Market Outlook June 2017

Transcription

1 Market Outlook June

2 EQUITY MARKETS 2

3 How May 2017 Unfolded -Key Events of May 17 GST Council has finalised a four-tier GST tax structure of 5 %, 12 %, 18 % and 28 %, with lower rates for essential items and the highest for luxury and demerit goods. Tax rates on 6 categories (gold, branded and packaged food etc) and all services yet to be decided. Tax rates for majority of the categories were either lower than current rates or on expected lines. GDP growth in Q4 was subdued at 6.1% YoY. CPI inflation fell to an all-time low of 2.99 % in April, compared to 3.89 % in March mainly due to a sharp fall in the prices of vegetables and pulses. The government released a new base-year series for WPI inflation and IIP. Using the new base, WPI eased sharply to 3.85 % inapril compared to 5.29 % in March. IIP rose 2.7 % in March 17 compared to 1.9 % in February 17 (lower than the 5.5 % seen in March 2016), according to the revised IIP data with the base year as that adjusts the basket of goods to reflect changes in the economy. For the year , IIP rose 5 % under the new series. Markets continued to move up in March by 3.4% (Nifty) due global risk-on sentiment,flows from domestic investors and good monsoon prospects. Earnings releases by Corporate India paints a mixed picture with domestic oriented companies reporting inline results while export oriented sectors continued to report challenging quarters. Nifty earnings growth for Q4FY17 was 15% YoY higher than the trend seen in the recent past.

4 BJP Government And Nifty Journey Over The Last Three Years 4 Source: BSE India

5 BJP s Expanding Footprint 5 Source: Newsflicks

6 Macro Improvement Continues Softening headline inflation (%YoY)...along with Improving fiscal deficit (% of GDP) 6

7 INR Is One Of Best Performing EM Currency In Source: Bloomberg, MOSL

8 GST Rates Impact By Key Segments 8 Source: Axis Capital

9 9 Fitment Of Goods In Tax Slabs

10 10 Impact Of GST On Inflation International Experience

11 Earnings Season Q4FY2017 Majority Nifty companies delivered in line or better than expected returns 11

12 Financial Savings Are Rising 12 Source: RBI, Credit Suisse estimates

13 Weekly Trend Of Currency In Circulation Close To Pre Demonetisation Levels 13

14 While Valuations Not Cheap, Market Not In A Bubble Zone While equities may still be outperforming other alternate asset classes, moderate return expectations Corporate earnings, especially of domestic oriented companies already showing improving trend Use intermittent volatility to increase equity exposure 14

15 15 Market performance

16 Strong Performance By Majority Sectors Over The Last 1 Year Exporters lagging in returns BSE Sectoral Indices (10) (20) (1.4) (0.5) (%) (3.8) Oil & Gas Metals PSU Realty Bankex FMCG Auto Capital Goods (1.5) 1m return % 1 yr return % (4.7) (8.3) (9.7)(11.0) (11.6) Power Tech Healthcare IT Services 16 *As on 31 May 2017 Source: Axis Capital, Bloomberg

17 Performance Across Market Cap - Strong performance down the capitalisation curve (5) (10) (3.2) Nifty Nifty Midcap S&P BSE Smallcap (1.9) 1m returns 1y returns 3 yr CAGR 5 yr CAGR 10 yr CAGR *As on 31 May 2017, Source: Bloomberg 17

18 Indian Markets Returns Of Last 1yr In Line With Most Global Markets Brazil (IBOV) HK (HSI) Germany (DAX) China (HSCEI) UK (FTSE 100) Indonesia (JCI) Korea (Kospi) US (Dow Jones) India (Nifty) (2.2) France (CACS 40) Taiwan (TSWE) EURO (Euro Stoxx 50) Singapore (Straits) Japan (Nikkei 225) Swiss (SMI) Malaysia (KLCI - FTSE) Russia (MICEX) (4.2) (0.1) M 1Yr (10) Source: Bloomberg. Performance data 18 * As on 31 May 2017

19 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 19

20 20 Valuations

21 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,Metal and Power at lower end of valuations, other sectors moving towards upper end of valuation zone 21 *As on 31 May 2017

22 May-07 May-08 May-09 May-10 May-11 May-12 May-13 May-14 May-15 May-16 May-17 May-07 May-08 May-09 May-10 May-11 May-12 May-13 May-14 May-15 May-16 May-17 May-07 May-08 May-09 May-10 May-11 May-12 May-13 May-14 May-15 May-16 May-17 Large Caps at a Discount -More Bang For The Buck! Key Indices: Forward P/E Trailing PB (X) Sensex CNX Midcap BSE Sensex PB (x) BSE Midcap PB (x) Source: Axis Capital, Bloomberg Trailing ROE (%) 36.0 BSE Sensex ROE (%) BSE Midcap RO E (%) *As on 31 May 2017

23 Indian Valuation In A Global Perspective P/E Multiple CY17 of Indices US (Nasdaq) India (Sensex) US (Dow Jones) Japan (Nikkei 225) Malaysia (KLCI - FTSE) UK (FTSE 100) Thailand (SET) Singapore (Straits) HK (HSI) Brazil (IBOV) Korea (Kospi) China (HSCEI) (x) Source: Axis Capital, Bloomberg * For India & Japan Fiscal year is FY18 while others it is CY17 23

24 Net Cash Market Purchase Category (Rs cr) May - Month CY17 CY-16 CY-15 DII 5,217 15,753 37,125 66,816 MF 8,960 31,484 48,005 71,562 Insurance, Banks & Insurance (3,743) (15,731) (10,880) (4,746) FII 8,997 51,592 18,783 18,356 Clients (1,917) (15,550) (336) (9,795) NRI (199) (471) (714) (317) Proprietary 213 1, ,191 Strong purchase by Mutual funds and FII in May *Source : NSE, BSE, SEBI, Internal calculation FII & MF data updated upto 30 th May

25 Domestic Flows May Sustain Into Equity Funds In 2017 Low FD Return Uncertain real estate environment & Lower time limit for LTCG Gold potentially impacted by drop in import duties/us Fed rate hikes Mature investor base understanding the benefits of compounding of equities as asset class SIP as a tool to counter volatility Flows to equities 25

26 But Based On Hope In Earnings Recovery For FY-18/19 Rather Than Greed Sensex Earnings growth of 13.0 % in FY16-19E 1,922 1,351 1,332 1,34 9 1,581 FY15 FY16 FY17 E FY18 E FY19 E Source: Motilal Oswal 26

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

28 Key Variables & Their Impact On Equities Key Variables Short - term Economy Corporate Earnings FII Flow DII Flow Supply of paper Medium - term Remarks Demonitisation to impact near-term growth, but normalcy to return. Improving operating leverage, falling interest costs and improvement in working capital can accelerate earnings, but a bit back-ended (FY18). Key is improvement in capacity utilisation India stands out among global asset classes with prospects of strong long term growth. Our tax policy has spooked FII couple off times. Budget FY 18 should reassure them. Focus on improving financial savings of households Higher disinvestment target and repair of leveraged balance sheet to create supply in markets. 28 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 is key reform for government to focus on; step closer to implementation, can provide a significant fillip

29 May-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 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 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 1640 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) 29

30 Strategy For Investment in 2017 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: US Fed raising interest rates India Quarterly Earnings European Banking Crisis China Slow down GST Roll Out 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 30

31 Strategy To Participate In A Market Pendulum FEAR Opportunistic buying at these levels may improve short term return potential GREED 31

32 Sensex bagger over 40 years! But not without its share of ups and downs! Date of Mkt Peak Date of Mkt Trough % Return Duration (days) Market Peak Market Trough S&P Sensex index Values, Source: ICRA

33 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 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. 33

34 DEBT MARKETS 34

35 Market Outlook June

36 How May 2017 Unfolded -Key Events Of The Month India's GDP or gross domestic product grew 6.1% year-on-year during the January-March period, suggesting that the effects of November's note swap were rippling through the economy. The GDP growth rate for the full year ( ) came in at 7.1 % in line with official estimate compared to a revised growth figure of 8 % in FY16. The IMD announced the year monsoon could be 'normal' and bring 100 % rainfall instead of 96 % as predicted earlier, raising prospects of higher farm and economic growth. The Nikkei Markit India Manufacturing Purchasing Managers' Index (PMI) -- an indicator of manufacturing activity -- declined from 52.5 in April to a three-month low of 51.6 in May, with softer demand causing slower expansions in output and the amount of new work received by firms. Core sector industrial production in the country expanded at a slower pace of 2.5% in April against the 5% growth recorded in March amidst a decline in the production key inputs including coal crude oil and cement. 36

37 How May 2017 Unfolded -Key Events Of The Month CPI inflation recorded a higher-than-expected overall slip of 2.99% from last month s recorded overall CPI of 3.89 %, on the back of drop in both food and manufactured inflation. India's wholesale price inflation (under new series=base year ) have increased 3.85% inapril, lower than the 5.3% rise in March. India's trade deficit widened to levels not seen since November 2014, on account of sharp jump in gold and crude oil imports during the month. The trade deficit in April widened to $13.2 billion. The deficit stood at $10.4 billion a month ago and at $4.8 billion in April China s credit rating has been downgraded by Moody s by one notch to A1 from Aa3, first time in almost 30 years over fears that slowing growth and rising debts will weaken the world s second largest economy. 37

38 Nov-98 Mar-99 Jul-99 Nov-99 Mar-00 Jul-00 Nov-00 Mar-01 Jul-01 Nov-01 Mar-02 Jul-02 Nov-02 Mar-03 Jul-03 Nov-03 Mar-04 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Gilt Yields in Policy Perspective NDA 1( 1998 to 2004) NDA 2 (2014 to date) As of 31 st May 2017, Source Bloomberg Remember Prime Minister Vajpayee did 5.6% - 6% loans and how it gave a boost every middle class, low-income person had the desire to own a house of his own : Piyush Goyal, Minister, GOI. 38

39 2-May 7-May 12-May 17-May 22-May 27-May 10 Year Gilt Yield in May Month Diagnosis of a rally India 10 year Yield(%) Issuance of new 10 year Gilt 6.66 The 10 year gilt rallied by around 20 bps in the month. This was on account of coming together of many factors. Global concerns surrounding the US rate hike trajectory got allayed as the US treasuries began to increasingly discount the trump administration s fiscal and tax agenda April CPI of 2.99% came as a positive surprise for the domestic market. The CPI trajectory also indicated a sub-3% CPI for most of H1-FY18. This created an expectation of change of stance by RBI in the upcoming monetary policy China rating downgrade highlighted the growth slowdown in the 2 nd largest economy. This led to slump in global commodity prices, which may have a dis-inflationary effect. FII s made a net purchase of more than US$ 3 bn in the May month providing the demand stimulus in the market 39

40 Weighted Average Tax Rate For Various CPI Baskets: Existing And GST Source: CBEC, state VAT rates and Nomura Global economics estimates. 40 Note: We have covered 87.2% of the CPI basket by weight. Tax rates for another 7.6% are yet to be announced (including apparel, footwear, precious metals, bidis). The categorisation here does not exactly match the CPI breakdown, as we have clubbed items differently to separate goods from services. The tax rate on the overall CPI is much lower than individual categories owing to a number of exempt and zero tax categories. We use CPI weights to calculate the weighted average tax for each segment. Based on the weighting of these items, if the entire change in the headline tax rate is passed on to the consumer (increase as well as decrease, as applicable), then headline CPI inflation could moderate by 33bp in the short term More specifically, we estimate that food and beverage price inflation could moderate by 60bp owing to lower tax rates

41 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 Positive Real Interest Rates to Stimulate Financial Savings Real Rates 3.86 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 should move from physical to financial assets. 41

42 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 CPI Inflation: Actuals Much Docile Than Expected 12.00% Source: MOSPI 10.00% 8.00% CPI Core CPI 6.00% 4.5% 4.00% 2.00% 2.99% 0.00% The CPI inflation eased sharply to a series low 3.0% in April 2017 (+5.5% in April 2016) from the revised 3.9% in March 2017 (+4.8% in March 2016), on the back of drop in both food and manufactured inflation. Latest available data indicates a continued softening of pulses and vegetable prices in May This is likely to form the basis of continued sub-3% inflation prints in the next few months, possibly till September 2017 Core inflation is also softening: Though food inflation contributed significantly to the slide in the Headline CPI inflation, core inflation had also been softening, led mostly by Personal Care and Effects. 42

43 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 Crude Prices Remain Range Bound -Brent Crude Oil Prices (USD) Brent crude (USD) as on 31 st May 2017 Source:Bloomberg Crude Oil prices have remained range bound during the month The prices are on the downward slide despite the production cut by Oil producing countries. If oil remains between 50-60$ a barrel, then it will be inline with the budgetary expectations. 43

44 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 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 Credit Growth Moderates This Month Credit Growth (Weekly Data) Commercial Credit by Banks = Rs 76 lakh Crore (LHS) 7.63 M Current Credit/ Deposit Ratio is ~72% (RHS) Source: Bloomberg, Data as on 31 st May 2017 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. 44

45 Higher Gilt Demand Likely In The Long Term Long Term Moderation in CPI and CAD will lead to higher household savings Resultant higher bank deposit growth will lead to higher Gilt demand Demonetisation has accelerated deposit growth in the banking system 5 0 FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 CPI(%) CAD (% GDP) Large deposits will be withdrawn by public and we expect that about 15-20% will stay back and will keep system flush with liquidity Bank Credit Growth % Subdued Credit growth will also favor higher Gilt demand FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 Source:RBI

46 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 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 India Foreign Exchange Reserves Stability Is Key India Foreign Exchange Reserve ($ US Billion) $ Billion Source: Bloomberg, Data as on 31 st May 2017, India continues to attract capital flow resulting in healthy foreign exchange reserves. Source: Bloomberg Indian foreign exchange reserves have grown by $ 19 billion in CY17 till date, indicating rising foreign investor interest, and stronger rupee. This provides one additional reason for a rate cut if RBI wants to constrain the Rupee rise further. 46

47 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 The Game Changer Total Liquidity in INR bn Total Liquidity From liquidity deficit to liquidity Positive Source: Internal Calculations Total liquidity in the system continued to be positive, but has come down to 3 lakh crores from 4 lakh crores. RBI had conducted MSS during the period which bought down the liquidity by 1 lakh crores. 47

48 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 Active Liquidity Management -Liquidity Scenario Repo Rate In the Last 1 year Repo Rate Overnight Rate(MIBOR%) As of 31 st May 2017 Amount in Rs. billion. Date Repo Reverse Repo 31 st May MSF 0 SLF Total Systemic Liquidity Source:Bloomberg Government Balances RBI has managed to keep overnight rate close to the repo rate. Market is yet to believe that surplus liquidity is here to stay for long, this will lead to flattening of the curve. 48

49 Yield Curve (M-o-M Analysis) 8 Source: Bloomberg M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 10Y 11Y 12Y 13Y 17Y 18Y 28Y 30Y 35Y INR India Sovereign Curve Last Mid YTM INR India Sovereign Curve 05/01/17 01/05/17 Mid YTM YTM (M-o-M Change) 3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 10Y 11Y 12Y 13Y 17Y 18Y 28Y 30Y 35Y As foretold the curve flattened with a bullish trend and yr segment were the best gainers We expect the trend to continue. The 20-30yr segment is warming up to catch the rally in the belly of the curve. It is only likely to happen if RBI is not hawkish which could potentially lead to more bull flattening. 49

50 India-US 10 Year Gilt Spreads have widened creating space for reversion 50 The spreads have widened to above historical average. In the near term we expect spread to remain at similar levels or compress due to expectation of drop in domestic bond yields

51 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 Nov-16 Jan-17 Mar-17 India-US 10 Year & CPI Spreads Source: Bloomberg Spread 10 year yield India - US Spread CPI India - US Narrowing CPI spread makes Indian bonds attractive and therefore creates space for Indian Gilt yields to fall. 51

52 Global Interest Rates Have Eased Recently 3 10 Year Gilts of Select Countries 2.5 US 10 Year 2 US Election results 1.5 UK 10 Year Germany 10 Year Japan 10 Year May-17 Apr-17 Mar-17 Feb-17 Jan-17 Dec-16 Nov-16 Oct-16 Sep-16 Aug-16 Jul-16 Jun-16 52

53 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 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Fed Rate Hike Probability 120 Historical Analysis of Meeting 100 Probability of Hike Probability of No Change (0.75-1) The Fed Fund Futures are indicating a hike in June This likelihood already seems to be factored in by the US 10 year. Market believes that future rate action will be increasingly data dependent. 53

54 Is India s Country Rating Under-rated? India with Better Debt Ratio and Growth Profile is evidently under-rated. Apparently moody rating agencies have shown some poor standards in ratings. 54

55 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 denotes fall in interest rates 55

56 Debt Outlook Long Term Outlook: The concerns from the US debt market have reduced. The June month US Fed hike seems to be discounted in their T-bill prices. We expect that the US 10 year may trade in the 2-2.5% band in the coming days. The downward price movement in the crude prices has significantly addressed the inflation fears in the Indian debt market. Despite the production cuts, the crude seems to have a limited upside trajectory. We believe that the crude is likely to trade in the 50-55$ per barrel. The 2.99% CPI inflation for April month gave a major shift to the sentiments in the Indian debt market. Latest available data indicates a continued softening of pulses and vegetable prices in May This is likely to form the basis of continued sub-3% inflation prints in the next few months, possibly till September Thus, in H1FY18, our calculations indicate Headline CPI inflation averaging at 2.5%, ~200 bps lower than the RBI s expectations of 4.5%. As per some, Even as headline CPI inflation is expected to rise in H2FY18, the average is likely at 3.8%, ~120 bps lower than RBI s expectation of 5.0% The Q4 FY17 GDP growth of 6.1% suggests that demonetisation did have a moderating effect on growth. The construction and the financial services seem to have been impacted the most by this event. As a consequence, growth may become an imperative for RBI and may vaunt a more accommodative stance 56

57 Debt Outlook In the next RBI policy we believe the central banker may acknowledge the drop in inflation and may give guidance for lower interest rates. We assign a low probability of rate cut in June -17 policy Having said that, we believe that lower inflation and moderating growth would provide the space for RBI to reduce policy rate by 50 bps over the course of next 1 year. In the near term, we expect the new 10 year gilt to trade in the band, RBI policy to give direction to the market and will lead to shift in the trading band but will not alter the long term trend of easy rates. Short Term Outlook: We expect short term rate curve up to 2 year to flatten given the renewed possibility of rate cuts going ahead. Short Term rates would move down further in case RBI cut rates or would remain at similar levels in absence of rate cuts. 57

58 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 58

59 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 inaa & 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. 59

60 Story in Accruals Accruals funds generate performance by purchasing high yielding assets Corporates have alternative in NBFCs for funding. But such corporates would need to provide high collateral in keeping with the RBI guidelines shares. regarding loan against 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

61 Need to Watch Out for Opportunities in Hybrid Space 61

62 Kotak MIP Performance* Consistency In Growth Kotak Monthly Income Plan Performance (%) Year 3 Years 5 Years Kotak Monthly Income Plan - Reg - Growth 28.56( 31-May-17 ) Crisil MIP Blended Index -- * Less than 1 year Simple Annualized returns, Greater than or Equal to 1 year Compound Annualized returns.. Performance as of 28 th April 2017 Past performance may or may not sustain in the future 62

63 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. 63

64 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 64 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

65 Have You Noticed The Regular Dividends In Kotak Balance? 65 Record Date Rupees Per Unit Dividend Yield 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 % 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 % * 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

66 Kotak Balance Performance Growth and Stability Together Kotak Balance Fund Performance (%) Year 3 Years 5 Years Kotak Balance - Dividend 16.89( 31-May-17 ) 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 28 th April 2017 * Less than 1 year Absolute returns, Greater than or Equal to 1 year Compound Annualized returns 66

67 Our Calls in 2016 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 the next 5 month Equity- Buy on dips 29th February 26% absolute returns from 29 th Feb to 31 st Aug 2016

68 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 68

69 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: 69

70 Performance (%) as on 30 th April, 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 As of 28 th April 2017 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 30 th April, 2017 Source: ICRA

72 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 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 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 Regular Income over short term Income by focusing on low duration securities 72 * Investors should consult their financial advisers if in doubt about whether the product is suitable for them

73 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 73 * Investors should consult their financial advisers if in doubt about whether the product is suitable for them

74 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 74