Market Outlook October 2016

Transcription

1 Market Outlook October 2016

2 EQUITY MARKETS

3 HOW SEPTEMBER 2016 UNFOLDED -Key Events Of Sep 16 Tensions escalated in the second half of the month with Indian army conducting surgical strikes across the Line of Control (LOC) post the attack on the Indian army camp in Uri. US Federal Reserve left rates unchanged but strongly signaled it could still tighten monetary policy by the end of this year. India's ranking on the World Economic Forum's Global Competitiveness Index for has improved 16 places to 39, across the board. It is the fastest improvement in rank among the 138 nations surveyed. Earnings growth momentum continues - Second consecutive quarter of high single digit earnings growth The RBI cuts Repo rate by 25bps to 6.25% as per market expectation in Dr. Urjit Patels debut monetary policy. Policy Sounds more dovish with room for further rate cuts which should bode well for market. Monsoon until now is broadly in normal range on pan India basis. Jul IIP came in at a 8 year low of -2.4% vs 2.1% in Jun led by decline in manufacturing (- 3.4%). Within manufacturing, capital goods recorded a steep decline of 29.6% YoY in the month. Aug CPI fell sharply to 5% post the 22 month high of 6.1% YoY in previous month. The decline was led primarily by vegetables (wt=6% in CPI) which contributed ~90bps of the total 100bps drop in headline CPI.

4 INCOME DECLARATION SCHEME 2016 WAS A SUCCESS Rs. 65,250 cr. disclosed 64,275 individuals Final figure may be >Rs 70,000 cr. Estimated Tax collected by the Government > Rs. 30,000 cr. Source: Finance Ministry media release

5 MOST OF THE GLOBAL EQUITY MARKETS IN THE GREEN FOR LAST 1 YEAR INDIAN MARKETS MIDDLE OF PACK IN TERMS OF 1YR RETURN Brazil (IBOV) Indonesia (JCI) (0.4) 27.0 Russia (MICEX) UK (FTSE 100) Taiwan (TSWE) 1M 1Yr HK (HSI) US (Dow Jones) (1.4) 11.4 India (Nifty) (2.0) 8.3 Germany (DAX) (1.8) 7.7 Korea (Kospi) Singapore (Straits) Malaysia (KLCI - FTSE) (1.5) 1.9 China (HSCEI) France (CACS 40) (0.3) 0.1 EURO (Euro Stoxx 50) (1.0) (3.5) Swiss (SMI) (0.5) (4.1) Japan (Nikkei 225) (2.6) (5.4) (20) (10) Source: Bloomberg. Performance data

6 STABLE DOMESTIC CURRENCY IN SEPTEMBER (10) (5) (3.9) (3.6) (4.7) (1.0) (1.7) (1.6) (1.5) (0.1) (0.2) (0.0) (0.2) Depreciation Appreciation Source: Bloomberg from to Barring Turkey, Malaysia and Philippines, most countries currency appreciated in September M 1Yr 21.1 Brazilain Real Indonesian Rupiah South Korean W on Malaysian Ringgit Taiwanese Dollar Thai Baht Singapore Dollar Russian Ruble Turkish Lira Hong Kong Dollar South African Rand Indian Rupee Philippine Peso Chinese Renminbi

7 PERFORMANCE ACROSS MARKET CAP (5) (2.0) Nifty Nifty Midcap S&P BSE Smallcap 1m returns 1y returns 3 yr CAGR 5 yr CAGR 10 yr CAGR *As on 30 September 2016,Source: Bloomberg

8 STRONG PERFORMANCE BY CYCLICAL SECTORS OVER THE LAST 1 YEAR BSE Sectoral Indices (10) (20) (1.8) (%) (2.7) (0.6) (4.1) (1.9) (5.2) (4.1) (3.5) Metals Oil & Gas Auto Bankex PSU FMCG Realty Power Capital Goods 1m return % 1 yr return % 0.1 (2.1) (2.0) (9.0) (10.0) (11.6) Healthcare Tech IT Services Source: Axis Capital, Bloomberg Barring Oil & Gas and Auto, all other sectorial indices ended in red during the month *As on 30 September 2016

9 STOCK PICKING WILL BE CRITICAL AS SECTORS ARE AT HIGHER END OF FAIR VALUE Sensex sectoral long-term valuation snapshot: Forward PE* Auto BFSI Engg FMCG IT Metals Oil Pharma Power Telecom Sensex 0 Max Top Quartile Current Lower Quartile Min Source: Axis Capital, Bloomberg Note: * Since April-2005 Technology & Power at lower end of long term valuations largely due to lower earning visibility *As on 30 September 2016

10 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 LARGE CAPS AT A DISCOUNT -More bang for the buck! Key Indices: Forward P/E Trailing PB (X) 30 Sensex CNX Midcap BSE Sensex PB (x) BSE Midcap PB (x) Source: Axis Capital, Bloomberg Due to continuing strong performance of midcaps, midcaps are trading at slight premium to large caps from price to earning point of view but trade at a discount on price to book basis due to lower ROE Trailing ROE (%) BSE Sensex ROE (%) BSE Midcap RO E (%) *As on 30 September 2016

11 INDIA S PREMIUM TO GLOBAL EQUITY - LONG WAY FROM PEAKS 100% India's PE premium over MSCI World 80% 60% 40% 20% 0% -20% -40% -60% Sep-02 Sep-04 Sep-06 Sep-08 Sep-10 Sep-12 Sep-14 Sep-16 Source: Credit Suisse Research

12 INDIA BETTER PLACED AMONG EM PEERS - Global Valuation P/E Multiple CY17 of Indices Source: Axis Capital, Bloomberg * For India & Japan Fiscal year is FY18 while others it is CY17

13 CURRENT RALLY IS LIQUIDITY DRIVEN -Net Cash Market Purchase* Category (Rs cr) Sep - Month CY-16 (YTD) CY-15 CY-14 DII 1,999 1,805 66,816 (29,780) MF 2,717 12,212 71,562 23,999 Insurance, Banks & In (718) (10,406) (4,746) (53,779) FII 9,786 52,007 18,356 97,449 Clients (177) (2,585) (9,795) (23,878) NRI (11) (41) (317) (181) Proprietary ,191 1,881 Significant rebound in FII flows since Feb end, CY2016 almost 2.8x of entire CY2015 ; FIIs have pumped in Rs 18,000 crore in last 2 months Capital raised through IPO/QIP strong close to Rs 10,000cr raised over the last month *Source : NSE, BSE, SEBI, Internal calculation FII data updated upto 29 Sept & MF data updated till 27 Sept 2016

14 BUT BASED ON HOPE IN EARNINGS RECOVERY FOR FY-18 RATHER THAN GREED Sensex Earnings growth of 16.6 % in FY ,807 1,337 1,356 1,330 1,490 FY14 FY15 FY16 FY17 E FY18 E Source: Motilal Oswal

15 EARNINGS WILL RECOVER BECAUSE OF Government Spending Infrastructure 7 th Pay Commission Interest Rate Cut Negative WPI Govt. spending 46% of net tax revenue on interest payments with Debt/GDP of 65% Exports Recovering Make in India Capacity Utilisation Low capacity utilization Decline in new investment intentions

16 Corporate Fundamentals Real Rates Positive real rates helping increased domestic savings to financial assets from physical assets Yield Curve Oil Fall in yeilds to reduce interest costs and improve earnings Significant rise in oil prices from these levels to have adverse impact on fiscal. Rupee Inflation Relatively stable rupee reflecting improved fundamentals Can improve household consumption as well as reduction in interest rates Domestic IIP Sluggish private capex and low capacity utilisation Investment Cycle Improvement led by govt capex

17 WHERE IS FDI MONEY FLOWING INTO? Sectoral Share of Incremental FDI in FY16 Manufacturing Trading Restaurants Education Misc. Services Mining Financials Transportation Trade Telecom IT Business Services Construction Share in Incremental $11bn FDI in FY16-10% -5% 0% 5% 10% 15% 20% 25% Source: Credit Suisse estimates, RBI

18 URBAN BOOM Source: World Bank, Country Census data, Morgan Stanley Research India is the second largest country in terms of number of urban conglomerates with 1mn+ population 32% 11% Urban conglomerates with 1mn+ population % of total cities % China India Brazil Russia Japan US Urban 56% 33% 86% 74% 94% 82% Population 8% 4% 3% 10 35% 30% 25% 20% 15% 10% 5% 0% The rapid increase in urban centers in India along with improving income profiles could become fertile ground in which ecommerce companies may thrive

19 CONSUMPTION INDICATORS SUGGEST PICK-UP YOY %(Latest) FY-16 Data As of Cars 13% 7.30% Apr-Jun-16 Two Wheelers 14.3% 2.80% Apr-Jun-16 Petrol Consumption 10% 14.50% Apr-Jun-16 Air Traffic 18.40% 20.00% Apr-Jun-16 Credit card transactions 10.20% 26.00% Apr-Jun-16 Retail Loans outstanding N.A 19.40% Mar-16 Residential property demand -21% -4% Feb-16 & 11M FY-16 Asian Paints domestic revenue growth 10.00% 8.50% Q1 FY-17 HUL domestic consumer business volume 4.00% 6.00% Q1 FY-17 Source: Company Data, RBI, SIAM, Citi Research

20 ASSESSING PAY COMMISSION IMPACT See what it did to Maruti vols last time pay comm came.. 20% Maruti witnessed a massive boost to volumes from 6th PC 15% 10% % share of Govt employees in Maruti volumes 5% 0% FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 Source: Credit Suisse estimates

21 BULLISH ON PHARMA SECTOR NSE Pharma Index has underperformed NIFTY in FY 16 by ~ 7.0 %. Few Pharma Stocks have corrected for concerns like US FDA issues, Few are in the process of correcting. The underperformance may continue in FY 17 due to US FDA related challenges and Rebuilding of pipeline for US Markets. Market is likely to have discounted many of the concerns & hence could provide opportunity for a long term investor Recommend to invest on a STP ( Systematic Transfer Plan ) or SIP (Systematic Investment Plan ) basis in FY 17 to average your entry into a Pharma Sector Portfolio We are aiming to play for a revival in Pharma Sector over FY19 onwards. Investment horizon of more than three years is a must. Risk to the strategy is regulatory changes not priced by the market, inability of Indian Companies to meet US FDA standards, longer recovery cycle than priced by the market.

22 PHARMA SECTOR HAS MORE DOLLAR BILLIONAIRES THAN ANY OTHER SECTOR 22

23 THE INFRASTRUCTURE OPPORTUNITY MORE THAN ASSET OWNERS A MULTI-SECTORAL OPPORTUNITY Demographics Outsourcing India Story Infrastructure Logistics Industrials Oil and Gas Infrastructure Financing Utilities Urban Infrastructure Construction Airport and Air Transport Real Estate Ports and Shipping Cement Power SEZ Development Road and Railways Telecom Universe comprises about 300 companies with market cap of US$400bn (Rs 25,00,000 cr)

24 IS THE ASSET CYCLE CHANGING NOW? Expectation 24 months ago change in government will change fortunes of stuck projects Reality Government doesn t have any magic wand. Full resolution a long drawn affair Given this, we prefer asset owners where either competitive activity was low in the past (eg rail logistics) or where there have been near monopolistic franchises with significant barriers to entry (eg: ports, transmission infrastructure)

25 GOING WITH THE FLOW WHERE ALL THE ACTION IS Better cost structure now Commodity costs potentially account for 50-80% of any project with global commodities down 25-50%, theoretically government can implement far more projects even with limited financial resources Interest costs Fall in interest rates helps improve viability of new projects Better fiscal health of government Government focusing on reviving investment cycle Comeback in rural housing can also provide support to overall investment cycle Growth is already picking up and the evidence is visible in Roads, T&D, Railways, Defense, Power sector

26 INFRASTRUCTURE HEAT MAP ACTIVITY LEVELS SHOWING IMPROVING TRENDS Weak Strong

27 INFRASTRUCTURE HEAT MAP ACTIVITY LEVELS SHOWING IMPROVING TRENDS Weak Strong

28 THERE IS TRIVENI SANGAM IN EQUITY MARKET Mutual Funds Private Insurance Cos Retail & HNIs FIIs LIC Banks, EPFO, NPS and Private PF Trust Flows Sentiment Fundamentals Fiscal Prudence GDP Growth FDI Reforms Demographic dividend Stable Polity Improving Ease of Doing Business, GST, FDI flows, Monsoon, Liquidity

29 INDIA INC SHIFTING GEARS? DIFFERING CHARACTERISTICS ACROSS THEMES Key Themes Current Valuations Remarks Urban Consumption 2 nd Gear 3 rd Gear FAIR 7 th Pay Commission, Lower Urban Inflation, Smart Cities, Services sector still resilient Rural Consumption 1 st Gear 2nd Gear LOW Back-to-back poor monsoons, lower MSP hikes, soft commodity prices hurting rural consumption; however a favourable monsoon can revive fortunes Investment Cycle 1 st Gear 2 nd Gear FAIR Government capex reviving, household capex (real estate) to stabilize, private sector capex revival still some time away Financials 1 st Gear 1 st Gear LOW Large haircuts in corporate lending, commodity crash not helping, new licenses to impact growth at margin - RBI deadline of Mar17 provides a timeline to consider financials Exports 2 nd Gear 1 st Gear FAIR Stagnating global growth, relative INR stability to hurt exports, regulatory observations in pharma increasing, election year in US to add to jobs rhetoric Commodities Reverse Gear Reverse Gear LOW China worries to impact global commodities, Indian commodities on aggregate have large debt levels ; besides cost of production for most Indian commodities have gone up Utilities 1 st Gear 1 st Gear LOW SEB reform to be keenly watched, however pace of new technologies can impact conventional utilities

30 KEY VARIABLES & THEIR IMPACT ON EQUITIES Key Variables Short - term Economy Corporate Earnings FII Flow Medium - term Remarks Improving growth, falling inflation Improving operating leverage, falling interest costs and improvement in working capital can accelerate earnings, but a bit back-ended (FY17) India stands out among global asset classes with improving macro-economic variables and 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 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 is key reform for government to focus on; if it gets passed, can provide a significant fillip

31 WHAT NEXT? Upcoming drivers and draggers New RBI Governor & Sept-Nov 16 Payout India s FCNR (B) borrowing of more than US$ 26 bn is due for payout in Sep-Nov16. While India has around US$ 360 bn FX reserves to manage the liability, the impact not evident in currency movement as of now Continuation of revival in 2QFY17 corporate earnings to be closely watched The Q1 earnings witnessed high single digit growth second consecutive quarter of positive earnings growth Domestic oriented companies to reported better results Rural economy to witness uptick with normal monsoon Cumulative rainfall on pan-india basis has been largely in normal range

32 WHAT NEXT? Upcoming drivers and draggers GST Bill The Govt. is targeting GST roll out by April 1,2017. Most Corporates are not prepared from infrastructure point view till Mid of FY 18. Will the roll out be deferred? The Govt. is indicating Revenue Neutral Rate of 22 %. Market is pricing in Rate of 18 %. The difference in actual rate vs expected rate can have material impact on stocks. Global events Fiscal stimulus plans in Japan, Europe and US (most likely post elections) will provide cue to global liquidity Chinese currency continues to weaken, from its highs in end 2013, Chinese currency has depreciated by around 10% As US elections get underway, news flow on sectors like pharmaceuticals, IT can increase volatility in these sectors Italian Debt Crisis emerging from NPAs in Banking system Formalising of plan for Britain s exit from European Union 32

33 WHAT NEXT? UP Election Party wise Seat Projection in opinion poll Party ABP News CSDS Lokniti Pre Poll-Seats Projected VDP Associates Pre Poll- Seats Projected Leadtech Online Pre Poll- Seats Projected ABP News Neilson Pre Poll- Seats Projected SP BJP BSP INC Others Total Source:Infoelection.com Market is still to discount expected outcome of a likely hung UP assembly. This may cause some volatility at the time of polls

34 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 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 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 ASSET ALLOCATION This asset allocation guide helps you to determine the suggested equity exposure at different valuations levels based on the Sensex Stretched 18x-20x Fair Value Plus 16-18x Fair 12x-16x Attractive 10x-12x Cheap 9x-10x Valuation levels of the Sensex based on rolling 12month fwd EPS estimate of 1650 Market Cheap Attractive Fair Fair Value Plus Stretched Bubble Over Invested Neutral + Neutral Neutral - Under Invested Exit Equity Allocaion 80% - 90% 65% - 75% 50% 35% - 45% 15%- 25% 5% - 10% Suggested equity allocation (Assuming 50% equity allocation as neutral)

35 EQUITY OUTLOOK After strong performance in the past few months, markets are in fair value plus zone India catalysts corporate earnings recovery and normal monsoon can help sustain current momentum Time in the market more important than timing the market volatility in markets to remain elevated Recommend regular and disciplined investment in equities Investors should look at a mix of large and midcap funds for 3-5 years horizon on systematic investment basis

36 STRATEGY FOR INVESTMENT Assuming an agnostic perspective on risk, the following recommendations can be prescribed:- Around half the money in SIP with 5 year horizon The rest of the corpus can be placed aside for event related volatility, such as: China slow down or similar global turbulence US fed raising interest rates Earnings disappointment creating a correction in market In the absence of significant event risk, one can look at fresh issuance opportunities with attractive valuations in IPO, OFS and FPO Any IPO in which NBFC are providing leveraged financing for applications might be a good bet for retail application

37 KEY RECOMMENDATIONS Key theme Large Cap play on buying sectoral leaders that benefit from improving investment climate 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 Remarks Kotak50 Kotak Select Focus Kotak Infrastructure & Economic Reforms Fund Through SIP in Midcap oriented scheme Kotak Emerging Equities Fund We recommend investors to invest through SIP with a 5 years horizon.

38 REGULAR DIVIDEND PAYOUT IN KOTAK BALANCE SINCE FY 2006 Record Date Rupees Per Unit Dividend Yield 25- Aug % 25-Jul % 27-Jun % 25-May % 25-Apr % 29-Mar % 25-Feb % 27-Jan % 15-Dec % 28-Sep % 25-Mar % 24-Sep % 25-Mar % 30-Sep % 25-Mar % 27-Sep % 26-Mar % 27-Sep % 28-Mar % 29-Sep % 25-Mar % 25-Sep % 25-Mar % 25-Sep % 27-Sep % 27-Mar % 12-Dec % 16-May % * 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. Inception Date: November 25, 1999 All dividends are on face value of Rs.10 per unit

39 DEBT MARKETS

40 HOW SEPTEMBER 2016 UNFOLDED -Key Events Of The Month Rate Cut - The RBI cut the repo rate by 25bps to 6.25% and was within market expectation. The reverse repo rate under the LAF stands adjusted to 5.75 %, and the marginal standing facility (MSF) rate and the Bank Rate to 6.75 % CPI inflation eased to a five-month low 5.05% in August 2016 from the high 6.1% in July 2016, helped by softer food prices. Crude Oil prices rose to $49.06/barrel (4.29% MoM) during the month as OPEC has agreed a preliminary deal to cut production between 32.5 million and 33.0 million barrels per day for the first time in eight years. India s current account deficit (CAD) narrowed to $0.3 billion, or 0.1 % of GDP, in the first quarter of , significantly lower than $ 6.1 billion or 1.2 % of GDP in Q1 of on account of lower trade gap. The Union Cabinet on Wednesday gave its nod to merge the railway budget with the general budget from next year, putting an end to a practice that started in 1924 The government appointed three external members to the Monetary Policy Committee, which will decide the policy rates of the RBI. These members who will serve a 4-year period are academicians with reputed educational institutions of India. The other three members will be from RBI, including Governor Urjit Patel. The second meeting of the GST Council, headed by FM Arun Jaitley, has approved draft rules for GST and would be applicable under the new GST regime, expected to be rolled out from April 1, 2017.

41 HOW SEPTEMBER 2016 UNFOLDED -Key Events Of The Month Tensions escalated in the second half of the month with Indian army conducting surgical strikes across the Line of Control (LOC) post the attack on the Indian army camp in Uri. This acted as a break in the bond rally and resulted in an unwanted spike of bps in the 10 yr benchmark bonds The new 10 year benchmark bond was auctioned and the cut-off was 6.97% this was approx. 16 bps below the old benchmark 7.59% G sec 2026 India's industrial growth fell sharply in July after rising for two months, with data suggesting that rural demand and investments are yet to pick up. Growth as measured by the Index of Industrial Production (IIP)contracted 2.4% in July Normal Monsoon - The southwest monsoon ended with a 3% rainfall deficit, which is considered near normal, leaving a wider area under cultivation and higher reservoirs levels that will help the kharif, or summer, harvest and boost planting of crops in winter. The Bank of Japan (BOJ) unveiled its new policy framework, saying it will keep its negative policy rate at minus 0.1% while modifying the framework of its bond-buying programme to guide long-term rate at around 0%. The US Federal Reserve left interest rates unchanged but strongly signalled it could still hike interest rates by the end of this year as the labour market improved further. The European Central Bank kept its stimulus programme unchanged in a sign that policy makers don't see an immediate danger to the euro-area recovery from risks including Britain's decision to leave the European Union.

42 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 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 Jun-16 Jul-16 Aug-16 INFLATION CORE MODERATED 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% CPI Core CPI Source: MOSPI 5.0% 4.7% 0.00% CPI inflation eased to a five-month low 5.0% in August 2016 from the high 6.1% in July 2016,, reverting within the inflation target band of 4% +/-2%. This benefitted from a considerable softening in the inflation for food and beverages, as well as a mild easing in the print for fuel & light and housing, which outweighed the uptick in the inflation for miscellaneous items and pan, tobacco & intoxicants Core-CPI inflation (excluding food & beverages and fuel & light) inched up to 4.7% in Aug 2016 from 4.6% in July Accordingly, the wedge between headline and core-cpi inflation narrowed significantly in Aug Core-CPI inflation remained lower than headline CPI inflation for the 12 th consecutive month. We expect the headline CPI to fall sharply ~4% due to fall in prices of vegetable, Food & Pulses and as the monsoon has been good it will help the CPI stay lower in coming months

43 CRUDE PRICES REMAIN RANGE BOUND -BRENT CRUDE OIL PRICES (USD) 55 Brent Crude Prices (USD) Brent Crude Prices (USD) 25 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 as on 30 th Sept 2016 Source:Bloomberg Crude Oil prices rose to $49.06/barrel (4.29% MoM) during the month. The oil producers cartel OPEC has agreed to a preliminary deal to cut production for the first time in eight years, sending crude prices surging. Russia, not an OPEC member but a large producer pumping crude at record highs, said it would find a way to freeze production if it reaches a deal with OPEC.

44 Sep-14 Oct-14 Oct-14 Nov-14 Dec-14 Jan-15 Jan-15 Feb-15 Mar-15 Mar-15 Apr-15 May-15 May-15 Jun-15 Jul-15 Jul-15 Aug-15 Sep-15 Oct-15 Oct-15 Nov-15 Dec-15 Dec-15 Jan-16 Feb-16 Feb-16 Mar-16 Apr-16 Apr-16 May-16 Jun-16 Jul-16 Jul-16 Aug-16 Sep-16 CREDIT GROWTH MODERATES THIS MONTH Credit Growth (Weekly Data) Commercial Credit by Banks=73 Lakh Crore (approx)(lhs) 7.30M Current Credit/ Deposit Ratio is ~75% (RHS) Source:Bloomberg 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.

45 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 Jun-16 Jul-16 Aug-16 Sep-16 BUILDING CUSHION -INDIA FOREIGN EXCHANGE RESERVES India Foreign Exchange Reserve (in $US Billion) India Foreign Exchange Reserve (in $US Billion) $ Billion Source:Bloomberg As mentioned in our previous update, forex reserves increased as RBI took delivery of forward dollar purchases. The forex reserves may see a decline in Oct-Nov 2016 as FCNR (B) deposits of US$ 26 bn mature amid uncertainty on the extent of rollover/inflows.

46 SMALL SAVINGS RATES -THE ARBITRAGE HAS REDUCED Saving Plans Revised Rates Old Rates Public Provident Fund 8.1% 8.7% Kisan Vikas Patra 7.8% 8.7% Post Office Deposit(1Yr) 7.1% 8.4% Post Office Deposit(2Yr) 7.2% 8.4% Post Office Deposit(3Yr) 7.4% 8.4% Post Office Deposit(5Yr) 7.9% 8.5% Senior Citizen Scheme Interest Rate(5Yr) 8.6% 9.3% Postal Savings Deposit Unchanged 4.0% 4.0% Lower rates Higher bank deposit mobilization Rate transmission Decline in personal and corporate loan rates Higher SLR demand Lower Gilt yields

47 HIGHER GILT DEMAND LIKELY- LONG TERM Resultant higher bank deposit growth will lead to higher Gilt demand. 0 FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 CPI % CAD (% GDP) Bank Credit Growth % FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 Subdued Credit growth will also favor higher Gilt demand Source:RBI

48 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 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 THE GAME CHANGER From liquidity deficit to liquidity Positive 1500 Total Liquidity Total Liquidity in INR bn In line with its guidance, RBI has been actively providing liquidity when needed and has gradually taken systemic liquidity into positive territory Source: Internal Calculations

49 FACTORS FOR FUTURE RALLY IN GILT -MULTIPLE FACTORS COME TOGETHER year Gilt Yields year Gilt Yields Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Source: Bloomberg As of 30 th Sept Good Monsoon Overall normal monsoon is likely to reduce inflationary pressure on agri-supplies - Easing Pulses Inflation Strong sowing trends can tame pulses inflation down from 35% YOY levels and can bring down CPI by bps - Low Food & Commodity Inflation - Lower Food Prices and Commodity prices would bring down CPI inflation and provide additional space for 25 bps rate cut in the FY Space for additional cuts will depend on data, if it unfolds as per the current trajectory - OMOs - In case liquidity tightens post FCNR deposit maturity, RBI may resume OMO which is positive for G- sec

50 YIELD CURVE (M-O-M ANALYSIS) Source: Bloomberg I180 INR India Sovereign Curve Last Mid YTM I180 INR India Sovereign Curve 01/09/16 Mid YTM 3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 16Y 17Y 18Y 19Y 20Y 24Y 27Y 28Y 29Y 39Y 0-10 I180 Mid YTM (Last-01/09/16) 3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 16Y 17Y 18Y 19Y 20Y 24Y 27Y 28Y 29Y 39Y I180 Mid YTM (Last-01/09/16) -40 The fall in 10 yr gilt is overstated as the new benchmark came 17bps below the old. Otherwise the curve flattened further. Going forward we expect some bull steepening of the curve ie 5-10 yr will fall more than yr

51 ACTIVE LIQUIDITY MANAGEMENT -LIQUIDITY SCENARIO 9.5 Repo Rate In the Last 1 year Repo Rate (%) Overnight Rate (MIBOR %) Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep Amount in Rs. billion. Date Repo Reverse Repo MSF SLF Total Systematic Liquidity Source:Bloomberg Government Balances 30th Sept 2016 (369.05) (1.75) (16.66) The systemic liquidity has remained positive over last 3 months due to OMO purchases by RBI, government spending and forward $ purchases by RBI

52 WORLD FLOATING ON EASY MONEY -GERMANY AND JAPAN YIELDS ENTER NEGATIVE TERRITORY 2.5 Global 10 Year Bond Yields(%) 2 US 10 Year UK 10 Year Germany 10 Year Japan 10 Year Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Source:Bloomberg The US Federal Reserve left interest rates unchanged on Wednesday but strongly signalled it could still hike interest rates by the end of this year as the labour market improved further. Bond yields in Germany and Japan continued to be in negative territory.

53 Jan-15 Jan-15 Feb-15 Mar-15 Mar-15 Apr-15 May-15 May-15 Jun-15 Jul-15 Jul-15 Aug-15 Sep-15 Oct-15 Oct-15 Nov-15 Dec-15 Dec-15 Jan-16 Feb-16 Feb-16 Mar-16 Apr-16 Apr-16 May-16 Jun-16 Jul-16 Jul-16 Aug-16 Sep-16 Sep-16 FED RATE HIKE PROBABILITY Fed Effective rate: 0.40 Futures: Fed Funds Calculated:30/09/2016 Meeting Prob Of Hike Prob of Cut /11/ % 0.00% 0.00% 82.90% 17.10% 0.00% 0.00% 0.00% 0.00% 14/12/ % 0.00% 0.00% 40.70% 50.60% 8.70% 0.00% 0.00% 0.00% 01/02/ % 0.00% 0.00% 39.00% 50.20% 10.50% 0.40% 0.00% 0.00% 15/03/ % 0.00% 0.00% 34.40% 48.80% 15.20% 1.60% 0.00% 0.00% 03/05/ % 0.00% 0.00% 32.10% 47.90% 17.40% 2.50% 0.10% 0.00% 14/06/ % 0.00% 0.00% 27.70% 45.70% 21.60% 4.50% 0.50% 0.00% 26/07/ % 0.10% 0.10% 27.80% 45.60% 21.50% 4.50% 0.50% 0.00% 20/09/ % 0.10% 0.10% 24.40% 43.50% 24.40% 6.50% 0.90% 0.10% 01/11/ % 0.10% 0.10% 23.90% 43.10% 24.80% 6.90% 1.10% 0.10% 13/12/ % 0.10% 0.10% 20.60% 40.40% 27.40% 9.40% 1.90% 0.20% The Fed Fund Futures are indicating low probability of Fed Rate Hike in 2016, increasing from 34% in Aug-end to 17% in Sep-end.

54 SCOPE FOR MORE -10 YEAR GILT YIELDS OF SELECT NATIONS Indonesia United states Canada India Brazil China UK Thailand France South Korea Germany Australia Switzerland Japan As of 30 th Sept, Source: Bloomberg. Globally the yields are converging towards the centre while India remains one of the few exceptions (amongst countries experiencing lower inflation) hovering around ~7%

55 KEY VARIABLES & THEIR IMPACT ON INTEREST RATES 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 denotes fall in interest rates

56 DEBT OUTLOOK The month of September witnessed more flattening as the 10 year benchmark gilt came off by 2 bps; the 15 year and 30 year curve came down by 10 bps As expected the new Governor Dr Urjit Patel in the policy announcement maintained the continuity in the policy and also gave a repo rate cut 25 bps. The key point of the policy was that global growth will slow significantly which may give more room for monetary easing. CPI inflation is expected to average between for the remaining part of the year with low upside risk. This will open more space for a rate cut of at least 25 bps in the remaining part of the year and more will depend on the fundamentals which appear promising as of now. The measures taken by RBI for development of the bond market will take some time to have an impact but the measures are very positive and will have a meaningful impact on yields - particularly on bonds spreads. We expect the new 10 year gilt to inch towards 6.50% yield in the coming months. Post the new 10 year gilt, all the spread assets viz AAA/AA+ corporate bonds and SDL will appear attractive and will witness rally/compression vis-a-vis the new 10 year gilt. Therefore we are positive on various spread assets. If liquidity becomes tight post FCNR deposit maturity, we expect RBI to resume OMO, which would be positive for gilts. RBI has also indicated that they would look at lowering the real interest rate band from ~150bps to ~125bps which could open up room for further rate cuts if inflation moderates. We do believe that RBI has room to cut rates further by another 25bps. However, the timing of the same would be data dependent and as more clarity emerges on the CPI inflation trajectory going into The 18 month -36 month segment remains the best bet on the short term curve, since this segment is in a bull steepening mode driven by liquidity.

57 KEY RECOMMENDATIONS Segment Scheme Rationale Duration Play Accrual Play Kotak Mahindra Bond Scheme / Kotak Mahindra Gilt Scheme Kotak Bond Short Term/ Kotak Flexi Debt Scheme Kotak Income Opportunities Fund / Kotak Medium Term Fund Investment for longer maturities Investment for shorter maturities 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 PSU Debt Fund Kotak Equity Arbitrage Fund Higher post tax return

58 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 RBI has slashed repo by 125 bps in 2015 and more cuts are expected in the next months. Though transmission has been slow, proposed calculation of base rate on marginal cost basis will ensure faster transmission and lower base rates (and hence lower cost of capital for borrowers). 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, anda around 88% of times With efficiently managed credit risk, yields on accrual funds are attractive even on risk-adjusted basis.

59 STORY IN ACCRUALS Accruals generate performance by purchasing high yielding assets Currently, the market is gradually reviving after recent credit events and even prudent funds are witnessing lack of flows. Thereby, this has led to demand paucity and consequent spike in yields The market is currently tilted towards the buyers Corporates have alternative in NBFCs for funding. But such corporates would need to provide high collateral in keeping with the RBI guidelines regarding loan against shares. Thus, creditable and quality corporates has to shell out high rates to attract capital Retail Investors can consider accrual funds like Kotak Income Opportunities / Kotak Medium term to gain from the potential high yields in the market.

60 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.

61 TACTICAL ASSET ALLOCATION THROUGH MIP - Growing Through Asset Allocation 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

62 OUR RECOMMENDATIONS IN THE LAST QUARTER Our Outlook Date Outcome Overweight Gold 4 th January Gold Rallied by ~22% during Jan- Aug 16 Overweight Duration 2 nd February Approx 75bps rally since 25 th Feb Equity- Buy on dips 22 nd January 10.27% absolute returns in last 5 month Equity- Buy on dips 29th February 26% absolute returns from 29 th Feb to 31 st Aug 2016

63 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.

64 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 Opportunities Kotak Gilt Investment Kotak Bond Kotak Medium Term Fund Kotak Low Duration Fund (Formerly known as PineBridge India Short 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 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 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

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