Equity & Debt Strategy

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Mervyn Fields
6 years ago
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1 Equity & Debt Strategy Mid Jan Feb 218

2 Equity Market Update & Equity MF Strategy

3 Equity market ended 2 on a high note, Nifty 5 up by 28% in CY Nifty up 3% in Dec, MidCap Index up 6.2% FII flows reversed while MF investments slowed down in Dec 1,6 1,5 1,4 1,3 1,2 1,1 1, 9,9 22, 21,5 21, 2,5 2, 19,5 19, 18,5 9,8 18, 6-Dec- 12-Dec- 18-Dec- 24-Dec- 3-Dec- 5-Jan-18 NIFTY Index BJP won Gujarat Election Strong US GDP leads global rally Nsemcap index 25, cr 2, 15, 1, 5, -5, -1, -15, 21,45 19,188 13,46 12,9 1,664 6,182 1,918 1,586 Sep Oct Nov Dec -9-2,841-6,663-1,764 FII DII excl MF MF December saw higher contribution through Balanced Funds In 2, sectors which had been lagging like Realty, Energy and Infra did well cr 25, 2, 15, 1, 5, % NSE sector indices Sep Oct Nov Dec Equity Balanced -2 Realty Bank Energy Infra Auto FMCG IT Pharma -6.3 Source: Bloomberg, Kotak Institutional Equities (KIE) As of 5 th Jan 218 Confidential 3

4 Emerging Markets have benefited from rising global demand and weak USD World Economy has been expanding in 2 Other than Equities, even Gold was up 13% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov US Comp PMI Europe Comp PMI China Comp PMI 58 Above 5 - Expanding Dec $/oz 1,4 1,35 1,3 1,25 1,2 1,15 1,1 1,5 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan US Dollar has remained under pressure despite decent US data Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 92 CY Return% Weak dollar has helped fuel Emerging marker rally globally Hong Kong India US Dow Phillipines Korea Japan Source: Bloomberg Confidential 4

5 Equity Markets Trends Based on current run rate, Government is is expected to have to have 1% of 1% of GDP shortfall in in indirect tax tax collection Metal companies are are likely likely to restart to restart private private capex, capex, cement cement and Power and power might might follow follow 6 Rs. cr Rs. bn CGST Excise - Petrol Custom Duties Total Indirect Tax FY 18BE Shortfall FY16 CL 18CL 19CL 2CL 6 5 Auto Sales have been rising at high pace reflecting strong consumer sentiment and demand 5.4 Intense pricing pressure in USA due to to customer consolidation is is leading to consolidation in in US US generic space space (eg. (eg. Teva) Teva) 16. Drug Price YoY% 12. YoY% Jul- Aug- Sep- Oct- Nov- Commercial Vehicle Sale Passenger Vehicle Sales Q3'11 Q2'12 Q1'13 Q4'13 Q3'14 Q2'15 Q1'16 Q4'16 Q3' Branded Generic Source: KIE, CLSA Confidential 5

6 L&T Dilip Buidcon NCC IRB Ashoka buildcon KNR Construc tions Hindusta n Construc tions Opportunity in Infrastructure Government had planned higher spend for Affordable Housing and has spent a large proportion already After L&T, 2 nd highest EPC player has a market cap of only 14k cr Rs bn , 18, 15, 12, 9, 6, 3, 187,493 13,823 8,612 7,455 4,673 4,444 4,381 FY15 FY16 FYRE FY18BE FY18 till Oct Government s Power for All initiative will pay out $25bn in capex with $5bn opportunity in Transmission by FY22 Government has announced 6.92 lk crore spend on roads under Bharatmala project by 222 USD Bn Renewables Generation Sub Transmission and Distribution 5 Transmission 5 Energy Efficient Rs cr Existing NH Projects By 219 Total 6 Source: Blooomberg, CLSA, Ministry of Power Confidential 6

7 Earnings and Valuation Liquidity and Hope of strong Earnings growth has led to slightly expensive valuations Mid Cap Index consensus earnings expectation has seen recent downgrade leading to widening premium over large cap MSCI India P/E Premium over MSCI EM is above long term average of 35-4% despite broad rally in EMs Bloomberg Estimate % Premium Large Cap Current 12M Forward PE Mid Cap 5 Year Average 12M Forward PE Mar 2 Apr 2 May 2 Jun 2 Jul 2 Aug 2 Sep 2 Oct 2 Nov 2 Dec % Jan % 44% 4% 36% 32% 28% 24% 2% 16% 12% 8% 4% % Bloomberg Consensus FY18 Nifty earnings cut have slowed down recently 48 Apr- May- Jun- Jul- Aug- Sep- Oct- Nov Infra looks attractive in terms of valuation, Consumers most expensive Auto Banking Consumers Infra Pharma Tech Nifty 5 PE 219E Average Earnings Growth FY19E and FY2E Source: Bloomberg Actual/Expected >1.5 Better, Actual/Expected <.95 - Worse Confidential 7

8 Key Triggers Resolution of NPA & Earnings Positive Triggers Global Demand: GDP growth strong in US and Europe, exports oriented sectors can benefit Commodity Prices: Sustained high prices is expected to lead to high earnings growth in Steel/Oil sector and thus indirectly benefit Banks on NPA issues Resolution of NPA: Effective addressal and high recovery rates of NCLT cases will be positive for Banks Weaker Rupee: Benefit IT and Pharma Lower Corporate Tax: Talks of lowering tax rate in next Budget Government Capex: Government might increase spending irrespective of fiscal concerns ahead of General Election Risks Outflow from EMs: US tax reforms could again trigger capital flight back from EM to US Earnings: Consensus expected earnings growth for domestic equities is high at around 15-2%, any downgrade would make the valuations more expensive Geo-Political Risk: Uncertainty in Middle East, North Korea Monetary Policy: Faster than expected monetary tightening in Europe and US Economy Slowdown: Economy has been suffering for last 1 year and none of the economic indicators have shown signs of recovery yet Changes in Budget: Government could introduce LTCG tax on equity due to revenue shortfall post lower than expected GST collection Confidential 8

9 India Equities: Valuations & Strategy Maintain Neutral Stance For the month of December, Indian Equity markets continued its rally to make new life-time highs on the back of BJP s win in key states of Gujarat and Himachal Pradesh. With this gain, equity markets have locked in a gain of ~28% for calendar year 2. Inflows by mutual funds also continued post a small dip seen last month. At current levels of approx. 1,637 (1 th January, 218), Nifty is trading at a 1 year forward PE of 19X. In the current scenario, we continue to maintain a Neutral stance. Mutual Funds: As domestic liquidity continues to drive markets, we advise new investments in Mutual Funds to be deployed 25% in lumpsum and subsequent in tranches via SIPs/STPs. Recommended allocation within equity mutual funds is as under: 1% Large Cap allocation (Prefer Large Caps due to relatively Favorable Valuations) This allocation to Large caps can also be taken through Opportunistic Funds which currently have a bias towards Large cap For investors who want equity exposure but have low appetite for volatility, they can take equity exposure through Balanced Funds. Balanced funds have around 25% to 3% of their portfolio into Debt instruments which provides cushion to the portfolio return during market volatility. Source: EPS Estimates by KIE Confidential 9

10 Debt Market Update & Debt MF Strategy

Debt Market: Key Variables Indicators Policy Action For now, the rate cut cycle seems over Tone of the policy seemed

Liquidity surplus has reduced significantly Expected to drift towards neutrality Inflation CPI inched up to 4.

7% for 2HFY18 We expect CPI to remain firm at around 5% by Mar 218 INR INR to remain stable relative to remaining EM

5 over 1 Year Broad range of 63-66 to hold G-Sec Supply Additional borrowing of INR 5, cr announced Higher borrowing could

11 Debt Market: Key Variables Indicators Policy Action For now, the rate cut cycle seems over Tone of the policy seemed neutral but with caution on inflation 1 Year G-Sec Benchmark Yield Near term upward pressure, can settle lower Liquidity Liquidity surplus has reduced significantly Expected to drift towards neutrality Inflation CPI inched up to 4.88% in Nov 2, higher than RBI forecast RBI increased CPI forecast by 1 bps to 4.3%-4.7% for 2HFY18 We expect CPI to remain firm at around 5% by Mar 218 INR INR to remain stable relative to remaining EM universe Expect mild depreciation towards 65.5 over 1 Year Broad range of to hold G-Sec Supply Additional borrowing of INR 5, cr announced Higher borrowing could lead to slippage in fiscal deficit to the tune of upto 5 bps SDL supply for Jan - Mar quarter at INR 1.3 Lac Crs Key Risks Global monetary tightening Strengthening Crude Prices Impact of GST revenues and spending on Fiscal Deficit Higher inflation print Confidential 11

12 Yields have spiked over concerns on Fiscal Deficit, rising core inflation and falling Liquidity Amount in Rs. Bn % Yield % Yield Spread (bps) Spread (bps) Liquidity back to neutral level near quarter end 2, 1, 245 1/12 6/12 11/12 16/12 21/12 26/12 31/12 G Sec Spread over Repo near highest in last 1 Year over fiscal and inflation concerns , Spread 1 Year G Sec Repo Rate Core inflation is inching up G Sec yields rose across the curve 6.% 5.% 4.% 3.% 2.% 1.% 4.88% 4.59% % Jan Feb Mar Apr CPI May Jun Jul Aug Sep Oct Nov Core Inflation 5.6 1Y 2Y 3Y 4Y 5Y 8Y 1Y Change Current G-Sec Yield 1M earlier G-Sec Yield Note: As of 4 th Jan 218, Source Bloomberg Confidential 12

13 Indian Bonds are still attractive to Foreign Investors however limits are almost utilized USD Million FIIs buying has slowed down despite Moody s upgrade since Utilization level is near 1%, CYTD $23bn inflow from FIIs 4,5 4, 3,5 3, 2,5 2, 1,5 1, 5-5 3,13 2,84 4,57 3,112 2, , Apr May Jun Jul Aug Sep Oct Nov Dec Crude prices have increased over events in Iran May Jun Jul Aug Sep Oct Nov Dec Jan Indian currency has gained on global Dollar weakness FII Debt Utilization in GSecs and Corporate near 1% % 8.% 95.% 94.9% % 4.% 2.% 11.35% 63. Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 18.% Dec 16 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Government Corporate SDL Note: As of 4 th Jan 218, Source Bloomberg Confidential 13

14 Debt Market Trends 8.8% 8.6% 8.4% 8.2% 8.% Perpetual Bond yields have become attractive 8.75% 8.7% 8.13% 8.12% CD and CP yields have spiked due to falling Liquidity leading to underperformance in Ultra Short Term Funds 1 Year CD 1 Year CP 7.8% Aug Dec 6.4 Jun Jul Aug Sep Oct Nov Dec SBI Perp HDFC Perp AAA Corporate Curve spreads over GSec have reduced significantly in last few months In 2, Credit Funds were the best performers, Gilt Funds were the worst performers with just 2% return Spread over 1 Year GSec Jun Jul Aug Sep Oct Nov Dec 3 Year AAA 5 Year AAA SDL Credit RHS % Short Term Income Funds Credit Funds Dynamic Funds Gilt Funds Note: As of 31st Dec 2, Source Bloomberg, MFI Confidential 14

15 India Fixed Income: Strategy Substantial part of the portfolio should be deployed through a mix of high rated and credit accrual strategies. Exit from duration funds only for investors who have completed 3 years and can deploy with another 3 years view. Investment Focus: Passive Accrual-Oriented Debt funds High quality portfolios (~1% AAA / Sovereign) Portfolio is run on a passive accrual basis i.e buying a bond and holding it till maturity thereby earning from the accruing of interest Higher predictability of return, lower volatility & lower interest rate risk High Yield Credit-Oriented Funds Low volatility on account of maturity of portfolio between 3 5 years, attractive and stable accrual yields Experienced teams to carefully evaluate and tightly monitor high yielding debt instruments Short Term Bond Funds Actively managed to run a low avg. maturity of 2-3 years, attractive risk-reward Lower volatility and interest rate risk than Dynamic Bond Funds, better suited from a risk-adjusted basis in volatile markets Continue to recommend ultra short term relative to liquid funds (up to 3 Months) For short term parking of funds for a minimum of 6 months, Arbitrage funds preferred over ultra short term funds on back of better tax adjusted returns Source : AMCs, other Financial websites Confidential 15

16 Disclaimer The aforesaid is for information purposes only and should not be construed to be investment advice under SEBI (Investment Advisory) Regulations. In the preparation of the material contained in this document, Kotak Mahindra Bank has used information that is publicly available, including information developed inhouse. Some of the material used in the document may have been obtained from members/persons other than the Kotak Mahindra Bank and/or its affiliates and which may have been made available to Kotak Mahindra Bank and/or its affiliates. Information gathered & material used in this document is believed to be from reliable sources. Kotak Mahindra Bank however does not warrant the accuracy, reasonableness and/or completeness of any information. For data reference to any third party in this material no such party will assume any liability for the same. Kotak Mahindra Bank and/or any affiliate of Kotak Mahindra Bank does not in any way through this material solicit any offer for purchase, sale or any financial transaction/commodities/products of any financial instrument dealt in this material. All recipients of this material should before dealing and or transacting in any of the products referred to in this material make their own investigation, seek appropriate professional advice We have included statements/opinions/recommendations in this document which contain words or phrases such as "will", "expect" "should" and similar expressions or variations of such expressions, that are "forward looking statements". Actual results may differ materially from those suggested by the forward looking statements due to risks or uncertainties associated with our expectations with respect to, but not limited to, exposure to market risks, general economic and political conditions in India and other countries globally, which have an impact on our services and / or investments, the monetary and interest policies of India, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices, the performance of the financial markets in India and globally, changes in domestic and foreign laws, regulations and taxes and changes in competition in the industry. By their nature, certain market risk disclosures are only estimates and could be materially different from what actually occurs in the future. As a result, actual future gains or losses could materially differ from those that have been estimated Kotak Mahindra Bank (including its affiliates) and any of its officers directors, personnel and employees, shall not liable for any loss, damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss of profit in any way arising from the use of this material in any manner. The recipient alone shall be fully responsible/ are liable for any decision taken on the basis of this material. The investments discussed in this material may not be suitable for all investors. Any person subscribing to or investing in any product/financial instruments should do so on the basis of and after verifying the terms attached to such product/financial instrument. Financial products and instruments are subject to market risks and yields may fluctuate depending on various factors affecting capital/debt markets. Please note that past performance of the financial products and instruments does not necessarily indicate the future prospects and performance thereof. Such past performance mayor may not be sustained in future. Kotak Mahindra Bank (including its affiliates) or its officers, directors, personnel and employees, including persons involved in the preparation or issuance of this material may; (a) from time to time, have long or short positions in, and buy or sell the securities mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation in the financial instruments/products/commodities discussed herein or act as advisor or lender / borrower in respect of such securities/financial instruments/products/commodities or have other potential conflict of interest with respect to any recommendation and related information and opinions. The said persons may have acted upon and/or in a manner contradictory with the information contained here. No part of this material may be duplicated in whole or in part in any form and or redistributed without the prior written consent of Kotak Mahindra Bank. This material is strictly confidential to the recipient and should not be reproduced or disseminated to anyone else This material is not a research report as per the SEBI (Research Analyst) Regulations, 214. Mutual Fund investments are subject to market risks, read all scheme related documents carefully. Confidential 16

Equity & Debt Strategy

Equity & Debt Strategy Mid Oct Nov 2 Equity Market Update & Equity MF Strategy 1/14 3/14 5/14 7/14 9/14 11/14 1/15 3/15 5/15 7/15 9/15 11/15 1/ 3/ 5/ 7/ 9/ 11/ 1/ 3/ 5/ 7/ 9/ cr Nifty-5 corrected post