Market Outlook January 2018

Transcription

1 Market Outlook January

2 2 Equity Markets

3 3

4 4 Key Interesting Events Seen In 2017

5 5 Key Interesting Events Seen In 2017

6 6 Key Interesting Events Seen In 2017

7 Key Events December 2017 BJP won its 6th consecutive term in Gujarat with 99 of 182 seats and also secured a comfortable win in Himachal Pradesh with 44 of 68 seats. Key to note in Gujarat is while BJP has done well in urban seats the race was tighter than expected for the rural seats. In line with street expectations, RBI held status quo on policy rates at 6% (voted 5-1) and maintained neutral policy stance. The MPC statement however struck a vigilant tone on inflation and revised its 2HFY18 CPI forecast marginally higher to % from % earlier The Finance Ministry notice in the last week of Dec confirmed fears of fiscal slippage as it announced extra borrowing of INR 500 bn (0.3% of GDP) through government bonds over and above the budgeted net borrowing of INR 3482 bn for FY18. Oct IIP slowed to 2.2% vs 3.8% in Sep as manufacturing sector slowed to 2.4% vs 3.4% last month. Capital goods output was in the green for the 3rd straight month FIIs reversed position to net sellers in Dec after 2 consecutive months of buying with net outflows $ 1025mn. The total net inflows from FIIs for the year 2017 stood at $7.8bn. DIIs continued to remain buyers for the 9th straight month with net inflows of $1.2bn led by Mutual Funds at $951mn.. 7

8 Assembly election outcome Win but by a smaller margin ELECTION OUTCOME Source: Election Commission of India MOST OF BJP S LOSSES IN FARMER- DOMINATED SAURASHTRA REGION Source: NDTV,*Congress figure includes one seat of an independent supported by the party 8

9 Political map of India BJP adds Himachal Pradesh to its kitty 9 Source: CLSA, RBI, Census of India

10 Election calendar Tight political calendar for Source: CLSA, Rajya Sabha, Election Commission. *The number of members the BJP gets to nominate (sans election) is included in the above data.

11 GST Collections still short Oct 2017 (GST collections, Rs. bn) Higher than budgeted expenditure, weak GST collections and sharply lower than budgeted non-tax revenues are the main reasons for fiscal stress 11 Source: CGA, Spark Capital Research

12 Small slip in fiscal for FY18 also. If the gov t intends to maintain the budgeted expenditure, the fiscal deficit will likely slip by 40-50bp Revenues & Expenditure Table 12 Source: CLSA, CGA, Ministry of Finance documents

13 Annual Performance Of Sensex And Nifty Indices Sensex s and Nifty s Performance (%) 13 Source: Bloomberg, Kotak Institutional Equities

14 High PE, But On Low Profitability Base Source: Bloomberg, CMIE, ACE Equity, MOSPI, CLSA

15 2018 and beyond Key Events with large range of outcomes Budget along path of fiscal prudence? Targeted Fiscal deficit next year? Subsidy dole out or infra spend maintained? GST Collections Need to watch out for collection in next few months Election On development plank On populist measures (farm waivers/subsi dy etc) FOMC hikes in CY2018 How many hikes? Global events Trump protection barriers for trade? China CNY stabilising? Eurozone election more surprises in store RBI Policy action in 2018 Hike? Pause? 15

16 Long Term Theme Emerging : Disruptor versus Disrupted 3D printing and artificial intelligence is disrupting traditional models of manufacturing Robotics is disrupting human way of providing services 16

17 Rural Sector Recovering 17 Source: CMIE, Ministry of Finance

18 18 Lead Indicators Show Possible Uptick in Growth

19 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 19

20 20 Market Performance

21 Strong Performance By Majority Sectors Over The Last 1 Year IT and Pharma lagging in returns BSE Sectoral Indices (20) (%) Realty Metals Capital Goods (0.1) Bankex Oil & Gas Auto FMCG Power PSU Tech IT Services Healthcare 0.5 1m return % 1 yr return % 21 *As on 29 Dec 2017, Source: Axis Capital, Bloomberg

22 In percent Performance Across Market Cap - Strong Performance Down the Capitalisation Curve Nifty Nifty Midcap S&P BSE Smallcap 1m returns 1y returns 3 yr CAGR 5 yr CAGR 10 yr CAGR 22 *As on 29 Dec 2017, Source: Bloomberg

23 Mid Caps are at a Premium 23 Source: Bloomberg, CLSA

24 24 Laggards become Leader

25 Most Global Markets Had Strong Showing In The Last Year HK (HSI) India (Nifty) Brazil (IBOV) US (Dow Jones) China (HSCEI) Korea (Kospi) Indonesia (JCI) Japan (Nikkei 225) Singapore (Straits) (0.4) (0.9) Taiwan (TSWE) Swiss (SMI) Germany (DAX) Malaysia (KLCI - FTSE) France (CACS 40) UK (FTSE 100) EURO (Euro Stoxx 50) Russia (MICEX) (5.5) (0.8) (1.1) (1.8) M 1Yr (10) * As on 29 Dec 2017, Source: Bloomberg. Performance data in local currency

26 26 Valuations

27 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 and Power at lower end of valuations, other sectors moving towards upper end of valuation zone 27 *As on 29 Dec 2017

28 Indian higher than most peers on Valuation P/E Multiple CY17/FY18 of Indices India (Sensex) 23.3 US (Nasdaq) 21.4 US (Dow Jones) 17.9 Japan (Nikkei 225) 17.0 Malaysia (KLCI - FTSE) Thailand (SET) UK (FTSE 100) Singapore (Straits) Brazil (IBOV) HK (HSI) Korea (Kospi) 9.1 (x) Source: Internal Estimates, Bloomberg * For India & Japan Fiscal year is FY18 while others it is CY17

29 Greater Power comes Greater Responsibility MF Equity collections in CY17 were ~80% of collections in last trade 29 Source: CEIC, AMFI, IIFL Research. Note: Based on sum of ELSS, Other ETF, Growth and 65% Of Balanced category collections. * CY17 flows based on period of Jan to to Nov-17

30 Trend In Equity And Derivatives Flows Net Investments by FPIs, DIIs and MFs in the cash market (US$ mn) Net foreign flows in the derivatives market (US$ mn) 30 Notes: A) DII- Domestic Institutional Investors (Includes Bank, DFIs, Insurance, New Pension Scheme and MF) B) FII data till Dec 26, MF data is till Dec 21 and DII data is for full month till Dec 28, Source: Kotak Institutional Equities Research

31 Domestic Flows May Sustain Into Equity Funds In CY 18 Low FD Return Uncertain real estate environment & Lower time limit for LTCG Mature investor base understanding the benefits of compounding of equities as asset class SIP as a tool to counter volatility Flows to equities 31

32 Earnings Projected to Pick Up in FY19 32 Source: Companies, CLSA

33 33 Nifty EPS Growth

34 Jul-93 Jul-94 Jul-95 Jul-96 Jul-97 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Sensex P/E FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Mar-17 Mar-18 Mar-19 FY18E FY19E Sensex EPS ,024 1,111 1,180 1,331 1,352 1,332 1,347 1,461 1,670 Markets Consolidating As It Awaits Economy To Take Off FY17-19E: 11.3% CAGR FY93-FY17: 12% CAGR FY03-08: 25% CAGR FY08-17: 5.5% CAGR FY93-96: 45% CAGR FY96-03: 1% CAGR 30 Sensex P/E (x) Sensex CAGR 14% Sensex CAGR -1% Sensex CAGR 39% Sensex CAGR -1% Average of 15.3x FY93-97 FY98-03 FY05-09 FY10-17 FY18-19e 25 Past performance is not a reliable indicator of expected future performance

35 Key Variables & Their Impact On Equities Key Variables Short - term Economy Corporate Earnings FII Flow Medium - term Remarks GST to impact near-term activity especially informal segment 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 India stands out among global asset classes with 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. Policy/Reform Initiative GST landmark reform implemented, can result in higher tax compliance 35

36 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 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Markets above Fair range month forward Sensex P/B (x) India s Market Cap to GDP (%) Sensex P/B (x) - LHS month forward Sensex P/E (x) Stretched 20x - 24x Fair Value Plus 17x - 20x Fair 13x - 17x Attractive 10x - 13x Cheap 8x - 10x

37 While Valuations Not Cheap, Patience to be key as we await earnings to pick up 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 37

38 Risk 1 Higher Oil Prices Nifty & Crude Show an Inverse Relationship 400 Prices Normalised to Nifty Prices Crude Prices 0 Nov-17 Jul-17 Mar-17 Nov-16 Jul-16 Mar-16 Nov-15 Jul-15 Mar-15 Nov-14 Jul-14 Mar-14 Nov-13 Jul-13 Mar-13 Nov-12 Jul-12 Mar-12 Nov-11 Jul-11 Mar-11 Nov-10 Jul-10 Mar-10 Nov-09 Jul-09 Mar Source: Bloomberg

39 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Risk 2 : Interest Rates too are on Upswing While Nifty is Testing New Peaks Gilt 10 Yr (LHS) Nifty 50 (RHS) Source: Bloomberg

40 Risk 3 Rise in equity issuance impacting market liquidity A POTENTIAL RISE IN EQUITY ISSUANCE MIGHT IMPACT MARKET LIQUIDITY But low returns in traditional avenues and increasing awareness continues to drive money to capital markets 40 Source: Bloomberg, CLSA

41 Risk 4 Delay in NPL resolution NPL RATIOS YET TO COME DOWN AND RESOLUTION MAY GET DELAYED Bank recap details & roadmap would give further clarity 41 Source: RBI, CLSA

42 Risk 5 US Fed Rate Hike & Other Geo Political Risks India has been relatively resilient to US rate hikes & geo political risks in the past 42 Source: Bloomberg, BNP Paribas

43 Risk 6 Populist measures Government may turn populist While the current government has been disciplined fiscally, as it has focussed incremental spending on capex and/or fiscal deficit reduction, the risk of rising profligacy cannot be ruled out as we head towards the May 19 general elections. One example of this is the rise in farm loan waivers in the past few months, partly driven by low agri product prices and weak monsoons in The government has already readied its armour to take the fight against corruption to the next level with the law on benami property. This law can be used to provisionally attach benami properties and eventually confiscated. The act can help to improve transparency in property ownership but can cause economic disruption if used indiscriminately. A big crackdown under the benami property law may yield political gains as seen with the demonetisation move. though the probability of the same is low 43

44 Risk 7: IndAS Introduction May be a Risk 44 Source: Banks, CLSA

45 Key Recommendations Key theme Large Cap play on buying sectoral leaders that benefit from improving investment climate Remarks Kotak 50 Balance of IQ and EQ Kotak Classic Equity 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 Opportunities Fund Kotak Infrastructure & Economic Reforms Fund Kotak Emerging Equities Fund Kotak Tax Saver Fund Kotak Balanced Fund 45 We recommend investors to invest through SIP with a 5 years horizon.

46 Market Valuation Strategy For Investments In The Current Scenario 1- Kumbhkaran (Invest & forget) Or 2- Asset Allocation Investor Stance Underweight Neutral Overweight Below Fair Value Lumpsum Lumpsum Leverage Fair Value STP/ Lumpsum SIP Partial Profit Booking Above Fair Value STP Partial Profit Booking Take Profit Home 46

47 DEBT MARKETS 47

48 How Dec 2017 Unfolded Macro Data: India reported a fiscal deficit of 6.12trillion Rs($95.77 billion) for Apr-Nov, or 112% of the budgeted target for the current fiscal year that ends in Mar. This was mainly due to lower GST collections and higher expenditure. The RBI kept the repo rate unchanged at 6% in its latest credit and monetary policy review, as was widely expected given the concerns on the rising headline inflation and firm global crude oil prices. Inflation : Retail inflation soared to a 15-month high of 4.88% in November mainly due to higher food prices. Trade Data : India's exports rose at a fast clip in November, reversing the contraction in the previous month. Value of exports was $26.2 billion against imports of $40 billion, yielding a trade gap of $13.8 billion, higher than $13.4 billion same month last year but less than $14 billion in October. Eight core sectors grew by 6.8% in November 2017, on robust performance in segments like refinery, steel and cement. Favourable base effect also helped. 48

49 How Dec 2017 Unfolded India's factory activity expanded at the fastest pace in five years in December, buoyed by a rise in output and new orders, which allowed firms to raise prices. The Nikkei Manufacturing Purchasing Managers' Index, rose to 54.7 in December from November's The government reduced the interest rates on small saving schemes, including National Savings Certificates (NSCs), Public Provident Fund (PPF) and Kisan Vikas Patra (KVP), by 0.2% for the fourth quarter of the fiscal (January-March). The U.S. economy grew at its fastest pace in more than two years in the third quarter, powered by robust business spending, Gross domestic product expanded at a 3.2 % annualized rate last quarter. US Federal Reserve officials followed through on an expected interest-rate (target range of 1.25% to 1.5%) increase and raised their forecast for economic growth in 2018, even as they stuck with a projection for three hikes in the coming year 49

50 2017 : The Year of Ping-Pong Yields RBI changes its stance to neutral Govt. sticks to a prudent budget RBI surprises by narrowing the policy corridor India 10 Yr Gilt Inflation eases below 2% Govt announces bank recapitalization programme for Rs 2.1 lakh crore RBI cuts rates by 25 bps RBI surprises by cancelling bond sale worth Rs 10,000 crore Concerns on fiscal slippages and below par GST revenue 6 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Year 2017 was a roller coaster ride for the fixed income markets. The 10-yr benchmark sovereign yield moved from 6.40% levels at the start of the year to 7.39% levels by the year end, i.e. a rise of almost 100 bps (i.e. 1%). Govt announces additional borrowing of Rs 50,000 crore 50

51 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 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 FII Debt Flows 4.0 FII Net Investment- Debt (USD bn) (1.0) (2.0) (3.0) During the calendar year 2017 we saw 88,401 crore inflow in G Sec and 49,117 crore inflow in corporate bonds from FII 51

52 Disinvestment With the government retaining Rs145bn of inflows received for its Bharat 22 ETF sale done, the disinvestment proceeds for the year have reached a record Rs525bn already. Visible pipeline for divestment includes the c.rs320bn to be received if the ONGC HPCL deal goes through taking the total to c.rs bn. This implies high likelihood of divestments crossing the Rs725bn target. Historically, there tends be a shortfall between divestment target and actual achievement (e.g. Rs462bn achieved in FY17 vs. Rs565bn budget) and as such there is some cushion built here. However, this year the fiscal has been seeing multiple stresses (lower RBI dividend, telecom revenues, fuel duty cuts and likely GST shortfall) which have created a bit of a scare on the same. To that extent, beating the divestment target will be a relief. 52 Source : India Budgetget.in

53 Extra Borrowing Due To Fiscal Deficit Slippage Fiscal Deficit (Rs in crores) Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov 612,105 India's fiscal deficit stands at Rs 6,12,105 crore in just eight months of FY18, overshooting the budgeted estimate (BE) target by 112% for the current financial year Given the revenue shortfall from GST, lower dividend from Reserve Bank of India, Government has decided to borrow additional crs during Out of this crs, 50,000 crs would be through dated government securities and the balance crs from treasury bills 53

54 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 Aug-17 Nov-17 Positive Real Interest Rates to Stimulate Financial Savings Real Interest Rate (%) 2.18 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 may move from physical to financial assets. 54 Note: Monthly 10 year Gilt Yield taken as average of their respective month. Source: Bloomberg

55 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 May-17 Jul-17 Sep-17 Nov-17 CPI Inflation: 2 nd half 2018 inflation likely to be in RBI band 11% Source: MOSPI 9% CPI Core CPI 7% 5% 4.9% 3% 1% 4.88% The CPI inflation hardened to a 15-month high 4.9% in Nov 2017 (+3.6% in November 2016) from 3.6% in Oct 2017 (+4.2% in Oct 2016, primarily due to higher food prices and partly reflecting the base effect. The inflation for food and beverages rose to a 15-month high 4.4% in November 2017 (+2.6% in November 2016) from 2.3% in October 2017 (+3.7% in October The core-cpi inflation increased to a eight-month high 4.9% in Nov 2017 from 4.5% in Oct On an MoM basis, the core-cpi sub-index increased by a sharper extent in Nov 2017 (+0.6%), relative to Nov 2016 (+0.3%). Notably, ore-cpi inflation converged with the headline CPI inflation for the first time in 45 months, in Nov

56 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 Crude Prices Firming up Brent Crude(USD) Crude Oil prices rises to $66.44 from $63.57 in the previous month, on top of a pipeline shutdown in the North Sea. Additionally, prices have also been supported by strong demand from China, consecutive drawdowns in U.S. supply and the OPEC-led plan to cut output Commodities in general react negatively to strong dollar and therefore the scope for a sharp rally is very limited 56 Data as on 31st Dec 2017, Source : Bloomberg

57 Oil Prices Expected To Be Range Bound 57 Source: WSJ Market Data Group(oil price), the companies (forecasts)

58 Inflation to Drop Back Below RBI s 4% Medium-Term Target Inflation could drop to 4% to March 2019 on base effect wearing out, stable food prices and assuming crude prices to remain range bound 58 *CPI projections include impact of higher housing rent allowance for central government employees Source : Ministry of Statistics and Programme Implementation, Bloomberg Economics

59 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 in crores Credit Growth slowly picking up Credit Growth (Weekly Data) Commercial Credit by Banks = Rs lakh Crore (LHS) Current Credit/ Deposit Ratio is ~73.63% (RHS) In Percent Credit growth has picked up by 8-10% as compared to last year. 59 Source: Bloomberg, Data as on 31 st Dec 2017

60 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 India Foreign Exchange Reserves Stability Is Key India Forex Reserves(USD) $ Billion India continues to attract capital flow resulting in healthy foreign exchange reserves. Data as on 31 st Dec 2017 Indian foreign exchange reserves have grown by $ billion in CY17, indicating rising foreign investor interest, and stronger rupee. 60 Source: Bloomberg

61 Rupee Has Strengthened REER appreciation leads to high intervention in H2CY17 61 Source: CEIC, Citi Research

62 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Banking Liquidity The Game Changer Total Liquidity 3000 From Liquidity Positive to close to neutral levels Total Liquidity in INR bn Total liquidity has come down to Rs. 1.2 lakh crores on account of tax payments. We expect it to remain positive in the medium term. This is over and above 1 lac cr parked in MSS maturing March-2018; and depending on government s tax collection and its spending; it keeps oscillating between 20-70,000 cr 62 Source: Internal Calculations, Data as of 31 st Dec 2017

63 Active Liquidity Management 7.5 Repo Rate in the last 1 year As of 31 st Dec Repo Rate Overnight Rate (MIBOR %) Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Amount in Rs. billion. Date Repo Reverse Repo MSF SLF Total Systemic Liquidity Government Balances 31 st Dec RBI has managed to keep overnight rate close to the repo rate. 63 Source:Bloomberg

64 Spreads Between 10 Year & Repo Widening 10 year bond yield spread over repo similar to the 2013 rate hike cycle 64 Source: Bloomberg, Citi Research

65 Yield Curve (M-o-M Analysis) 8 Source: Bloomberg Belly and Long Front End I180 INR India Sovereign Curve Last Mid YTM I180 INR India Sovereign Curve 01/12/17 Mid YTM 3M 6M 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 17Y 23Y 27Y 28Y 30Y 40Y YTM (M-o-M Change) M 6M 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 17Y 23Y 27Y 28Y 30Y 40Y The key worry for the market has been the fiscal slippage and OMO bond supply which has led to bear flattening of the curve During last month there was a parallel shift across the 5-15 years curve The yield spike in the greater than 15 year bond was less then 5-15 year curve. 65

66 India-US 10 Year Gilt- Narrowing Spreads Have More Legs To Run The spreads have widened over last 1 year however we expect the spreads would compress in medium term due to narrowing inflation differentials 66

67 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 May-17 Jul-17 Sep-17 Nov-17 India-US 10 Year & CPI Spreads India-US CPI Spread India-US Gilt Spread 0-2 Narrowing CPI spread makes Indian bonds attractive. Therefore Indian bonds are increasingly attractive and will attract FII flows 67 Note: 10 year Gilt Yield taken as average of their respective month. Data as of Oct 2017 since CPI data is till Oct. Source: Bloomberg

68 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Global Bond Yields Remain Volatile Years Gilt of Select Countries US 10 Year UK 10 Year Germany 10 Year Japan 10 Year -0.5 Global bonds to remain range bound Yield curve in US is flattening. 68 Data as of 31 st Dec Source: Bloomberg

69 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 69 denotes fall in interest rates

70 Debt Outlook Longer End Yield curve in India has moved up from 6.5% on 1 st September to 7.39% on 29 th Dec 2017 Yield curve has moved up on account of: Likely Higher borrowing by Government Crude Prices/ Select Vegetable prices moving up resulting in higher inflation and higher inflationary expectation Liquidity in the system reducing along with additional supply of government securities by RBI through OMOs There would be volatility in Gilt given the uncertainty on future inflation reading, crude prices, fiscal deficit target for next year, MSP policy adopted by government in 2018 and its resultant impact on food inflation However, inspite of uncertainty since most of the negative have been priced in we believe 10 year Gilt to be in the band of % over the course of next 3 months 70

71 Debt Outlook Shorter End - Due to reduction in liquidity, increase in CD issuance from banks, and rate cut getting ruled out we have also seen spike in short term rates up to 3 years - There has been a spike of bps in yields in instruments crossing March We believe from here till march, short term curve would move up by bps on account Jan- March 2018 quarter and expect the same to reverse post March We believe the yield curve up to 2 years in too steep and pricing in minimum 50 bps rate hike by RBI over the course of next 1 year - We believe there is strong case for investors to take advantage of the steep yield curve by investing in ultra short term fund and short duration funds 71

72 Key Recommendations Segment Scheme Rationale Accrual Play Kotak Income Opportunities Fund / Kotak Medium Term Fund Investment for higher accrual Asset Allocation Short Term Parking of Funds Duration Play Kotak Monthly Income Plan Kotak Treasury Advantage Fund / Kotak Low Duration Fund / Kotak Corporate Debt Fund Kotak Equity Arbitrage Fund Kotak Mahindra Bond Scheme Kotak Bond Short Term/ Kotak Flexi Debt Scheme Investment for asset allocation Higher post tax return Investment for longer maturities Investment for shorter maturities 72

73 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 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, and A around 88% of times With efficiently managed credit risk, yields on accrual funds are attractive even on riskadjusted basis. 73

74 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. 74

75 Need to Watch Out for Opportunities in Hybrid Space 75

76 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. 76

77 Tactical Asset Allocation Through MIP 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 77

78 Kotak Equity Saving Fund Performance Kotak Equity Savings Fund Performance(%) Year 3 Years Since Inception Kotak Equity Savings Fund - Reg - Growth 75% of Nifty 50 Arbitrage Index & 25% in Nifty 50 * Less than 1 year Simple Annualized returns, Greater than or Equal to 1 year Compound Annualized returns. Scheme in inception since 13th Oct 2014 Performance as of 31st Dec 2017 Past performance may or may not sustain in the future 78

79 Kotak Balance Performance Growth and Stability Together Kotak Balance Fund Performance (%) Year 3 Years 5 Years Kotak Balance - Dividend 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 31 st Dec 2017 * Less than 1 year Absolute returns, Greater than or Equal to 1 year Compound Annualized returns 79

80 Have You Noticed The Regular Dividends In Kotak Balance? 80 Record Date Rupees Per Unit Dividend Yield 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 % 27-Sep % 25- Aug % 25-Jul % 27-Jun % 25-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. Dividends are subject to distributable surplus Inception Date: November 25, 1999 All dividends are on face value of Rs.10 per unit

81 Go Digital It s time to GO DIGITAL by having your own website and app that has following feature : 1. Initiate online transactions on behalf of your investors for all AMCs 2. Digital Factsheet for all AMCs 3. Your investor can view portfolio and transact for all AMC from your website and app. 4. E-Lockers to manage document and get reminders for your investors. 5. Financial Calculators. 6. Integrated back office software to manage client data 81

82 Acquisition through Digital For IFAs :- Go Digital with Kotak Mutual Fund Build your own website and App with Multiple features lakh IFAs Enrolled Websites Live Apps Clients

83 Performance (%) as on 31 st December, 2017 Date Since Inception Scheme Returns(%)^ CRISIL Balanced Fund Aggressive Index#(%) Nifty 50##(%) Kotak Balance Current Value of Standard Investment of Rs in the Scheme(Rs) Benchmark# (Rs) Additional Benchmark##(Rs) 15.18% NA 11.75% 1,29,274 NA 74,757 Last 1 Year 23.19% 19.82% 28.65% Last 3 Years 11.69% 8.70% 8.34% Last 5 Years 13.72% 11.29% 12.27% 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 25/08/2015. Date Since Inception Scheme Returns(%)^ CRISIL Balanced Fund Aggressive Index#(%) Nifty 50##(%) Kotak Equity Savings Fund Current Value of Standard Investment of Rs in the Scheme(Rs) Benchmark#( Rs) Additional Benchmark##(Rs) 9.27% 7.30% 9.42% 13,298 12,540 13,357 Last 1 Year 14.02% 9.97% 28.65% Last 3 Years 8.93% 6.89% 8.34% Last 5 Years NA NA NA 83 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 76 for top 3 and bottom 3 schemes managed by & Mr. Abhishek Bisen. `

84 Other Funds Managed by Mr. Pankaj Tiberwal and Mr. Deepak Gupta 1 YEAR 3 YEARS 5 YEARS Since Inception Scheme Names Scheme Returns(%)^ Benchmark Returns (%)^* Scheme Returns(%)^ Benchmark Returns (%)^* Scheme Returns(%)^ Benchmark Returns (%)^* Scheme Returns(%)^ Benchmark Returns (%)^* Kotak Midcap - Growth Kotak Emerging Equity - Growth 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. Deepak Gupta Scheme Names Top 3 1 YEAR 3 YEARS 5 YEARS Since Inception Benchmark Benchmark Benchmark Returns Scheme Returns Scheme Returns Scheme (%)^* Returns(%)^ (%)^* Returns(%)^ (%)^* Returns(%)^ Bottom 3 Funds Managed by Mr. Deepak Gupta Benchmark Returns (%)^* Scheme Returns(%)^ Kotak Banking ETF NA NA Kotak Classic Equity Fund - Growth Kotak NV20 ETF NA NA NA NA YEAR 3 YEARS 5 YEARS Since Inception Scheme Names Scheme Returns(%)^ Benchmark Returns (%)^* Scheme Returns(%)^ Benchmark Returns (%)^* Scheme Returns(%)^ Benchmark Returns (%)^* Scheme Returns(%)^ Benchmark Returns (%)^* Kotak US Equity Fund - Growth NA NA Bottom 3 Kotak Equity Arbitrage Fund - Growth NA Kotak World Gold Fund - Growth Performance (%) as on 31 st December, 2017 Source: ICRA

85 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 85

86 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: 86

87 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 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 Kotak Low Duration Fund (Formerly known as PineBridge India Short Term Fund) 87 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

88 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 88 * Investors should consult their financial advisers if in doubt about whether the product is suitable for them

89 Product Labeling Name of the Scheme This product is suitable for investors who are seeking* Riskometer Kotak Equity Savings Fund Income from arbitrage opportunities in the equity market & long term capital growth Investment predominantly in arbitrage opportunities in the cash & derivatives segment of the equity market and equity & equity related securities 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 89