Market Outlook July 2018
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- Maurice Burke
- 5 years ago
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1 Market Outlook July
2 Equity Markets 2
3 Tug of War between Macro and Micro Macro- Challenging Micro- Improving Macro challenges Oil Prices Trade wars US bond yields Domestic growth Corporate earnings 3
4 1-Jun 2-Jun 3-Jun 4-Jun 5-Jun 6-Jun 7-Jun 8-Jun 9-Jun 10-Jun 11-Jun 12-Jun 13-Jun 14-Jun 15-Jun 16-Jun 17-Jun 18-Jun 19-Jun 20-Jun 21-Jun 22-Jun 23-Jun 24-Jun 25-Jun 26-Jun 27-Jun 28-Jun 29-Jun Performance Of Sensex And Nifty Indices Profit booking ahead of RBI Policy Meet RBI hiked policy rate by 25bps S&P BSE Sensex Nifty 50 Us Fed signaled faster than expected rate hike trajectory US imposed further tariffs on Chinese goods and China retaliated RBI's minutes of its latest policy meet suggested an increase in inflationary risk Rising crude prices, confirmed rupee depreciation resulted in market selloff Tepid global sentiments on increasing risk of trade wars Easing crude prices, appreciation of USD/INR and reduction of Chinese tariffs on Indian goods lifted market mood Source: Bloomberg, Kotak Institutional Equites
5 Market in a Snapshot Dec-07 Jun-18 Macro Indicators Capacity Utilisation(Mar 2017) 91.70% 79.00% Credit Growth 23.30% 12.67% ROE Nifty % 13.78% Net FII Flows (12 M Trailing in Rs. Crore) IIP (twelve months trailing) 15.58% 4.9% ( April 18) GDP Growth 9.6% (Oct-Dec 07) 7.3% ( Jan - Mar 18) Dec-07 Jun Year Government Bond Yield India 7.79% 7.90% USA 4.02% 2.86% Japan 1.51% 0.03% Europe 4.31% 0.30% China 4.46% 3.48% 5 Dec-07 Jun-18 Valuations Trailing P/E Nifty Trailing P/B Nifty Dec-07 Jun-18 Past Returns of Nifty 50(CAGR) Last 1 Year Return 54.80% 12.53% Last 2 Year Return 47.10% 13.72% Last 3 Year Return 43.40% 8.59% Source: Bloomberg
6 Key Events June RBI hiked policy rates by 25bps to 6.25% after over 4 years while maintaining a neutral stance. Some changes for bond markets were announced as well - extension in spreading of MTM losses till Jun 18 quarter and increase in LCR carve out from SLR from 11% to 13%. Monsoon continues to remain in the advancing stage with IMD expecting a good monsoon in the sowing month of July with a 101% rainfall forecast and 97% forecast for the overall June-September period May trade deficit widened to $14.7bn, despite 20% growth in May exports. While imports were expectedly driven up by oil, there was a strong 13% growth in non-oil non-gold imports as well. India s Industrial Production data rose to 4.9% with a sharp rebound in capital goods and steady growth in infrastructure and construction sector. Mining and manufacturing expanded by 5.1% and 5.2% respectively while electricity production fell to 2.1% CPI inflation continued to be on the rise, moving to 4.9% from 4.58% in May, coming in-line with expectations.the rise was on the back of core inflation which increased to 6.2%YoY and fuel inflation which rose to 5.8%YoY. WPI came in higher than expected at 4.43% YoY driven by higher petrol, diesel and vegetable prices. India equities were flattish in June.
7 Macroeconomic Fundamentals Navigating the Global Challenges 7
8 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Per barrel Increasing Crude Oil Prices Poses A Risk For Fiscal & Current Account Deficit Brent Crude (USD) As on 29 th June 2018 Source: Bloomberg
9 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17 Jun-17 Oct-17 Feb-18 Jun-18 INR Touches Life Time Low As on 29 th June 2018 INR movement over the last 10 years Source: Bloomberg
10 Rupee Among The Weaker of the Emerging Market Currencies Emerging Market Currencies Performance V/S USD 10 As on 29 th June 2018 Source : KIE, Bloomberg
11 Emerging Market Bond Yields Have Risen 11 Source : Bloomberg
12 12 On the other hand.
13 India : The Fastest Growing G-20 Nation In The Past 5 Years 13 Source: Macrobond, Macquarie Macro Strategy
14 Global Rating Agencies Feel India Vulnerable But Facts say otherwise Government Debt as % Share of GDP USA 74% 108% France 69% 96% UK 50% 86% China 27% 81% Japan 183% 236% India 75% 69% 14 Source: Bloomberg
15 Forex Reserves Are Large - Can Help To Withstand Currency Shock India's Foreign Exchange Reserves (US$ Bn) 15 Source: CEIC, Kotak Institutional Equities
16 Domestic Flows Into Equities Remain Stable Equity Buying by domestic investors supporting markets Net Investments by FIIs, DIIs and MFs in the Cash Market (US$ mn) FIIs net sellers CYTD DIIs net buyers CYTD 16 Notes: (a) DII -Domestic Institutional Investors (Includes Bank, DFIs, Insurance, New Pension Scheme and MF). Source: Bloomberg, Kotak Institutional Equities
17 17 Microeconomic fundamentals
18 18 Domestic Consumer demand is strong
19 ~ Indians Present At The Football World Cup In Russia India among Top 10 countries in buying of premium ticket- costing upwards of $ 695 for Football world cup in Russia. Indians have spent more money on football world cup than on cricket world cup in Australia in
20 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 In millions Foreign Tourist Arrivals In India An important sector with a multiplier effect is showing robust growth YoY % Growth 10.5% 30.00% 25.00% 20.00% 15.00% % 10.00% Graph is a depiction of last 12 months total imports for each month 5.00% 0.00% -5.00% % Few years ago, Louvre Museum In Paris got more visitors than whole of India. Now India gets more tourists than Louvre. At this pace after few years Incredible India should reach to its fair share in Global Tourism 20
21 High Frequency Indicators Point To Strength In Domestic Growth PMI remained above 50 in May 21 Source: IHS, Macquarie Macro Strategy, June 2018
22 Uptick In Credit And Deposit Growth Indicates Rise In Savings And Investments 22 Source: CEIC, Macquarie Macro Strategy, June 2018
23 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Passenger Vehicle Sales And Commercial Vehicle Growth Remains Robust 40% Passenger Vehicles 38% 100% Commercial Vehicle 30% 20% Monthly Vol 3MMA 20% 80% 60% 40% Monthly Vol 3MMA 51% 10% 20% 42% 0% 0% -20% -10% -40% -20% -60% MMA: Monthly Moving Average 23 Source: CEIC, Macquarie Macro Strategy, June 2018
24 Air Passenger Traffic Growth Remains Robust Trend In Air Passenger Traffic 24 Source: CEIC, Macquarie Macro Strategy, June 2018
25 Rail Freight And Cement Growth Is Improving Trend in rail freight Trend in core industries 25 Source: CEIC, Macquarie Macro Strategy, June 2018
26 Multiple Farmer Support Initiatives By State Governments 26 Source: CLSA
27 Early signs of Capex Recovery? Corporate Confidence Is Back, Capex to Follow Corporate capacity 27 Source: Alpha, Morgan Stanley Research
28 One year of GST: India s biggest tax reforms Revenues And Compliance Is Improving 28 Source: Economic Times
29 Tax Base Has Expanded With GST 29 Source: Economic Times
30 Formalisation Of Economy Seems To Have Gathered Pace 30 Source: Economic Times
31 More than 90% of items in 3 slabs of GST 31 Source: Economic Times
32 CGST and SGST stable in May Monthly trends in GST collections (Rs Bn) 32 Source: PIB, Kotak Economics Research estimates
33 Government Savings Resulting From Usage Of Aadhaar Savings already at US$13bn Just on the Government side Total cost of implementing Aadhaar US$1.4bn 33
34 Key Factors To Watch Out For Monsoon Q1 FY19 Earnings Pick up in rural activity General election
35 Monsoon Season Has Been Normal So Far Monsoon season rainfall against normal for 2017 and 2018 July rains are considered crucial to farming 35 Source: IMD CLSA
36 21% Earnings Growth In FY19 Would Be A Major Acceleration Over The Past Several Years 36 Source: CLSA, Bloomberg
37 MSP Hike Equal To Nearly Last Three Years Of Hikes Trend in paddy (rice) minimum support price % YoY FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 E MSP hike will provide an income boost which will increase the rural demand 37 Source: CLSA, Bloomberg
38 38 Market Performance
39 Strong Performance By Majority Sectors In 1 year period Pharma, PSU and Power lagging in returns (%) (10) (20) (4.0) (2.5) (0.7) (5.3) (7.1) IT Services Tech Metals Bankex FMCG Oil & Gas Capital Goods (1.3) (2.6) (7.2) (7.6) (10.1) (8.6) (12.5) Auto Realty Healthcare PSU Power 1m return % 1 yr return % 39 *As on 30 June 2018, Source: Axis Capital, Bloomberg
40 In percent Performance Across Market Cap - Midcaps and Smallcaps corrected sharply during month (5) (10) (0.2) (3.8) (7.1) Nifty Nifty Midcap S&P BSE Smallcap 1m returns 1y returns 3 yr CAGR 5 yr CAGR 10 yr CAGR 40 *As on 30 June 2018, Source: Bloomberg, Past Performance may or may not sustain in the future
41 Most Global Markets Had Strong Showing In The Last 1 Year Russia (IMOEX) (0.3) 22.2 Brazil (IBOV) (5.2) 15.7 US (Dow Jones) (0.6) 13.7 India (Nifty) (0.2) 12.5 HK (HSI) (5.0) 12.4 Japan (Nikkei 225) China (HSCEI) (7.6) 6.8 UK (FTSE 100) (0.5) 4.4 Taiwan (TSWE) (0.3) 4.3 France (CACS 40) (1.4) 4.0 Singapore (Straits) (4.7) 1.3 Germany (DAX) (2.4) (0.2) Indonesia (JCI) (3.1) (0.5) EURO (Euro Stoxx 50) (0.3) (1.3) Korea (Kospi) (4.0) (2.7) Swiss (SMI) 1.8 (3.3) 1M 1Yr Malaysia (KLCI - FTSE) (2.8) (4.1) (20) (10) * As on 30 June 2018, Source: Bloomberg. Performance data in local currency
42 42 Valuations
43 Forward PE Level Midcap valuations declining as Market Corrects 25 Nifty, NSE midcap one year rolling forward PE chart (X) 20 Nifty NSE Midcap Dec-17 Jun-17 Dec-16 Jun-16 Dec-15 Jun-15 Dec-14 Jun-14 Dec-13 Jun-13 Dec-12 Jun-12 Dec-11 Jun-11 Dec-10 Jun-10 Dec-09 Jun-09 Dec-08 Jun Source: Kotak Institutional Equities
44 Stock Picking Will Be Critical Sensex sectoral long-term valuation snapshot: Forward PE* Auto BFSI Engg FMCG IT Metals Oil Pharma Power Telecom Sensex *As on 30 June 2018, Source: Axis Capital, Bloomberg, Note: * Since April Max Top Quartile Current Lower Quartile Min
45 Indian Markets Higher Than Most Peers On Valuation P/E Multiple CY18/FY19 of Indices US (Nasdaq) India (Sensex) Malaysia (KLCI - FTSE) Japan (Nikkei 225) US (Dow Jones) Thailand (SET) UK (FTSE 100) Singapore (Straits) HK (HSI) Brazil (IBOV) Korea (Kospi) China (HSCEI) (x) Source: Internal Estimates, Bloomberg * For India & Japan Fiscal year is FY19 while others it is CY18
46 Jun-15 Jul-15 Jul-15 Aug-15 Sep-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 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec- 17 Jan-18 Feb-18 Mar- 18 Apr-18 May-18 Jun-18 Jun-91 Jun-92 Jun-93 Jun-94 Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun E Sensex Above Fair Range 12-month forward Sensex P/B (x) India s Market Cap to GDP (%) Sensex P/B (x) - LHS Average of 78% for the period month forward Sensex P/E (x) Stretched 20x - 24x Fair Value Plus 17x - 20x Fair 13x - 17x Attractive 10x - 13x Cheap 8x - 10x Source : Internal Calculation
47 While Valuations Not Cheap, Patience To Be Key As We Await For Earnings To Pick Up Further While equities may still be out-performing other alternate asset classes, moderate return expectations Corporate earnings, especially of domestic oriented companies showing improving trend Use intermittent volatility to increase equity exposure 47
48 Sensex P/E Sensex EPS Earnings Growth Visibility Is Key FY93-97 FY98-03 FY05-09 FY10-17 FY18-20e 48 Source : Internal Calculation, Past performance is not a reliable indicator of expected future performance
49 Key Variables & Their Impact On Equities Key Variables Short - term Economy Medium term Remarks GST to impact near-term activity especially informal segment Corporate Earnings Improving operating leverage, falling interest costs and improvement in working capital can accelerate earnings, but a bit back-ended. Key is improvement in capacity utilisation FII Flow India stands out among global asset classes with prospects of strong long term growth. DII Flow Focus on improving financial savings of households Supply of paper Higher disinvestment target and repair of leveraged balance sheet to create supply in markets. Policy/Reform Initiative Election heavy year can dampen near term outlook for meaningful reform 49 Signify Growth
50 Strategy For Investments In The Current Scenario 1- Kumbhkaran (Invest & forget) Or 2- Asset Allocation 50
51 51 NFO from 13 th July, 2018 to 27 th July, 2018 An Open Ended Dynamic Asset Allocation Fund
52 What Is Our Idea? Stay at the docks in Euphoric Sea Our model measures the future of market weather and automatically directs accordingly Our Portfolio Sails Full Steam when Weather is fair and sea abandoned 52 Please click here for the presentation on Kotak Balance Advantage Fund.
53 Valuation as measured by PE What The Model Driven KBAF Wants To Achieve? Preserve Capital Preserve Capital 53 Market main reh karr trend se dushmani nahi karrtee Time
54 WHO CAN INVEST?? Frankly, Everybody!! First Timer Market Timer Long Term Investors First Time investor keen for an equity experience A wary Investor who is concerned of market level but is keen to generate wealth A goal oriented investor with a long horizon can look at investing in this product 54 Please click here for the presentation on Kotak Balance Advantage Fund.
55 Key Recommendations Key theme Balance Advantage/ Dynamic Equity Allocation Large Cap play on buying sectoral leaders that benefit from improving investment climate Balance of IQ and EQ Diversified/Multicap focus on sectors that are likely to benefit the most across market cap Multicap Large and Midcap 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 equity & debt allocation Remarks Kotak Balance Advantage Fund (KBAF) Kotak Bluechip Fund (Erstwhile Kotak 50) Kotak India EQ Contra Fund (Erstwhile Kotak Classic Equity) Kotak Standard Multicap Fund (Erstwhile Kotak Select Focus) Kotak Equity Opportunities Fund (Erstwhile Kotak Opportunities Fund) Kotak Infrastructure & Economic Reforms Fund Kotak Emerging Equities Fund Kotak Tax Saver Fund Kotak Equity Hybrid Fund (Erstwhile Kotak Balanced Fund) 55 We recommend investors to invest through SIP with a 5 years horizon.
56 DEBT Fundamentals weaken. But markets may have Oversold
57 How June 2018 Unfolded MPC hikes repo rate by 25 basis points to 6.25%, keeps stance neutral CPI rises to 4.9% in May-18, as per market expectations. Bond Market Yields continue to harden. The 10 yr gilt rose to 7.90%. Brent Crude oil peaked at 79.4$ a barrel 57
58 1-Jun 2-Jun 3-Jun 4-Jun 5-Jun 6-Jun 7-Jun 8-Jun 9-Jun 10-Jun 11-Jun 12-Jun 13-Jun 14-Jun 15-Jun 16-Jun 17-Jun 18-Jun 19-Jun 20-Jun 21-Jun 22-Jun 23-Jun 24-Jun 25-Jun 26-Jun 27-Jun 28-Jun 29-Jun 10 year Gilt Yield For the Month of June 8.05 India 10 year Gilt Yield (%) RBI hiked policy rate by 25bps/ Hike in Liquidity Coverage Ratio (LCR) CPI data as per market expectation RBI announced Open market operation (OMO) of 10,000 crore Oil Prices spike Source: Bloomberg, Data as of 29 th June 2018
59 Yield Curve (M-o-m Analysis) Update Chart INR India Sovereign Curve Last Mid YTM INR India Sovereign Curve 01/06/18 Mid YTM 3M 6M 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 16Y 17Y 35Y 40Y 5 YTM (M-o-M Change) M 6M 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 16Y 17Y 35Y 40Y The yield curve somewhat stabalised from a sharp upward move. We the best value is available in up to 5 yr curve on risk reward basis. 59 Source: Bloomberg
60 60 Macros Mixed
61 When It Rains It Pours Macro Weakening Crude Boils Rupee Tumbles Inflation Rises US$ Per/barrel US$ Per/barrel Jul-17 Jul-18 Crude price rise has been steep Rupee has lost value against USD rapidly CPI has risen sharply over last 1 year 61 Source: Bloomberg
62 Rising Crude Price & Domestic Demand is dragging the Trade Deficit 0.0 Sep-99 Jan-01 May-02 Sep-03 Jan-05 May-06 Sep-07 Jan-09 May-10 Sep-11 Jan-13 May-14 Sep-15 Jan-17 May Graph is a depiction of last 12 months total deficit for each month US$ bn High Crude, Electronic and Gold Import have worsen the Trade Deficit. 62 Source: Bloomberg
63 Sep-03 Feb-04 Jul-04 Dec-04 May-05 Oct-05 Mar-06 Aug-06 Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17 Jun-17 Nov-17 Apr-18 Electronic Imports Overtakes Gold Imports: - Though this could ease going forward as a weaker INR makes these goods costlier Electronics Gold US$ bn Graph is a depiction of last 12 months total imports for each month. 63 Source: Bloomberg
64 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 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 CPI Inflation: Inflation to peak out in July as the base effect wears off 12% 10% 8% 6% CPI Core CPI 6.2% 4% 2% 4.9% 0% The CPI inflation increased to a four-month high 4.9% in May 2018 (+2.2% in May 2017) from 4.6% in April 2018(+3.0% in April 2017). The uptick in the CPI inflation in May 2018 reflects higher inflation for transport and communication and fuel and light mirroring the hardening of crude oil prices, an unfavourable base effect for food prices, and a broad-based uptick in core inflation. The core-cpi inflation rose to a 46-month high 6.2% in May 2018 from 5.9% in April 2018 led by a broad-based uptick. On an MoM basis, the core-cpi sub-index increased by 0.5%. in May 2018, sharply higher than the 0.2% uptick in May Notably, the wedge between headline and core-cpi inflation narrowed to 131bps in May 2018 from 134 bps in April Source: MOSPI
65 PSU Banks Vital still a concern. Others Impaired 1, , , , , , ,991 7,580 In Rupees Billion PSU banks having tough time with rising NPA and the situation can get we get worse with rising rates. This is meaningfully impacting the lending activity and G sec demand as incremental risk appetite is getting constrained ^A loan is impaired when it is probable that the bank will be unable to collect all amounts due (including both interest and principal) according to the contractual terms of the loan agreement 65 Source: Bloomberg
66 GST Numbers Growing Steadily With Growing Tax Compliance Rs Lakh Crs y = x R² = Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Mr Adhia gives interesting numbers to support this. The gross monthly GST collections is about Rs5trn and input tax credit claims is more than Rs4trn, leaving net GST collections around Rs900bn/month. A lot of these input tax credits are spurious. If Input tax credits go down by say even 5-10%, GST collections will rise by 20-40% - Hasmukh Adhia 66 R2 : 100% indicates that the model explains all the variability of the response data around its mean. Source: Bloomberg
67 Factors Impacting the Markets 67
68 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct-16 Mar-17 Aug-17 Jan-18 Jun-18 From Liquidity Surplus to Liquidity Neutral Total Liquidity Total Liquidity in INR bn RBI has managed to keep overnight rate close to the repo rate. As the liquidity in the system reduces due to the increase in the Currency in Circulation, RBI may start conducting Open market operations, possibly in Q2, as against Q3 & Q4 of FY Source: RBI
69 Sharp Increase In Currency In Circulation Adding To Structural Liquidity Shortage, OMO Needed Jun-18 Jun-18 Jun-18 Jun-18 Jun-18 May-18 May-18 May-18 May-18 Apr-18 Apr-18 Apr-18 Apr-18 Mar-18 Mar-18 Mar-18 Mar-18 Mar-18 Feb-18 Feb-18 Feb-18 Feb-18 Jan-18 Jan-18 Jan-18 Jan-18 Dec Source: Bloomberg. In Rs Crores
70 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Credit Growth Slowly Picking Up Credit Growth (Weekly Data) Current Credit/ Deposit Ratio is ~75.4% (RHS) Commercial Credit by Banks = Rs lakh Crore (LHS) Credit growth has picked up by 10-12% as compared to last year. 70 Source: Bloomberg, Data as on 29 th June 2018
71 Uptick in Credit Quality 12 Months Rolling Credit Ratio And Debt-weighted Credit Ratio* Credit Ratio and debt-weighting credit ratio, continue to remain above 1 time on a rolling 12 months basis 71 *Credit ratio is the ratio of upgrades to downgrades recorded during a period. Debt-weighted credit ratio is the ratio of total debt on the balance sheets of firms upgraded versus firms downgraded, excludes financial sector players. Source: CRISIL rating report
72 Better Financial Metrics Strengthening median gearing ratio for CRISIL-rated firms Improving median interest cover for CRISIL-rated firms Median gearing (ratio of debt to equity) of CRISIL rated portfolio improved to 1.00 time in fiscal 2018 from 1.37 times in fiscal Median interest cover (ratio of profit before depreciation, interest and tax to interest and finance charges)improved to 2.83 times versus 2.37 times over the same period. 72 Source: CRISIL rating report
73 73 Yields & Its Metrics
74 Spreads Between 10 Year & Repo -10 year bond yield spread over repo similar to the 2013 rate hike cycle year bond yield spread over repo similar to the 2013 rate hike cycle Yr GSEC Repo Spread -1 4 Jun-18 Feb-18 Oct-17 Jun-17 Feb-17 Oct-16 Jun-16 Feb-16 Oct-15 Jun-15 Feb-15 Oct-14 Jun-14 Feb-14 Oct-13 Jun-13 Feb-13 Oct-12 Jun-12 Feb-12 Oct-11 Jun-11 Feb-11 Oct-10 Jun-10 Feb-10 Oct-09 Jun-09 Feb-09 Oct-08 Jun-08 Feb-08 Oct-07 Jun-07 Feb-07 Oct-06 Jun-06 Feb Source: Bloomberg, Citi Research
75 Positive Real Interest Rates to Stimulate Financial Savings Source: Bloomberg -3 Jun-18 Mar-18 Dec-17 Sep-17 Jun-17 Mar-17 Dec-16 Sep-16 Jun-16 Mar-16 Dec-15 Sep-15 Jun-15 Mar-15 Dec-14 Sep-14 Jun-14 Mar-14 Dec-13 Sep-13 Jun-13 Mar-13 Dec-12 Sep-12 Jun-12 Mar-12 Earlier, negative real rates fueled inflation in physical assets as people chased assets such as real estate and gold till This can lead to healthy banks deposits and therefore lending to the formal sector 75 Note: Monthly 10 year Gilt Yield taken as average of their respective month. June 2018 CPI is assumed to be same as May-18 and Real Interest rate is calculated. Source: Bloomberg
76 Inflation Adjusted Yields In India Is Attractive India-US CPI Spread India-US Gilt Spread May-18 Mar-18 Jan-18 Nov-17 Sep-17 Jul-17 May-17 Mar-17 Jan-17 Nov-16 Sep-16 Jul-16 May-16 Mar-16 Jan-16 Nov-15 Sep-15 Jul-15 May-15 Mar-15 Jan-15 Nov-14 Sep-14 Jul-14 May-14 Mar-14 Jan-14 Nov-13 Sep-13 Jul-13 May-13 Mar-13 Jan-13 Nov-12 Sep-12 Narrowing CPI spreads and widening bond spreads make Indian fixed income attractive therefore risk of sharp outflow due to rates differential is unlikely 76 Note: 10 year Gilt Yield taken as average of their respective month. Data as of June 2018 (June 2018 CPI is assumed to be same as May Source: Bloomberg
77 Jun-17 Jul-17 Jul-17 Aug-17 Aug-17 Sep-17 Sep-17 Oct-17 Oct-17 Nov-17 Nov-17 Nov-17 Dec-17 Dec-17 Jan-18 Jan-18 Feb-18 Feb-18 Mar-18 Mar-18 Apr-18 Apr-18 May-18 May-18 May-18 Jun-18 Jun-18 Global Bond Yields Sharp fall in UST due to risk off Year Gilt of Selected Countries 2.83 US 10 Year UK 10 Year 1.27 Germany 10 Year Japan 10 Year 0.02 The Risk off sentiment was triggered due to political uncertainty in Italy leading to sharp rise in the Italy bond yields. 77 Data as of 30 th June Source: Bloomberg
78 Key Variables & their Impact On Interest Rates in 2018 Key Variables Short term (3-6 month) Medium term (6month 2 years) Inflation Rupee Credit Demand Government Borrowing RBI Policy Global Event Risk Corporate bond Spread Debt FII flow Liquidity 78 denotes fall in interest rates
79 Debt Outlook Long End RBI hiked repo by 25 bps in June month. Given that the Brent is trading at 80$ a barrel, we cannot rule out possibility of another rate hike in August The CPI is expected to Inch up to % by July and peak around these levels provided we have a normal monsoon, brent stabilizes at current levels; and there is nominal increase in MSP. If RBI follows through on its stance then the August MPC will be the best opportunity for the RBI to hike repo RBI surprised the markets by announcing the OMO of INR 10,000 cr in mid June; which led to a relief rally. However, it was short lived as the follow through OMO announcement did not come and Brent crude oil prices hit 80$. This took the 10 yr bond yields to 7.93%, with the month closing at 7.91% The present gilt levels provide a real interest rate spread of more than 200 bps from peak CPI levels. Thus at these levels, the yields may be already discounting additional 1 to 2 rate hikes. However the yield may still trend higher on higher oil price and on Rupee depreciation From valuation stand point, the market is at fair levels and is largely a trading market. However due to lack of liquidity, we may 79 avoid risky bets, wait for clear signs.
80 80 Debt Outlook Short End Post LCR relaxation in the policy (resulting in reduced supply) and improvement in liquidity condition; we saw a drop in short term rates up to 2 year (despite the rate hike) The magnitude of fall in the 3-6 months segment was higher at bps as compared to bps drop in yield in the 1-2 year segment We have seen relatively less movement in the greater than 6 months segment. This is due to uncertainty on the inflation; possible RBI action; and uncertainty on the liquidity front. We are seeing reduction in liquidity on account of increase in CIC and RBI forex intervention As the probability of rate action would increase, we may see upward movement at the extreme shorter end of the yield curve
81 81 Our Duration Strategy 10 Year bond at 8.10%, SDL at 8.70%... We are managing funds actively. Actively managed duration/ dynamic fund can reduce duration to cut the MTM risk We have been running relatively low duration across schemes since some time now. This has helped us save investors from a lot of potential damage caused due to sharp rise in yields We will increase the duration gradually when the markets have stabilized or we see some signs of peaking in interest rates
82 82 Key Recommendations Segment Scheme Rationale Accrual Play Asset Allocation Short Term Parking of Funds Kotak Credit Risk Fund (Erstwhile Kotak Income Opportunities Fund) / Kotak Medium Term Fund Kotak Monthly Income Plan Kotak Savings Fund (Erstwhile Kotak Treasury Advantage Fund) / Kotak Low Duration Fund / Kotak Corporate Bond Fund Kotak Equity Arbitrage Fund Investment for higher accrual Investment for asset allocation Parking of surplus cash Higher post tax return Duration Play Kotak Bond (Erstwhile Kotak Mahindra Bond Unit Scheme 99) Kotak Bond Short Term Investment for longer maturities Investment for shorter maturities
83 Why Accrual Funds? Default Risk - Very Low - CRISIL s average 1 year transition rates for long term ratings between 1988 and 2016 Ratings AAA AA A BBB BB B C D AAA 97.37% 2.63% 0% 0% 0% 0% 0% 0% AA 1.45% 93.22% 4.49% 0.49% 0.16% 0.03% 0.02% 0.04% A % 88.91% 5.72% 1.48% 0.11% 0.23% 0.51% CRISIL FY16 Round Up AAA rate firms have never ever defaulted. The risk of default of AA is only 0.04% and Risk of A is only 0.51% AAA continue to hold its rating 97% of times, AA around 93% of times, A holds the rating around 88% of times Our Comments 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 Moreover, to protect our interests, we ensure guarantee / mortgage / collateral etc. where required We look to invest in assets that have wide market acceptance This ensures that: 1. Our credit risk is lower than perceived 2. That we capture value with limited risk 83 *Unrated papers that we invest in is generally very low and has implied credit risk which is moderate to low
84 Story in Accruals The Fund Manager focuses on generating income from credit allocation rather than duration calls. Accruals funds generate performance by purchasing high yielding assets with relatively short duration. This provides investor with a relatively high yield with low NAV volatility Investors with months horizon can look at investing in Accrual Funds Accrual funds like Kotak Income Opportunities / Kotak Medium term provide retail investors the potential to obtain high yields in the present condition. 84
85 Need to Watch Out for Opportunities in Hybrid Space 85
86 Kotak Equity Saving Fund Performance Year 3 Years Since Inception Kotak Equity Savings Fund - Reg - Growth 75% NIFTY 50 ARBITRAGE + 25% Nifty 50 TRI# * Less than 1 year Simple Annualized returns, Greater than or Equal to 1 year Compound Annualized returns. Scheme in inception since 13th Oct Performance as of 31st May 2018 Past performance may or may not sustain in the future 86 Performance (%) as on 31 st May, 2018 Source: ICRA
87 Have You Noticed The Regular Dividends In Kotak Equity Hybrid(erstwhile Kotak Balance Fund? 87 Record Date Rupees Per Unit Dividend Yield 25-Jun % 25-May % 25-Apr % 26-Mar % 26-Feb % 26-Jan % 26-Dec % 27-Nov % 25-Oct % 28-Sept % 28-Aug % 25-July % 27-June % 25-May % 25-Apr % 27-Mar % 27-Feb % 25-Jan % 26-Dec % 01-Dec % 26-Oct % * 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 Source: ICRA
88 88
89 Now Learn Anywhere Anytime Kotak Mutual Fund launches Video Learning Modules for IFA s Visit If you are empanelled with Kotak AMC & have updated your mobile number & id, follow the process mentioned below. Enter your ARN number and password Click on video to view 89
90 Get your business on the go through distributor initiated transaction Step 1 Step 2 Step 3 Step 4 Enter Your Mobile Verify Via OTP Select Type of Transaction Trigger Transaction for your Investor 1. Existing Investors Lumpsum SIP STP SWP Redemption Switch 2. First Time Investors Type of Transactions: Lumpsum SIP Zero Balance Folio 90
91 Go Digital Make your Digital Footprint 990 Distributors on Go Digital & Counting 91
92 Leading the Way First AMC in India to Sign the United Nations supported principles for Responsible Investment Please click atimes.com/mf/mfnews/kotak-mutual-fundsigns-un-supportedprinciples-for-responsibleinvestment/articleshow/ cms for the Newspaper article 92 Source: MINT
93 93 Disclaimers & Disclosures
94 Performance (%) as on 31 st May, 2018 Scheme Inception date is 13/10/2014. Mr. Deepak Gupta has been managing the fund since 17/09/2014. Mr. Abhishek Bisen has been managing the fund since 17/09/2014. 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 95 & 96 for top 3 and bottom 3 schemes managed by Deepak Gupta. 94 Source: ICRA
95 Other Funds Managed by Mr. Deepak Gupta Top 3 Funds Managed by Mr. Deepak Gupta 95 Mr. Deepak Gupta manages 12 funds of Kotak Mutual fund. Kotak Global Emerging Market Fund - Growth, *Name of the Benchmark - MSCI Emerging Market index, Scheme Inception date is 26/09/2007. Mr. Deepak Gupta has been managing the fund since 04/04/2011(Dedicated fund manager for overseas investment) and Mr. Abhishek Bisen has been managing the fund since 04/04/2011. Kotak NV20 ETF - *Name of the Benchmark Nifty 50 Value 20 TRI, Scheme Inception date is 01/12/2015. Mr. Deepak Gupta has been managing the fund since 08/12/2015. Kotak India EQ Contra Fund (Erstwhile Classic Equity Fund) - Growth, *Name of the Benchmark - Nifty 100 TRI, Scheme Inception date is 27/07/2005. Mr. Deepak Gupta has been managing the fund since 01/01/2017. 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. TRI Total Return Index. With effect from 1st February 2018, we are comparing the performances of the funds with the total return variant of the benchmark instead of the price return variant. Performance (%) as on 31 st May, 2018 Source: ICRA
96 Other Funds Managed by Mr. Deepak Gupta Bottom 3 Funds Managed by Mr. Deepak Gupta Mr. Deepak Gupta manages 12 funds of Kotak Mutual fund. Kotak Asset Allocator Fund - Growth, *Name of the Benchmark - CRISIL Hybrid Aggressive Index, Scheme Inception date is 09/08/2004. Mr. Deepak Gupta has been managing the fund since 01/09/2008. Kotak World Gold Fund - Growth, *Name of the Benchmark - Financial Times Gold Mines Total - Price, Scheme Inception date is 06/06/2008. Mr. Deepak Gupta has been managing the fund since 01/02/2015. Kotak PSU Bank ETF, *Name of the Benchmark - Nifty PSU Bank TRI, Scheme Inception date is 08/11/2007. Mr. Deepak Gupta has been managing the fund since 25/02/2011. 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. TRI Total Return Index. With effect from 1st February 2018, we are comparing the performances of the funds with the total return variant of the benchmark instead of the price return variant. 96 Performance (%) as on 31 st May, 2018 Source: ICRA
97 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. 97
98 Product Labeling 98 * Investors should consult their financial advisers if in doubt about whether the product is suitable for them
99 Product Labeling 99 * Investors should consult their financial advisers if in doubt about whether the product is suitable for them
100 100 Product Labeling
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