Market Outlook December 2017

Transcription

1 Market Outlook December

2 2 Equity Markets

3 Key Events Sovereign Rating Upgrade: India s improving growth outlook and structural reforms agenda got a boost with Moody s upgrading India s local and foreign currency rating to Baa2, a notch above Baa3 earlier. Moody s cited reforms such as GST, measures to address the banking system NPL, Aadhaar-enabled direct benefit transfer etc. The Q2 GDP print came in at 6.3% reversing the decelerating trend. The recovery was led by manufacturing which saw a smart rebound to 7%. In terms of expenditure, both private and govt consumption growth remained weak but investments i.e: GFCF (Gross fixed Capital Formation) growth improved to 4.7%. Net exports were up marginally as well India s rank improving by 30 places in World Bank s Ease of Doing Business Survey supporting the view of transitions being underway in the economy The Central Cabinet approved an ordinance approving an amendment to the Insolvency and Bankruptcy Code to prevent wilful defaulters from bidding for stressed assets. FIIs finally turned into large net buyers once again with $2.8bn of buying in November; taking the YTD net buying to $8.6bn. DIIs remained buyers to the tune of $1.4bn in November; which took the DII YTD tally to a staggering ~$12.8bn. Mutual Funds once again drove the inflows with $1.6bn being poured-in; while Insurers were small net sellers of $220mn. Capital market activity swelled in Nov-17, with some sizeable IPOs like HDFC Life and block trades like that in Bharti Airtel. 3

4 Sensex s And Nifty s Performance During Nov Month (%) 4 Source: Bloomberg, Kotak Institutional Equities

5 Moody's Upgrade First change to India's ratings in more than a decade Movements in India s ratings by three major Rating Agencies Portfolio flows improved in after ratings upgrade 5 Source: Bloomberg, Credit Suisse estimates, MOSL

6 Moody's Upgrade stalls the unwarranted self-reinforcing bond yield spike that was in progress Term premium, or gap between repo and 10yr yield was high High FPI Bond holdings acted as an overhang for INR 6 Source: Bloomberg, NSDL Credit Suisse estimates

7 7 Big GST Relief: Tax cut on 178 items, only 50 still in 28% slab

8 GST Collections Worries Lower IGST cause for GST collections down 10% MoM CGST shortfall staying even post IGST settlements IGST collections vs settlement against CGST and SGST 8 Source: CLSA, Ministry of Finance, * IGST number for Oct is derived as shown in Fig 1

9 Calculation Of Monthly CGST Breakeven Rate Vs Current Collections 9 Source: CLSA, Ministry of Finance, Budget Documents

10 GST Tax Rate Cuts Raise Questions On The Fiscal Central Government Fiscal Deficit as % of GDP 10 Source: CLSA, Ministry of Finance

11 Economy Rebounds: GDP growth rate rises to 6.3% in September quarter 11 Source: CGA, Ministry of Statistics & Programme Implementation, Ministry of Commerce & Industry

12 Growth Normalisation Underway Source: CLSA,CMIE, SEBI, RBI, total credit includes bank credit, corporate bonds and commercial paper

13 INR Should Remain Stable Against US$ 13 Source: CLSA, Bloomberg

14 P/E Multiples Have Risen Globally 14 Source: Bloomberg, Credit Suisse estimates

15 15 India's P/E No major expansion in PE Premium 2013 onwards

16 High PE, But On Low Profitability Base Source: Bloomberg, CMIE, ACE Equity, MOSPI, CLSA

17 Domestic Investor Flow: A Key Support DMFs Continue to Buy for 16th Consecutive Month MF Flows in Markets: Inflows Persists (US$ mn) Insurance Flows: Turn Sellers (US$ mn) Flows in MFs (October): Third-highest Monthly Equity Inflows Domestic Mutual Funds AUM (October): Equity AUM Up MoM 17 Source: Morgan Stanley Research, CDSL, BSE, SEBI,AMFI

18 Rising populism: Enter election mode 18 Source: CACP, Ministry of Agriculture, Election Commission of India, CLSA

19 19 Asset Sales to Reset Corporate Governance Culture?

20 20 Market Performance

21 Strong Performance By Majority Sectors Over The Last 1 Year Exporters lagging in returns BSE Sectoral Indices (20) 6.3 (%) (3.8) 0.2 Realty Bankex Oil & Gas Capital Goods (5.6) (0.8) (2.3) (1.2) (2.0) (11.1) Metals FMCG Auto PSU Power Tech IT Services Healthcare 1m return % 1 yr return % 21 *As on 30 Nov 2017, Source: Axis Capital, Bloomberg

22 In percent Performance Across Market Cap - Strong Performance Down the Capitalisation Curve (10) (1.1) Nifty Nifty Midcap S&P BSE Smallcap 6.6 1m returns 1y returns 3 yr CAGR 5 yr CAGR 10 yr CAGR 22 *As on 30 Nov 2017, Source: Bloomberg

23 Most Global Markets Had Strong Showing In The Last Year HK (HSI) US (Dow Jones) Korea (Kospi) India (Nifty) Japan (Nikkei 225) Germany (DAX) Swiss (SMI) Singapore (Straits) France (CACS 40) (1.9) (1.1) (1.6) (2.4) EURO (Euro Stoxx 50) China (HSCEI) Brazil (IBOV) Indonesia (JCI) Taiwan (TSWE) UK (FTSE 100) Malaysia (KLCI - FTSE) Russia (MICEX) (2.8) (0.3) (3.1) (0.9) (2.2) (2.2) (1.7) (0.2) M 1Yr (10) * As on 30 Nov 2017, Source: Bloomberg. Performance data in local currency

24 24 Valuations

25 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 25 *As on 30 Nov 2017

26 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 26

27 Indian Valuation In A Global Perspective P/E Multiple CY17/FY18 of Indices India (Sensex) 22.7 US (Nasdaq) 21.7 US (Dow Jones) Japan (Nikkei 225) Thailand (SET) Malaysia (KLCI - FTSE) Singapore (Straits) UK (FTSE 100) HK (HSI) Brazil (IBOV) Korea (Kospi) 9.2 (x) Source: Internal Estimates, Bloomberg * For India & Japan Fiscal year is FY18 while others it is CY17

28 Net Cash Market Purchase Category (Rs cr) Nov - Month CY17 CY-16 CY-15 DII 9,243 82,691 37,125 66,816 MF 10, ,845 48,005 71,562 Clients 424 (18,459) (336) (9,795) NRI (74) (453) (714) (317) Proprietary 407 2, ,191 Insurance, Banks & Insurance (1,425) (26,154) (10,880) (4,746) FII 19,784 56,291 18,783 18,356 Strong purchase by FII s and Mutual Funds in November 28 *Source : NSE, BSE, SEBI, Internal calculation Data updated till Nov 2017

29 Domestic Flows May Sustain Into Equity Funds In FY 18 Low FD Return Uncertain real estate environment & Lower time limit for LTCG Mature investor base understanding the benefits of compounding of equities as asset class SIP as a tool to counter volatility Flows to equities 29

30 Hope In Earnings Recovery For FY-18/19 1,670 1,351 1,332 1,350 1,461 FY15 FY16 FY17 FY18 E FY19 E 30 Source: Internal Calculation

31 Sensex P/E Sensex EPS Markets Consolidating As It Awaits Economy To Take Off FY93-97 FY98-03 FY05-09 FY10-17 FY18-19e 25 Past performance is not a reliable indicator of expected future performance

32 Key Variables & Their Impact On Equities Key Variables Short - term Economy Corporate Earnings FII Flow Medium - term Remarks GST to impact near-term activity especially informal segment 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 India stands out among global asset classes with prospects of strong long term growth. DII Flow Supply of paper 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 landmark reform implemented, can result in higher tax compliance 32

33 Markets Fairly Valued Few Indicators Like PE Indicate Over-valuation, While Other Composite Indicators Like P/B Or Market Cap To GDP Suggest Valuations Still at fair value range 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-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 FY04 Jun-16 Jul-16 FY05 Aug-16 FY06 Sep-16 FY07 Oct-16 Nov-16 FY08 Dec-16 FY09 Jan-17 Feb-17 FY10 Mar-17 FY11 Apr-17 FY12 May-17 Jun-17 FY13 Jul-17 FY14 Aug-17 FY15 Sep-17 Oct-17 FY16 Nov-17 FY17 FY18E month forward Sensex P/B (x) India s Market Cap to GDP (%) Sensex P/B (x) - LHS Average of 74% for the period month forward Sensex P/E (x) Stretched 20x - 24x Fair Value Plus 17x - 20x Fair 13x - 17x Attractive 10x - 13x Cheap 8x - 10x

34 While Valuations Not Cheap, Patience to be key as we await 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 34

35 Risk 1 Delay in NPL resolution NPL RATIOS YET TO COME DOWN AND RESOLUTION MAY GET DELAYED Bank recap details & roadmap would give further clarity 35 Source: RBI, CLSA

36 Risk 2 Rise in equity issuance impacting market liquidity A POTENTIAL RISE IN EQUITY ISSUANCE MIGHT IMPACT MARKET LIQUIDITY But Low returns in traditional avenues and increasing awareness continues to drive money to capital markets 36 Source: Bloomberg, CLSA

37 Risk 3 Populist measures Government may turn populist While the current government has been disciplined fiscally, as it has focussed incremental spending on capex and/or fiscal deficit reduction, the risk of rising profligacy cannot be ruled out as we head towards the May 19 general elections. One example of this is the rise in farm loan waivers in the past few months, partly driven by low agri product prices and weak monsoons in The government has already readied its armour to take the fight against corruption to the next level with the law on benami property. This law can be used to provisionally attach benami properties and eventually confiscated. The act can help to improve transparency in property ownership but can cause economic disruption if used indiscriminately. A big crackdown under the benami property law may yield political gains as seen with the demonetisation move. though the probability of the same is low 37

38 Risk 4 Continuity Of Reforms? Reforms part 2 38 General Elections Stable government continues 2 nd generation of reforms such as Labour, ease of doing business etc.

39 Risk 5 US Fed Rate Hike & Other Geo Political Risks 39 India has been relatively resilient to US rate hikes & geo political risks in the past Source: Bloomberg, BNP Paribas

40 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 Opportunities Fund 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. 40

41 Market Valuation Strategy For Investments In The Current Scenario 1- Kumbhkaran (Invest & forget) Or 2- Asset Allocation Investor Stance Underweight Neutral Overweight Below Fair Value Lumpsum Lumpsum Leverage Fair Value STP/ Lumpsum SIP Partial Profit Booking Above Fair Value STP Partial Profit Booking Take Profit Home 41

42 DEBT MARKETS 42

43 How Nov 2017 Unfolded Macro Data: The government's fiscal deficit during the first seven months (April-October) of the current fiscal was Rs 5.25 lakh crore, or 96.1% of the budgeted target for the current fiscal year that ends in March 2018 Inflation : Consumer prices in October rose 3.58 % over the same month last year, on the back of rising food and fuel prices. CPI inflation in September was revised to 3.28 % Wholesale inflation picked up in October to a six-month high to 3.59% in October driven by faster rises in prices of food and fuel products. Manufacturing activity improved in November to its highest level since October 2016 on the back of growth in new orders and output. The Nikkei India Manufacturing Purchasing Managers Index recorded a value of 52.6 in November, up from 50.3 in October Eight core sectors grew at a slower pace of 4.7% in October, chiefly due to subdued performance of cement, steel and refinery segments. The country s Index of Industrial Production rose 3.8 % in September, compared with the revised 4.5 % in August (a nine-month high) and 5.7 % in September last year The RBI cancelled a bond sale via open market operation worth Rs 10,000 crore scheduled, citing evolving liquidity conditions 43

44 How Nov 2017 Unfolded Trade Data : India s merchandise exports declined for the first time in 14 months in October as exporters struggled with a liquidity crunch because of delayed refunds under the goods and services tax (GST) regime Exports fell 1.1% in October to $23.1 billion (against $28.6 billion in September,2017) while imports expanded at the slowest pace in 10 months at 7.6% to $37.1 billion (against $37.6 billion in September) India s trade deficit in the month was $14 billion (against $9 billion in September) India s Rating: GST: Global rating agency Moody s upgraded India s sovereign bond rating for the first time in nearly 14 years. It lifted the India s rating to Baa2 from Baa3, changed its rating outlook to stable from positive as risks to its credit profile were broadly balanced Global rating agency Standard and Poor on Friday retained India s sovereign rating at BBB- with a stable outlook The GST Council reduced rates on 210 items of which 180 were in the top 28 per cent bracket. A uniform 5 per cent tax was prescribed for all restaurants, both AC and non-ac 44

45 Disinvestment With the government retaining Rs145bn of inflows received for its Bharat 22 ETF sale done, the disinvestment proceeds for the year have reached a record Rs525bn already. Visible pipeline for divestment includes the c.rs320bn to be received if the ONGC HPCL deal goes through taking the total to c.rs bn. This implies high likelihood of divestments crossing the Rs725bn target. Historically, there tends be a shortfall between divestment target and actual achievement (e.g. Rs462bn achieved in FY17 vs. Rs565bn budget) and as such there is some cushion built here. However, this year the fiscal has been seeing multiple stresses (lower RBI dividend, telecom revenues, fuel duty cuts and likely GST shortfall) which have created a bit of a scare on the same. To that extent, beating the divestment target will be a relief. 45 Source : India Budgetget.in

46 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 Positive Real Interest Rates to Stimulate Financial Savings 6 5 Real Interest Rate (%) 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 may move from physical to financial assets. 46 Note: Monthly 10 year Gilt Yield taken as average of their respective month. Source: Bloomberg

47 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 CPI Inflation: Way below RBI s Target 12% Source: MOSPI 10% 8% CPI Core CPI 6% 4% 2% 0% 4.6% 3.58% The CPI inflation hardened to a seven-month high 3.58% in October 2017 (+4.2% in October 2016) from 3.3% in September 2017 (+4.4% in September 2016; partly reflecting the base effect and on the back of rising food and fuel prices. The core-cpi inflation remained steady at 4.6% in October 2017, in line with the print in September On an MoM basis, the core-cpi sub-index increased by 0.5% in October 2017, similar to the rise in October The core-cpi inflation exceeded the headline CPI inflation for the fourteenth month in a row, although the wedge between the two narrowed mildly in October

48 CPI Inflation To Remain Anchored Below ~ % Considering All Scenarios 48 Source: MOSPI

49 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 Crude Prices Firming up 70 Brent Crude(USD) as on 30 th Nov 2017 Crude Oil prices have inched up to $63.57 from $61.37 in the previous month. Given the geo political and other factors, oil prices have risen however its still not in alarming zone Commodities in general react negatively to strong dollar and therefore the scope for a sharp rally is very limited 49 Source:Bloomberg

50 Oil Prices Expected To Be Range Bound 50 Source: WSJ Market Data Group(oil price), the companies (forecasts)

51 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 in crores Credit Growth Moderates This Month Credit Growth (Weekly Data) Current Credit/ Deposit Ratio is ~73% (RHS) Commercial Credit by Banks = Rs lakh Crore (LHS) In Percent 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. 51 Source: Bloomberg, Data as on 30 th Nov 2017

52 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 USD Billion India Foreign Exchange Reserves Stability Is Key 410 India Forex Reserves(USD) $ Billion Data as on 1 st Dec 2017 India continues to attract capital flow resulting in healthy foreign exchange reserves. Indian foreign exchange reserves have grown by $ billion in CY17 till date, indicating rising foreign investor interest, and stronger rupee. 52 Source: Bloomberg

53 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 The Liquidity to Remain Positive The Game Changer Total Liquidity From Liquidity Positive to close to neutral levels Total Liquidity in INR bn Total liquidity has come down to Rs. 1.8 lakh crores on account of tax payments. We expect it to remain positive in the medium term. This is over and above 1 lac cr parked in MSS maturing March-2018; and depending on government s tax collection and its spending; it keeps oscillating between 20-70,000 cr 53 Source: Internal Calculations, Data as of 30 th Nov 2017

54 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 Active Liquidity Management 7.5 Repo Rate in the last 1 year As of 30 th Nov Repo Rate Overnight Rate (MIBOR %) 5 Amount in Rs. billion. Date Repo Reverse Repo MSF SLF Total Systemic Liquidity Government Balances 30 th Nov RBI has managed to keep overnight rate close to the repo rate. 54 Source:Bloomberg

55 Yield Curve (M-o-M Analysis) 8 Source: Bloomberg Front End I180 INR India Sovereign Curve Last YTM I180 INR India Sovereign Curve 1/11/17 YTM 3M 6M 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 17Y YTM (M-o-M Change) Belly and Long M 6M 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 17Y 28Y 30Y 35Y 40Y The key worry for the market has been the fiscal slippage and OMO bond supply which has lead to bear flattening of the curve With cancelation of OMO and rating upgrade, there was brief rally. However the fiscal worry is not allowing the market to retrace The yield in the 5-10 yr space has gone up more than the 14yr maturity. The 10 year benchmark was the worse performer, as the market is awaiting for the new benchmark to come. 55

56 India-US 10 Year Gilt- Narrowing Spreads Have More Legs To Run The spreads will continue to compress in medium term due to narrowing inflation differentials and rating upgrade 56

57 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 India-US 10 Year & CPI Spreads India-US CPI Spread India-US Gilt Spread Narrowing CPI spread makes Indian bonds attractive. Therefore Indian bonds are increasingly attractive and will attract FII flows 57 Note: 10 year Gilt Yield taken as average of their respective month. Data as of Oct 2017 since CPI data is till Oct. Source: Bloomberg

58 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 Global Bond Yields Remain Volatile 3 10 Years Gilt of Select Countries US 10 Year UK 10 Year Germany 10 Year 0 Japan 10 Year -0.5 Global bonds to remain range bound Fed is likely to hike rate by 25bp but will remain dovish and the 10yr UST is likely to remain around 2.40% US has passed the tax plan which is likely to strengthen the dollar and therefore commodities particularly oil are likely to remain under control 58 Data as of 30 th Nov Source: Bloomberg

59 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 59 denotes fall in interest rates

60 Debt Outlook The RBI has made the future course of interest rates dependent on inflation trajectory and GDP growth The government is running fiscal, with no room for error. Therefore market will remain on the tenterhooks. This will keep the bond yields range bound till the clarity emerges either way CPI data was around market expectation of 3.50% while the Core was at 4.6%. However, we expect the CPI to be around 4.5% by March This is close to the RBI target While we agree that the CPI is rising; but it is not at alarming level. The market is running way ahead, despite the fact that the real rates remain high vis-à-vis the 10 yr bond yields (even after assuming 4.5% full year inflation) The GDP data was neutral however it will be extremely difficult to achieve RBI target of 6.7% GDP for the full year without any fiscal or monetary support. The RBI is likely to acknowledge this in the MPC The 10 yr benchmark is on the way out. Therefore we need to watch 6.68 G Sec 2031(security) which will trade in the band of 7%-7.15% in the near term In nut shell all eyes on the RBI MPC and fiscal clarity we believe fiscal will be maintained at 3.2% however clarity will emerge by end of December we expect RBI to be neutral and market has priced in potential negatives The corporate bond month yields are expected to remain stable and the curve will remain steep. 60

61 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 61

62 Why Accrual Funds? India is one of the fastest growing economy in the world and this will translate into revenue and profitability for India Inc. Commodity & oil price decline has reduced input cost and increased margin support Kotak AMC has strong fundamental processes in place to manage and mitigate credit risk Kotak AMC does not invest below A category rating. Our robust monitoring ensures that we do not take exposure even in AA & A ratings from sensitive sectors 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. 62

63 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. 63

64 Need to Watch Out for Opportunities in Hybrid Space 64

65 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. 65

66 Tactical Asset Allocation Through MIP Kotak Monthly Income Plan can be used as a de-risking strategy o The scheme invests upto 20% in equity & equity related instruments & rest in debt instruments o Thus, an investor could consider Kotak MIP as a starting point for a moderate exposure to equity and use it as de-risking strategy by shifting into funds with higher equity allocations as valuations become attractive o The same has been explained below with an illustration Whom is the Fund Ideal for? Investors seeking regular income over short term Investors seeking income through fixed income securities and marginal gains from equities Investors with 1-3 year investment horizon Those who are unwilling to assume the full equity risk Those who have low appetite for credit risk 66

67 Kotak MIP Performance* Consistency In Growth Kotak Monthly Income Plan Performance (%) 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 Oct 2017 Past performance may or may not sustain in the future 67

68 Kotak Balance Performance Growth and Stability Together Kotak Balance Fund Performance (%) 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 Oct 2017 * Less than 1 year Absolute returns, Greater than or Equal to 1 year Compound Annualized returns 68

69 Have You Noticed The Regular Dividends In Kotak Balance? 69 Record Date Rupees Per Unit Dividend Yield 27-Nov % 25-Oct % 28-Sept % 28-Aug % 25-July % 27-June % 25-May % 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 % * 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

70 Performance (%) as on 31 st October, 2017 Scheme Inception date is 25/11/1999. Mr. Abhishek Bisen has been managing the fund since 15/04/2008. Mr. Pankaj Tibrewal has been managing the fund since 25/08/ 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. `

71 Other Funds Managed by Mr. Pankaj Tiberwal and Abhishek Bisen Mr. Pankaj Tibrewal manages 3 funds of Kotak Mutual fund. Kotak Emerging Equity - Growth, *Name of the Benchmark - S&P BSE MidSmallCap, Scheme Inception date is 30/03/2007. Mr. Pankaj Tibrewal has been managing the fund since 27/05/2010. Kotak Midcap - Growth, *Name of the Benchmark - Nifty Free Float Midcap 100, Scheme Inception date is 24/02/2005. Mr. Pankaj Tibrewal has been managing the fund since 21/01/2010. Different plans have different expense structure. The performance details provided herein are of regular plan ^Past performance may or may not be sustained in future.*all payouts during the period have been reinvested in the units of the scheme at the then prevailing NAV. Returns > = 1 year: CAGR (Compounded Annualised Growth Rate). N.A stands for data not available. Source: ICRA MFI Explorer. Top 3 Funds Managed by Mr. Abhishek Bisen Bottom 3 Funds Managed by Mr. Abhishek Bisen 71 Performance (%) as on 31 st October, 2017 Source: ICRA

72 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 72

73 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: 73

74 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 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 Kotak Low Duration Fund (Formerly known as PineBridge India Short Term Fund) 74 Regular Income over short term Income by focusing on low duration securities * Investors should consult their financial advisers if in doubt about whether the product is suitable for them

75 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 75 * Investors should consult their financial advisers if in doubt about whether the product is suitable for them

76 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 76