Equity & Debt Strategy

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Martha Ryan
5 years ago
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1 Equity & Debt Strategy Mid Apr May 2

2 Equity Market Update & Equity MF Strategy

3 Equity markets corrected in Mar on global cues and selling pressure in Mutual Funds due to Dividend payouts Nifty 5 and Midcap 1 corrected by 3.6% and 4.6% in March on global cues FII selling was concentrated in Derivatives market, MF flow was subdued 1,5 1,4 1,3 1,2 1,1 1, 9,9 US imposes tariff 9,8 2-Mar- 8-Mar- 14-Mar- 2-Mar- 26-Mar- 1-Apr- NIFTY Index US hikes Fed rate by 25 bps Nsemcap index 22, 21,5 21, 2,5 2, 19,5 19,,5, 2, cr15, 1, 5, -5, -1, -15, -6,663 Net investment in Cash market 6,2 1,586 13,254-7,131 7,54-12,552 1,651 16,257 12,272 Dec Jan Feb Mar -228 FII DII excl MF MF 4,973 Flows to Equity Mutual Funds fell significantly in Mar 2 March net inflow was lower due to higher redemptions in both Pure Equity and Balanced funds possibly due to Dividend payouts cr 25, 2, 15, 22,528 2,372 19,535 11,47 5, 4, 3, 2, 1, 1, 5, Dec Jan Feb Mar Dec Jan Feb Mar Pure Equity Inflow Pure Equity Redemption Balanced Inflow Balanced Redemption Source: Bloomberg, Kotak Institutional Equities (KIE) As of 5 th Apr 2 Confidential 3

4 Domestic Economy showing early signs of revival in selected sectors Steel and Cement production up reflecting strong infrastructure expenditure Bank Credit Growth has picked up due to strong Consumer and SME Working Capital demand 25% 2% Steel Consumption Cement Production 21% 12% 1% 1% 9% 11% 15% 1% 5% % -5% 12% 4% 5% 5% 5% 2% -1% 215 Average 216 Average 2 Average 2 Average 8% 6% 4% 2% % 215 Average 216 Average 2 Average 2 Average 6% Ordering activity of NHAI saw a growth of 71% in FY2 with guidance of healthy ordering next fiscal also CV Sales posted healthy growth due to stricter truck overloading enforcement in UP and Rajasthan KM 8, 7, 6, 5, 4, 3, 2, 1, % 4% 3% 2% 1% % 7% 8% 13% 4% 215 Average 216 Average 2 Average 2 Average Source: Deutsche Bank, KIE Confidential 4

5 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 Apr Jun Aug Oct Dec Feb Domestic MF Inflow EPFO, NPS and other ETFs Insurance Net Flow Dividends Paid by MF Disinvestment by Govt IPOs PSU Bank QIP Other QIP Net Domestic Instituitonal Flow However favorable Liquidity scenario could reverse in 2 Libor OIS spread, a measure of credit risk, is at highest level in last decade due to US Tax reforms FII will continue to play an important role as domestic liquidity will be sucked by IPOs and disinvestments by Govt 7% 6% 5% 4% 3% 2% 1% USD bn % Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan Apr Jul Oct Jan 4,55, 4,5, $ Mn 4,45, 4,4, 4,35, 4,3, 4,25, QE Unwind program has resulted in asset drop of $74 billion resulting in lowest level of Fed Balance Sheet since % 1% 8% 6% 4% 2% % -2% India has been receiving major inflows from passive GEM ETFs which could reverse on negative sentiment over EM in trade war environment 11% Inflow in last 6 Months/ AUM 2% 2% GEM ETFs Others GEM Non ETF India ETF India Non ETF -1% 2% Source: DB,Bloomberg, CLSA Confidential 5

6 Market still remain overvalued compared to historic valuations, EPS growth coming from Auto, Metals and Banking Auto Auto Banks Banking Consumer Consumers Energy Energy Industrials Metals Infra Pharma Pharma Tech Tech Utilities Nifty 5 Sensex Mid Cap Index premium over large cap has been maintained in the correction so far Q4 2 Sensex PAT (KIE) is expected to increase by 1% yoy backed by Auto, Consumer, Infra, Metals and NBFCs Bloomberg Estimate.2 22% Premium vs 8% Average (1.). Large Cap Current 12M Forward PE Mid Cap 5 Year Median (2.) (3.) Consensus Earnings expectation of FY 219 has been relatively stable compared to previous Fiscals 4. Apr 15Jul 15Oct 15Jan 16Apr 16Jul 16Oct 16Jan Apr Jul Oct Jan FY 219 FY2 FY Infra looks attractive in terms of valuation, >4% of incremental profit expected from Banks due to lower provisions PE 219E Average Earnings Growth FY19E Source: Bloomberg, KIE Confidential 6

7 Key Triggers Resolution of NPA & Earnings Positive Triggers Global Economic data : World economy improving Commodity Prices: Sustained high prices is expected to lead to high earnings growth in Steel/Oil sector Resolution of NPA: Effective addressal by government of NPA issue in Indian Banks, initial bids for NCLT List 1 has been promising Weaker Rupee: Benefit IT and Pharma Rural recovery: Government focus on rural economy including increase of MSP could benefit rural consumption Risks Outflow from EM: US tax reforms and rising global rates could trigger capital flight from Emerging markets like India Earnings: Consensus expected earnings growth for domestic equities is high at around 25% for FY19, any downgrade would make the valuations more expensive Geo-Political Risk: Further tariffs imposed by US/China Monetary Policy: Faster than expected monetary tightening in Europe and US Weaker Macro: Higher crude prices and low GST collection could lead to lower re-rating of Equity valuations Tight Credit and Higher NPA: Recent PNB event could lead to cascading effect in the whole banking system Slowdown in Retail Flows: Redemption pressure in retail possible post 1% LTCG and 1-15% correction in markets State Elections: Elections in Rajasthan and Karnataka are expected to be tight for NDA Confidential 7

8 India Equities: Valuations & Strategy Maintain Neutral Stance Indian markets lost ~4% for the month of March on account of weakness in markets worldwide. The financial year FY- ended with a gain of 1.2% as against.5% for the previous FY. FII flows into equity markets turned positive with a net investment of INR 12,272 cr from negative last month. At current levels of approx. 1,481 (13 th April, 2), Nifty is trading at a 1 year forward PE of.5x. In the current scenario, we continue to maintain a Neutral stance on the back of healthy earnings growth expectations.. 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: 5% Large Cap allocation (Prefer Large Caps due to relatively Favorable Valuations) 5% Multi Cap allocation (such funds currently have a bias toward 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 8

9 Debt Market Update & Debt MF Strategy

Debt Market: Key Variables Indicators Policy Action No rate action as expected in Apr policy We expect repo rate to be unchanged for extended period of time Tone

and expectation of hike in FII could sustain rally Inflation CPI was lower than expectation at 4.28% in March 2 RBI lowered expectation of 4QFY to 4.

5 over 1 Year Broad range of 63-66 to hold Liquidity Liquidity has gone to deficit from surplus due to tax payments RBI has reaffirmed their objective of

10 Debt Market: Key Variables Indicators Policy Action No rate action as expected in Apr policy We expect repo rate to be unchanged for extended period of time Tone was softer and carried focus on upward risks to inflation 1 Year G-Sec Benchmark Yield Short term triggers like favorable Gsec supply, favorable inflation Prints and expectation of hike in FII could sustain rally Inflation CPI was lower than expectation at 4.28% in March 2 RBI lowered expectation of 4QFY to 4.5% and 1HFY19 to % We expect CPI averaging around 4.3% for FY219 INR Concerns over LOU limits and CAD put pressure on INR Expect mild depreciation towards 65.5 over 1 Year Broad range of to hold Liquidity Liquidity has gone to deficit from surplus due to tax payments RBI has reaffirmed their objective of maintaining a neutral level Key Risks Global monetary tightening Crude Prices Impact of GST revenues and spending on Fiscal Deficit Growth Recovery G-Sec Supply Government announced to borrow INR 2.88 trn of bonds in H1FY19, lower by 5k cr compensated by lower buybacks and higher small savings Issuance in medium term segment of 1-14 years was reduced to 29% against 5% in previous years A hike in FII limit and/or support from RBI in form of OMO purchase could further improve the Supply- Demand dynamics Confidential 1

11 Yields relaxed by 3-6 bps over positive news from inflation print, Borrowing announcement and RBI policy meet Amount in Rs. Bn % Yield % Yield Spread (bps) Spread (bps) Liquidity gone to deficit level before Fiscal end 1, 1-Mar 6-Mar 11-Mar 16-Mar 21-Mar 26-Mar 31-Mar -1, -575 G Sec Spread over Repo has fallen from peak of bps to 113 bps , Spread 1 Year G Sec Repo Rate Inflation for March 2 was lower than expected however Core inflation of 5% warrants caution 1 Year papers rallied the most due to lower gross supply announcement 6.% 5.% 4.% 3.% 2.% 1.%.% May Jun Jul Aug Sep CPI Oct Nov Core Inflation Dec Jan Feb 5.2% 4.28% Mar Y 2Y 3Y 4Y 5Y 8Y 1Y Change Current G-Sec Yield 1M earlier G-Sec Yield Note: As of 5 th Apr 2, Source Bloomberg Confidential 11

12 Fed Rate USD Million Decision to increase FII limit could lend support to Bond market and INR 3,5 3, 2,5 2, 1,5 1, , -1, FIIs buying slowing down due to rising global rates and high utilization levels May Jul Aug Sep Oct Nov Dec Jan Feb Mar Indian currency has depreciated on sustained dollar demand due to demand from importers and FII outflow from Equity Jun Jul Aug Sep Note: As of 5 th Apr 2, Source Bloomberg Oct Nov Dec Jan Feb Mar Apr GST collections running below target rate of 1.1 Trillion Rs/month Jul Aug Sep Oct Nov Dec Jan Feb Fed expects 5 rate hikes in 2, ~3.5% rate till 22 o 4 o 3.75 oo 3.5 o o ooo ooooo 3.25 o o oo o 3 ooooo ooooo 2.75 o oooo o o oo o 2.5 o oooooo 2.25 o oooooo o oo O o Long Term The Fed s Dot Plot chart: Dots represents number of members voting. The chart represents where each participant thinks the Fed rate should be in the next few years. Confidential 12

13 Debt Market Trends Spread of 1 Year CP over 1 Month CD has reduced but still at attractive levels 1 Year CP RHS Jul Aug Sep Oct Nov Dec Jan Feb Mar % of GDP 2 Due to better than expected Cess & stamp duty collection and low expenditure growth, State FD is expected to reduce this year FY13 FY14 FY15 FY16 FY FYRE FY19BE Government Yields rallied more than Corporate papers last month FY19 Central Government Borrowing has been reduced by 5, cr, duration mix and H1 supply favorable for 1 Year paper Spread over 1 Year GSec Sep Oct Nov Dec Jan Feb Mar Apr 3 Year AAA 5 Year AAA SDL Credit RHS Rs lk cr FY19 Fiscal Deficit.25 Higher Small Savings Borrowing.25 Lower Bond Buy Back.5 Lower Gross Borrowing 6.24 FY19 Fiscal Deficit Note: As of 3 rd Apr 2, Source Bloomberg, MFI Confidential 13

14 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 14

15 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 15

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