt over a period of time. 46

47 Yield Curve % As per our expectations, the steep curve moved down almost parallel Now as the RBI has delivered the rate cut but OMO s have become infrequent which may make the curve more steep in the near term INR India Sovereign Curve 01/04/19 YTM INR India Sovereign Curve 28/02/19 YTM 3M 6M 1Y 2Y 3Y 4Y 5Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 16Y 0 YTM M-o-M Change M 6M 1Y 2Y 3Y 4Y 5Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 16Y 47 Source: Bloomberg. As on 4 th April 2019

48 Positive Real Interest Rates to Stimulate Financial Savings % Mar-19 Dec-18 Sep-18 Jun-18 Mar-18 Dec-17 Sep-17 Jun-17 Mar-17 Dec-16 Sep-16 Jun-16 Mar-16 Dec-15 Sep-15 Jun-15 Mar-15 Dec-14 Sep-14 Jun-14 Mar-14 Dec-13 Sep-13 Jun-13 Mar-13 Dec-12 Sep-12 Jun-12 Mar-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 48 Note: Monthly 10 year Gilt Yield taken as average of their respective month. Mar-19 CPI is assumed to be same as Feb-19 and Real Interest rate is calculated. Source: Bloomberg

49 FACTORS IMPACTING THE MARKETS 49

50 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-18 Dec-18 Feb-19 CPI Inflation Rises To Four Month High 12.0% 10.0% CPI Core CPI 8.0% 6.0% 4.0% 2.0% 5.50% 2.57% 0.0% CPI inflation stood at 2.57 percent in February compared to a revised 1.97 percent in January 2019 as the year-on-year fall in food prices eased. The core CPI inflation rate for February 2019 is at 5.5% vs 5.4% in January 2019 is at 5.4% CPI food inflation stood at percent in February compared to percent in January. The urban inflation stood at 3.43 per cent in February 2019 against 2.91 per cent in January 2019 The rural inflation stood at 1.81 per cent in February 2019 against 1.29 per cent in January Source: MOSPI, ICRA Source: RBI, Bloomberg 50

51 Currency in Circulation (CIC) - Cause of Concern USD Mn Currency in Circulation (USD Mn) Sharp Increase in CIC leading to liquidity tightness. Thus OMO is needed Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar Source: Bloomberg; Mar-19 Data till 23 rd March 2019

52 Commercial Credit By Banks Remains Elevated Pace Of Deposit Growth Continues To Lag Credit Growth Lakh Crore 98 % Commercial Credit by Banks is ~Rs lakh Crore (LHS) Current Credit/ Deposit Ratio is ~78.14% (RHS) Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Source: Bloomberg, Data till 15 th March

53 Tightening Liquidity Total Liquidity in INR bn Liquidity 1, (500.00) (1,000.00) (1,500.00) -1, (2,000.00) Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 The RBI is committed towards maintaining the liquidity around the neutral zone. All liquidity tools remain on the table including FX Swaps. Thus OMOs are likely to continue going forward Source: RBI, Data till 2 nd April

54 YIELD & ITS METRICS 54

55 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 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 Apr Year Bond Yield Spread Over Repo % 2.50 Spread Between 10 Year And Repo Source: Bloomberg,, As on 4 th April Repo for 4 th April is taken as 6.20% 55

56 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 India-US CPI Spread India-US Gilt Spread Sep-18 Jul-18 May-18 Mar-18 Jan-18 Nov-17 Sep-17 Jul-17 May-17 Mar-17 Jan-17 Nov-16 Sep-16 Jul-16 May-16 Mar-16 Jan-16 Nov-15 Sep-15 Jul-15 May-15 Mar-15 Jan-15 Nov-14 Sep-14 Jul-14 May-14 Mar-14 Jan-14 Nov-13 Sep-13 Jul-13 May-13 Mar-13 Jan-13 Note: 10 year Gilt Yield taken as average of their respective month. Data as of Mar 2019 (Mar 2019 CPI is assumed to be same as Feb Source: Bloomberg Nov Mar-19 Jan-19

57 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Global Bond Yields UK 10 Year Gilt US 10 Year Gilt Japan 10 Year Gilt Germany 10 Year Gilt Source: Bloomberg, As of 29 th March

58 Key Variables & Their Impact On Interest Rates Key Variables Short Term (3-6 mo) Medium Term (6mo-2yrs) Remarks Inflation Inflation expected to remain benign over near & medium term. Thus, positive impact on interest rates. Rupee Rupee expected to remain range bound in the near term. It may gradually tend towards a relatively low depreciation that will affect the interest rates positively. Credit Demand Near term tight liquidity and demand for money may lead to widening for spreads. However in long term its likely to ease out as liquidity will ease from April. Government Borrowing Budget announced additional borrowings for FY19 and FY 20 Gross borrowing was also on higher side which will keep rates high. RBI Policy RBI is expected to be dovish thus will remain positive for short term rates. Global Event Risk Corporate bond Spread Debt FII flow Liquidity No immediate impact of global events on interest rates however IF there is a pause in FED rate then then next move may be a cut Spreads are already wide. Gradually they are expected to narrow; having positive impact on interest rates Currently no change in FII flows impact on interest rate. As we get more clarity going forward, esp. post general election outcome, it may positively impact interest rates Central Bank likely to add liquidity in the near and medium term. Thus a positive impact on interest rates denotes fall in interest rates 58

59 Debt Outlook The RBI has decided to cut rates further by 25 bps, but has continued to maintain its stance at neutral. The central bank has also revised the inflation and the GDP forecast downwards The RBI has reassured that they will be actively managing liquidity and all tools are on the table, with FX swaps being an additional tool. This means OMO is likely to continue. Further rate cuts may be on the table, however the election and the fiscal will be watched closely. By the time we have our next policy meeting, the election will be behind us. If all goes as per market expectation, then we may get one more cut as early as next policy. The US Fed has also indicated that a pause in rates is round the corner. If that happens, the next move may be a cut from FOMC (Federal Open Market Committee) Fiscal overhang is clearly disturbing long end of the yield curve. Given the over all situation, we expect further steepening of the curve and is likely to remain same for some time. 59

60 Debt Outlook The credit spreads have started shrinking post the dollar swap. Since more swaps are expected, the shorter end has the potential to offer an attractive risk-reward tradeoff We prefer to be overweight on spread assets over gilt. We believe that credit accrual funds and such duration funds which are over weight on corporate bonds may outperform over the medium term Given the overall macro picture, the RBI is creating more space to cut rates and bring liquidity to neutral. Funds with modified duration between may be relatively attractive investment opportunity for investors with low risk appetite. However, as the curve steepens and due to supply overhang, the 10yr and above assets may spike. This may be a good opportunity to accumulate since every rise may keep limiting the downside and increase the upside. As the supply pressure abates, we expect the duration to perform most likely in around Q2 of FY We believe that the window of investment opportunity in short duration bond funds, banking and PSU funds, credit funds and dynamically managed duration funds is still available. Investors may look to invest in the market depending on the scale of risk appetite and the investment horizon. 60

61 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 Debt Hybrid 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 61

62 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 62

63 Some Myths & Behavioral Anomalies That Hurt Accrual Fund Investors Myths Truths Credit Funds Are Risky Even Deposits are Risky. Credit Funds only better utilize the credit spectrum for gains while taking steps to mitigate risk LAS are Risky Payment Delay is Default Reduce exposure to Credit Fund at times of market upheaval LAS reduces risk and infact provides an early liquidity window before a credit event. Even in cases such as Satyam, LAS helped reduce and recover the loss It means a cash-flow issue. Payment is still an obligation of the borrower, which usually gets settled sooner or later Loss from Exit load and STCG is usually higher than risk of default. Increasing time horizon helps in recovering loss Credit Fund is investible due to the Portfolio and the Strategy they Build. Much Like using Sehwag for Test and Dravid for IPL. Both will play and perform but the style they add is different 63

64 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 The recent credit crisis has been a good learning for us. We have internally decided to reduce concentration risk across all our schemes. With the widening of spreads, we recommend investors to take the potential benefit by investing in accrual funds Investors with months horizon can look at investing in Accrual Funds Accrual funds like Kotak Credit Risk Fund / Kotak Medium Term provide retail investors the potential to obtain high yields in the present condition. 64

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73 ANNEXURES 73

74 PERFORMANCE OF SENSEX AND NIFTY INDICES Source: Bloomberg, Kotak Institutional Equities 74

75 Key Events March 2019 RBI cut Repo rate by 25 bps to 6%. Stance unchanged at neutral. Goods and Services Tax (GST) collection in March rose 15.6% from a year ago to hit 1.06 trillion, the highest since the new indirect tax system took effect on 1 July The Central Board of Direct Taxes (CBDT) has collected Rs 1,117,416.5 crore (11.17 lakh crore) in total direct taxes in FY , a shortfall of around Rs 83,000 crore or 7.4 percent of the Rs 12 lakh crore collection target. The collection is, however, 18.3 percent higher than last year. Jan IIP stayed moderated significantly to 1.3% versus 2.7% in Dec due in large part to slowing growth in manufacturing(1.3% in Jan versus 2.7% in Dec), electricity (0.8% in Jan versus 4.5% in Dec) and capital goods (-3.2% in Jan versus 5.9% in Dec) sector. Construction witnessed the strongest growth of all major sectors, of 7.9% in Jan, but this was still significantly slower than the 10% seen in Dec. Feb trade deficit came in surprisingly low at $9.6bn, best since Sep 2017 with exports rising 2.4% YoY and imports falling 5.4% YoY. YoY import growth worsened across all categories, with 7 of the major 9 categories in negative territory. Export growth was still positive, it but well below its 3- yr avg. The GST council approved transition plan for new tax rates for housing sector. The developers of residential projects which are incomplete as on March 31 will have the option to either choose the old structure with Input Tax Credit (ITC) or to shift to the new 5% and 1% rates without ITC RBI introduced a liquidity infusion measure announcing its intent to conduct a USD 5bn tenor USD/INR Buy/Sell swap auction. Deal activity gathered momentum in Mar with 15 deals totalling ~$5.5bn with the key ones being the IPO of Embassy Office Parks REIT ($689mn) and OFS of HDFC Life Insurance ($522mn) and ICICI Pru Life ($248mn). FIIs maintained Feb s buying trend in Mar to record inflows of ~$4.8bn, taking the YTD total to ~$7.1bn. DIIs however remained sellers with ouflows of ~$2bn with the YTD total standing at net outflows of ~$1.8bn. Indian markets (Nifty +7.7%) reversed Feb s weakness with renewed foreign inflows and sentiment boost from opinion polls, ahead of general elections, tilting further in favour of incumbent BJP. 75

76 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 76

77 Disclaimers & Disclosures 77

78 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. 78

79 Product Labeling * Investors should consult their financial advisers if in doubt about whether the product is suitable for them 79

80 Product Labeling * Investors should consult their financial advisers if in doubt about whether the product is suitable for them 80

81 Product Labeling * Investors should consult their financial advisers if in doubt about whether the product is suitable for them 81