Market Outlook March-2019

Transcription

1 Market Outlook March

2 Equity Market Outlook March- 2019

3 THE FINAL LAP Election & Border Skirmish : Historical Analysis 3

4 No Visible Sustained Impact Of Elections On Markets Performance Of Sensex Stocks 6 Months Before and After Elections 50% 40% 30% 20% 10% 12% 6M Before 6M After 44% 32% 36% 38% 18% 16% 0% -10% -20% -30% -17% -9% -20% -5% In each of the last six elections, despite the verdict being a surprise, the market did not show any significant divergence from the trend seen pre-elections. There was some occasional volatility, but no sustained impact on the indices due to elections. -7% Source: RAVE, Credit Suisse Estimates 4

5 Volatility Spiked Around Election Results Only In 2004 and 2009 Source: The BLOOMBERG PROFESSIONALTM service, Credit Suisse estimates 5

6 Even Sectors Are Immune Sector-wise Impact is also Insignificant Performance Of Sectors In 81 Days Preceding General Election Results IT Energy Banks Staples NBFC Cons. Disc. Pharma Industrials Utilities Telecom Materials Others % 16% 6% 4% 17% 13% 6% 14% 23% 32% 10% 5% % -5% 14% 23% 5% -7% 5% 0% 7% 3% -6% 6% % 12% -7% 3% 2% 20% 60% 5% 8% -5% 6% 5% % -19% -12% -23% -16% -17% -12% -31% -28% -12% -27% -16% % 30% 44% 6% 45% 35% 23% 42% 16% 30% 43% 56% % 35% 44% 7% 23% 17% 0% 40% 22% 19% 26% 21% With 81 days to go to election results (assuming they are announced like the last three times on 16/17 May), we find that most sectors in each election gave positive returns in the 81 days that preceded the results day, 2004 being the key exception Source: RAVE, Credit Suisse Estimates. Sectors are of BSE500. In the year 1999 the BSE500 constituants are backdated for 1996 and 1998 calculations. 6

7 India Asserting its Rightful Might Now Past also hints tensions unlikely to hit sentiments on Dalal Street Market Indicators Post URI Surgical Strike Indicators Strike Day Post 1 M Post 3 M Post 1 Yr % Change 1Yr Sensex % Nifty % 10 Yr G- Secs (%) (-)20 Bps Rs/USD % Market Indicators During Kargil War Indicators 26-May July-1999 % Change Sensex % Nifty % 10 Yr G- Secs (%) (-)0.02 Bps Rs/USD % Source: SBI Research 7

8 Pre-Poll Alliances Return Of Political Stability? 8

9 ECONOMY: SOME POSITIVES, SOME NEGATIVE 9

10 Driving With Handbrakes On Tight Liquidity Tight Credit High Interest Rates Lack of Transmission IMPACTING MARGINS 10

11 Margin Pressure Witnessed Across The Board Snapshot Of Broad Market Earnings Across Market Cap Segments Source: Company Data, Capitalline,Morgan Stanley Research 11

12 Corporate Profit Is At Lowest Point Nifty-500 Corporate Profit To GDP Ratio Has Touched a 15-year Low Source : Internal Calculations MOSL Research 12

13 Despite Strong GDP Growth Contrast Between Corporate PAT Growth and GDP Growth Source : Internal Calculations MOSL Research 13

14 Though EBITDA Margin Is Maintained Nifty-500 EBITDA Margin (%) Nifty-500 PAT Margin (%) Source : Internal Calculations MOSL Research 14

15 The Capacity Utilisation Seems To Have Bottomed Out And Now Edging Closer To Average Levels Capacity Utilization In Manufacturing Sector Tr-12 Months (RBI s OBICUS Survey) Source : CLSA, RBI 15

16 Key Core Sectors Trending Well Steel Production Growth, At 13% Yoy In December, Was The Highest In 13 Months Cement Production Increased 12% Yoy In December, Good Considering The High Base Source: CLSA, Ministry of Commerce & Industry Source: CLSA, Ministry of Commerce & Industry 16

17 Robust Manufacturing Activity Augurs Well For Future Capex Growth Manufacturing PMI At 53.9 Was Second Highest In 13 Months And Took The 3mmato A 6-year High Of 53.7 Source: CLSA, Bloomberg 17

18 KISAN Scheme First Installment To 1crore Farmers Already Disbursed! Source : Spark Capital Research 18

19 Skymet Preliminary Monsoon Forecast Guidance For 2019 Over 50 Percent Chances Of Normal Rains A normal monsoon will augur well for the country s agriculture sector and boost crop yields. However, much will depend on the timeliness, spread, and distribution of the precipitation in the critical rain-fed areas of the country. 19

20 Rural India and SME Can The Stress Abate? Did you know India s largest lending fintech? India s largest FinTech company is now govt initiative called PSBLoansin59minutes.com. In 3 months, about 30,000crores have been sanctioned and about 25,000 crores have already been disbursed 90,000 SME have their loans sanctioned, with 24,000 SME availing of these facilities for the first time from formal banking system Source: Company data, Credit Suisse estimates 20

21 Percentage of Indicators Showing Acceleration *Index values. The period of comparison is 2016 to date. Dark green shading suggests the fastest growth since 2014, while dark red suggests the slowest growth since Source: 21 CEIC and Nomura Global Economics.

22 Gearing Ratios Have Improved In Most Sectors Readying Itself For Next Capex Cycle Source: Ace Equity, Nirmal Bang Institutional Equities Research 22

23 Capex Cycle Key For Sustainable Growth Recovery Improving capacity utilisation, strengthening bank balance sheets and GST implementation tailwinds to provide a conducive environment for investment growth to pick up from late FY20/FY21 onward. Source: CEIC, UBS 23

24 MARKET PERFORMANCE 24

25 MSCI Indices: India Underperforms Global Indices in CY-2019 Source: RIMES, MSCI, Bloomberg, Morgan Stanley Research 25

26 MF Inflows Are Seeing A Deceleration Trend In Monthly Flows In Domestic Mutual Funds Source: AMFI, CLSA 26

27 FII Sees A Big Reversal In February Trend In Monthly FII Flows (Equity) Big spike in FII inflow could also be tied to some large blocks SUUTI sale in Axis Bank, ING sale in Kotak, Bharat22 ETF Source: CLSA 27

28 Performance Across Market Cap - Midcaps and Smallcaps corrected sharply in last 12 months In percent (5) (10) (15) (20) (25) (30) (0.4) (1.1) (1.7) (15.0) (24.5) Nifty Nifty Midcap S&P BSE Smallcap m returns 1y returns 3 yr CAGR 5 yr CAGR 10 yr CAGR *As on 28 February 2019, Source: Axis Capital, Bloomberg, Past Performance may or may not sustain in the future 28

29 There Is Carnage In Small And Mid Cap Drawdown from 52 Week High No. of Stocks % of Top 1000 stocks Less than 10% 80 8% 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 10-10% 10 to % 100 to % 500 to % Overall : Top % Drawdown from 52 Week High Nifty % Nifty Midcap % Nifty Smallcap % Source: Axis Capital, Bloomberg, As on 28 Feb

30 Market Snapshot Dec-07 May-13 Feb-19 Dec-07 May-13 Feb-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 Jan -19) 22.0% 14.4% 14.4% USA 4.0% 2.1% 2.7% ROE Nifty 50 (Feb-19) 25.5% 17.1% (Mar-13) 12.8% Japan 1.5% 0.9% 0.0% Net FII Flows (12M - Rs. Cr Feb19) 71, , Europe 4.3% 1.5% 0.2% IIP (Dec-18) 13.5% 1.0% 2.4% China 4.5% 3.4% 3.2% GDP Growth (Oct - Dec18) 9.6% 6.4% 6.6% Dec-07 May-13 Feb-19 Dec-07 May-13 Feb-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% 2.9% Last 2 Yr Return 47.1% 3.8% 10.2% Last 3 Yr Return 43.4% 5.6% %

31 Earnings Improving Momentum, Though Earnings Cuts Still Persist Source: Company Data, Morgan Stanley Research 31

32 Inclusion of China into MSCI to Impact FII Flows in EMs India could see passive outflows of up to US$0.8-1bn/year owing to A-share inclusion impact Source: Bloomberg, Morgan Stanley Execution Services APAC. Data as of Feb 22,

33 VALUATIONS 33

34 Feb-1 2 Aug-12 Feb-1 3 Aug-13 Feb-1 4 Aug-14 Feb-1 5 Aug-15 Feb-1 6 Aug-16 Feb-1 7 Aug-17 Feb-1 8 Aug-18 Feb-1 9 Midcap Valuations Now At Discount to Large Caps 12 Month Forward PE (x) NIFTY Midcap 100 Nifty Source: Axis Capital, As on 28th Feb

35 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 Small-Caps Valuations vs Nifty Has Corrected Back To 2014 & 2016 Lows % Smallcaps Relative Valuations vs Nifty 110% Nifty Smallcap 12 month forward PE relative to Nifty 12 month forward PE 100% 90% Average 80% 70% 60% Smallcap relative valuation v/s Nifty - Back to 2014 & 2016 zone which is a strong support zone 50% Source: Goldman Sachs 35

36 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Feb Sensex Above Fair Value Plus Range 12-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 36

37 Indian Markets Higher Than Most Peers On Valuation P/E Multiple CY18/FY19 of Indices India (Sensex) 22.7 US (Nasdaq) 21.6 Malaysia (KLCI - FTSE) 16.6 US (Dow Jones) Japan (Nikkei 225) Thailand (SET) Singapore (Straits) UK (FTSE 100) Brazil (IBOV) HK (HSI) 11.0 Korea (Kospi) China (HSCEI) (x) Source: Axis Capital, Bloomberg * For India & Japan Fiscal year is FY19 while others it is CY18 37

38 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 Dec- 18 Jan-19 Feb-19 Sensex Above 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 38

39 Domestic Flows Into Equities Slows Down 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 February 27, MF data is till February 27 and DII data 39 is till February 28. Source: Bloomberg, Kotak Institutional Equities

40 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 40

41 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 41

42 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 Source: Internal 42

43 Debt Market Outlook March

44 1-Feb-19 2-Feb-19 3-Feb-19 4-Feb-19 5-Feb-19 6-Feb-19 7-Feb-19 8-Feb-19 9-Feb Feb Feb Feb Feb Feb Feb Feb Feb Feb Feb Feb Feb Feb Feb Feb Feb Feb Feb Feb Year Gilt - Feb 2019 % MPC cut repo rate by 25bps and changed the stance to neutral 10 Year Gilt Pulwama Attack Rise in Geopolitical Tensions India strikes back at Pakistan Auction of State Govt Securities Escalation of geopolitical tensions Crude Soars RBI releases minutes of MPC meeting 7.25 ource: Bloomberg, 44

45 Yield Curve 8 % As foretold in the last call, the curve has steepened decisively since the RBI is buying assets close to 5 year maturity while fiscal concerns are not letting long end of the curve down. We believe this is likely to remain this way and may not steepen more but shape is unlikely to change in near future INR India Sovereign Curve 01/03/19 YTM INR India Sovereign Curve 31/01/19 YTM 3M 6M 1Y 2Y 3Y 4Y 5Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 15Y 16Y 21Y 25Y 30Y 40Y M 6M 1Y 2Y 3Y 4Y 5Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 15Y 16Y 21Y 25Y 30Y 40Y Source: Bloomberg. As on 1st March 2019 YTM M-O-M Change 45

46 Corporate Bond Spreads Remain At Elevated Levels AAA GSec (5 Yr) Source: Bloomberg, IIFL Research 46

47 Positive Real Interest Rates to Stimulate Financial Savings 6 % Feb-19 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 47 Note: Monthly 10 year Gilt Yield taken as average of their respective month. Feb-19 CPI is assumed to be same as Jan-19 and Real Interest rate is calculated. Source: Bloomberg

48 FACTORS IMPACTING THE MARKETS 48

49 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 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 CPI Inflation: Inflation remains benign & CPI remains below RBI s 4% target 12.0% 10.0% CPI Core CPI 8.0% 6.0% 5.40% 4.0% 2.0% 0.0% 2.05% The CPI inflation hits to a 19-month low, eases to 2.05% in January 2019 from 2.19% in December 2018 The core CPI inflation rate for January 2019 is at 5.4% vs 5.7% which was in December 2018 CPI food inflation stood at -2.17% in January compared to -2.51% in December The urban inflation remained unchanged at 2.91 per cent for January 2019 The rural inflation shed to 1.29 per cent in January 2018 from 1.50 per cent in December 2018 Source: MOSPI, ICRA Source: RBI, ET Now 49

50 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 Source: Bloomberg; Data as on 28 th Feb 2019; Feb data till 22 nd Feb

51 Commercial Credit By Banks Remains Elevated Lakh Crore 96 % Commercial Credit by Banks is ~Rs lakh Crore (LHS) Current Credit/ Deposit Ratio is ~77.79% (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 Source: Bloomberg, Data till 1 st Feb

52 Tightening Liquidity Total Liquidity in INR bn 1, Liquidity (500.00) (1,000.00) -832 (1,500.00) (2,000.00) Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 The RBI is committed towards maintaining the liquidity around the neutral zone. RBI has been coming up with OMO purchases of bonds and term repo to take care of durable and transient liquidity issues. RBI set to inject durable liquidity worth Rs 250bn OMO during first fortnight of Mar 19. Source: RBI, As on 28th Feb

53 YIELD & ITS METRICS 53

54 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 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Dec-18 Feb Year Bond Yield Spread Over Repo % 2.00 Spread Between 10 Year And Repo Source: Bloomberg,, As on 28th Feb

55 Inflation Adjusted Yields In India Is Attractive % 9.5 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 7.5 India-US Gilt Spread India-US CPI Spread Feb-19 Dec-18 Oct-18 Aug-18 Jun-18 Apr-18 Feb-18 Dec-17 Oct-17 Aug-17 Jun-17 Apr-17 Feb-17 Dec-16 Oct-16 Aug-16 Jun-16 Apr-16 Feb-16 Dec-15 Oct-15 Aug-15 Jun-15 Apr-15 Feb-15 Dec-14 Oct-14 Aug-14 Jun-14 Apr-14 Feb-14 Dec-13 Oct-13 Aug-13 Jun-13 Apr-13 Feb-13 Dec-12 Oct Note: 10 year Gilt Yield taken as average of their respective month. Data as of Feb 2019 (Feb 2019 CPI is assumed to be same as Jan Source: Bloomberg

56 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-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 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-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Global Bond Yields UK 10 Year Gilt 1.30% US 10 Year Gilt 2.72% Japan 10 Year Gilt -0.02% Germany 10 Year Gilt 0.18% Source: Bloomberg, As of 28th Feb

57 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 57

58 Debt Outlook We expect that RBI will ensure sufficient liquidity such that overnight rate hovers around the repo rate. RBI may continue to use OMO or may opt for CRR to infuse liquidity in to the system Further rate cuts are possible as early as April. The RBI has already acknowledged that inflation is not a concern. And we have a governor whose take is that central bank should work towards bringing back growth. The Fed has also indicated that a pause in rates is round the corner and has official and 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 The credit spreads have widened and we believe it has the potential to offer an attractive risk-reward tradeoff particularly in the short end For now, concerns about India s planned record debt sale, uncertainty about upcoming elections, higher oil prices and cross border tensions will put pressure on bonds. Yields may climb as high as % before falling as some of these worries start to fade. (unless RBI announces OMO in 7.17% 2028 erstwhile10 yr benchmark which will lead to short squeeze ) Upto 5 year Gilt and AAA rated bonds are poised to be the best beneficiaries of the present environment as the bulk of the central bank s purchases are in the shorter-end of the yield curve. Going forward, sharp fall in crude and the upcoming election result may be a provide an opportunity to begin/increase allocation in duration funds 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 long pause (with a strong possibility of one more cut) and neutral liquidity, funds with modified duration between shall be relatively better investment opportunity. 58

59 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 59

60 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 60

61 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 61

62 Story in Accruals The Fund Manager focuses on generating income from credit allocation rather than duration calls. Accruals funds generate performance by purchasing high yielding assets with relatively short duration. This provides investor with a relatively high yield with low NAV volatility 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. 62

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71 ANNEXURES 71

72 Performance of Sensex & Nifty Index Source: Source: Bloomberg, Bloomberg, Kotak Institutional Kotak Institutional Equities Equites 72

73 Key Events February 2019 RBI cuts rate by 25 bps to 6.25% from 6.50% and stance changed to neutral from calibrated tightening. Dec IIP stayed subdued at 2.4% in Dec, despite improving significantly from Dec lows of 0.5% on account of contraction in mining segment and poor showing by manufacturing sector India's GDP has slipped to 6.6 % in the third quarter of FY19. The economy had grown 7.1% in the second quarter and 8.2% in the first quarter, logging 7.6% for the first half. Jan trade deficit widened to $14.7bn from the 10-month low of US$13.1bn in Dec on the back of fall in exports led by fall in petro products. Brent prices jumped up 4.1% in Dec leading to an increase in oil imports from $11.2bn from $10.7bn The GST collections in January rose to Rs 1.02 lakh crore, the second highest monthly mop-up after April. The government has approved recapitalisation of Rs 48,239 crore in 12 public sector bank. Prime Minister Narendra Modi launched his government s ambitious Rs 75,000-crore scheme for farmers, the Pradhan Mantri Kisan Samman Nidhi (PM-KISAN), by transferring the first instalment of Rs 2,000 each to over one crore farmers. On the global front, Trump-Kim summit ended prematurely in Hanoi with the 2 leaders failing to strike a deal. FIIs reversed Jan s selling trend to record inflows of ~$2.25bn, taking the YTD total to ~$2.1bn. DIIs however turned sellers for the first time since Mar 2017 with ouflows of ~$86mn with the YTD total standing at inflows of ~$220mn. Deal activity picked up in Feb after weakness over last few months with 8 deals totaling ~$2bn. Indian equities (-0.4%) closed the month on a tense note as geo-pol pressures mounted following the Feb 14 militant attack on CRPF in J&K with both India and Pakistan engaging in aerial action 73

74 Mar-93 Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-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 FY17 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 FY18 FY19E FY20E FY21E ,024 1,109 1,179 1,334 1,348 1,330 1,345 1,377 1,570 2,020 2,384 Sensex EPS Earnings Growth Visibility Is Key FY93-FY17: 12% CAGR FY03-08: 25% CAGR FY08-18: 5.1% CAGR FY18-20E: 21.1% CAGR ent request FY93-96: 45% CAGR FY96-03: 1% CAGR Sensex P/E (x) Sensex CAGR 14% Sensex CAGR -1% Sensex CAGR % Average of 15.5x Sensex CAGR 7% FY93-97 FY98-03 FY05-09 FY10-17 FY18-20e Source : Internal Calculation, Past performance is not a reliable indicator of expected future performance 74

75 Disclaimers & Disclosures 75

76 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. 76

77 Product Labeling * Investors should consult their financial advisers if in doubt about whether the product is suitable for them 77

78 Product Labeling * Investors should consult their financial advisers if in doubt about whether the product is suitable for them 78

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