Market Outlook November 2016

Transcription

1 Market Outlook November 2016

2 EQUITY MARKETS

3 HOW OCTOBER 2016 UNFOLDED -Key Events Of Oct 16 Indian equities were largely flat in Oct as passive inflows tapered over the month led by FIIs resulting into outflows, the first since Feb-16. India s largest FDI came in from the Rosneft-Essar deal, which renewed hopes of deleveraging by large Indian corporates benefiting Indian banking system especially PSU Banks IIP contracted for the second straight month with Aug IIP at -0.7% vs -2.4% in July led by decline in manufacturing and mining. Retail inflation was the lowest in a year with Sept CPI recording at 4.3% well below RBI target vs 5% in previous month. RBI s Monetary Policy Committee (MPC) unanimously decided to cut repo rate by 25bps in its first policy meeting in line with market expectations. GST Council met over the month and appraised the proposal of four tier rate structure with the following slabs - 6, 12, 18 and 26%, with cess on the highest tariff for ultra-luxury and demerit items. The proposal also includes 4% rate on gold. The council is yet to finalize the rate structure. The next meet is scheduled on 3-4 Nov

4 PERFORMANCE ACROSS MARKET CAP ALL ACTION IN MID & SMALL CAPS Nifty Nifty Midcap S&P BSE Smallcap 1m returns 1y returns 3 yr CAGR 5 yr CAGR 10 yr CAGR *As on 30 October 2016,Source: Bloomberg

5 STRONG PERFORMANCE BY CYCLICAL SECTORS OVER THE LAST 1 YEAR BSE Sectoral Indices (10) (20) 5.7 (%) 8.3 (0.2) Metals Oil & Gas Auto PSU Realty Bankex FMCG Power Capital Goods (0.2) (8.8) (1.9) (1.9) (9.6) (10.9) Healthcare Tech IT Services 1m return % 1 yr return % Source: Axis Capital, Bloomberg Barring IT and Auto, all other sectorial indices ended positive during the month *As on 30 October 2016

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

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

8 INDIAN MARKETS MIDDLE OF PACK IN TERMS OF 1YR RETURN Brazil (IBOV) Indonesia (JCI) Russia (MICEX) UK (FTSE 100) Taiwan (TSWE) India (Nifty) US (Dow Jones) HK (HSI) 1M 1Yr (0.8) (1.5) Malaysia (KLCI - FTSE) Korea (Kospi) (1.2) (0.5) Germany (DAX) (1.4) Singapore (Straits) (1.9) (6.1) France (CACS 40) (7.1) China (HSCEI) (8.5) (0.7) Japan (Nikkei 225) (8.6) EURO (Euro Stoxx 50) (9.9) Swiss (SMI) (11.5) (2.8) (20) (10) Source: Bloomberg. Performance data

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

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

11 STABLE DOMESTIC CURRENCY IN OCTOBER (10) (5) (6.2) (6.8) (1.5) (1.3) (2.1) (0.9) (0.1) (0.8) (0.1) (3.8) (0.4) (0.3) (2.3) (0.1) (3.4) (3.4) (1.6) (0.1) (0.0) Depreciation Appreciation Source: Bloomberg from to Most countries currency depreciated against the dollar in October M 1Yr 20.5 Brazilain Real Indonesian Rupiah Taiwanese Dollar Malaysian Ringgit Thai Baht Russian Ruble Singapore Dollar Hong Kong Dollar South African Rand South Korean W on Indian Rupee Philippine Peso Turkish Lira Chinese Renminbi

12 Markets to take a breather in the short term Strong upmove in recent months coupled with high Equity Issuances Adv/Decline Ratio Rises to 12M high Equity Issuances make a 12M high Equity issuances (US$ mn) 77% Stocks trading above 200DMA DMF flows in markets: Strong buying Source : Morgan stanley

13 CURRENT RALLY IS LIQUIDITY DRIVEN -Net Cash Market Purchase* After strong inflows since March 2016, FII pulled out some money from India during Oct month *Source : NSE, BSE, SEBI, Internal calculation FII data updated upto 27 October 2016

14 BUT BASED ON HOPE IN EARNINGS RECOVERY FOR FY-18 RATHER THAN GREED Sensex Earnings growth of 16.7 % in FY ,810 1,337 1,356 1,330 1,493 FY14 FY15 FY16 FY17 E FY18 E Source: Motilal Oswal

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

16 RECOVERY Q2 FY17 EARNINGS DASHBOARD OF COMPANIES Broad-Based And Stronger Than Anticipated Thus Far Source: IDFC Research

17 EARNINGS WILL RECOVER IN FY 18 BECAUSE OF Government Spending Infrastructure 7 th Pay Commission Interest Rate Cut Neutral liquidity resulting in better transmission Govt. spending 46% of net tax revenue on interest payments with Debt/GDP of 65% Exports Recovering Make in India Capacity Utilisation Low capacity utilization Decline in new investment intentions

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

19 KEY VARIABLES & THEIR IMPACT ON EQUITIES Key Variables Short - term Economy Corporate Earnings FII Flow Medium - term Remarks Improving growth, falling inflation Improving operating leverage, falling interest costs and improvement in working capital can accelerate earnings, but a bit back-ended (FY17) India stands out among global asset classes with improving macro-economic variables and prospects of strong long term growth DII Flow Supply of paper Focus on improving financial savings of households Higher disinvestment target and repair of leveraged balance sheet to create supply in markets Interest Rates Policy/Reform Initiative Fall in interest rates to help revive demand and reduce stress for companies with significant debt. Market expecting better transmission of rates. GST is key reform for government to focus on; if it gets passed, can provide a significant fillip

20 WHAT NEXT? Upcoming drivers and draggers GST Bill The Govt. is targeting GST roll out by April 1,2017. Most Corporates are not prepared from infrastructure point view till Mid of FY 18. Will the roll out be deferred? GST council to decide on rate slabs in their meetings on Nov3-4, which will have a major bearing on various sectors in the short term India s FCNR (B) borrowing of more than US$ 26 bn is due for payout in Sep-Nov16. While India has around US$ 367 bn FX reserves to manage the liability, the impact not evident in currency movement as of now Continuation of revival in 2QFY17 corporate earnings to be closely watched The Q1 earnings witnessed high single digit growth second consecutive quarter of positive earnings growth Domestic oriented companies to reported better results

21 WHAT NEXT? Economic Effect of GST or Value added tax globally

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

23 WHAT NEXT? Upcoming drivers and draggers Global events US Election results increase in volatility as the polls are predicting a tight race News flow on sectors like pharmaceuticals, ITcan increase volatility in these sectors Fiscal stimulus plans in Japan, Europe and US (most likely post elections) will provide cue to global liquidity Chinese currency continues to weaken, from its highs in end 2013, Chinese currency has depreciated by around 10% Italian Debt Crisis emerging from NPAs in Banking system Formalising of plan for Britain s exit from European Union 23

24 WHAT NEXT? US Election Guide US Equities US Treasuries US Dollar Emerging Markets Commodities Clinton Wins Limited upside as Clinton victory is priced in. Initially may drive up US bond yields as investors move from bonds to equities. Little effect in the long run Dollar might not gain against other currencies as the event is been partially priced in by the markets. Continuity of risk-on event bodes well for emerging economies such as India Pro-climate change polices could put pressure on coal & oil & bodes well for natural gas Trump Wins Could trigger a significant sell-off as it would be a surprise. US 10 year yield could fall significantly Initially may lead to some weakening against all major currencies Risk-off event. Probability of selloff in emerging equities. Trumps protectionists policies could hurt a lot of economies Coal could benefit as he promised a roll back of environmental measures that hurt coal. Both candidates want to increase spending and cut taxes which would be bullish for equities in the long run. 24 Source : Bloomberg Article Dated 2/11/2016

25 SECTOR & THEMATIC STANCE

26 CONSUMPTION INDICATORS SUGGEST PICK-UP

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

28 FALL IN INTEREST RATES MAY NOT BENEFIT PSU BANKS TO THE SAME EXTENT AS IN 2002 Fall in rates have not been as sharp Size of investment book has contracted Size of pension liabilities is up multifold Increase in pension liabilities to partly offset treasury gains Source: Company Data, Credit Suisse

29 BULLISH ON PHARMA SECTOR NSE Pharma Index has underperformed NIFTY in FY 16 by ~ 6.4 %. Few Pharma Stocks have corrected for concerns like US FDA issues, Few are in the process of correcting. The underperformance may continue in FY 17 due to US FDA related challenges and Rebuilding of pipeline for US Markets. Market is likely to have discounted many of the concerns & hence could provide opportunity for a long term investor Recommend to invest on a STP ( Systematic Transfer Plan ) or SIP (Systematic Investment Plan ) basis in FY 17 to average your entry into a Pharma Sector Portfolio We are aiming to play for a revival in Pharma Sector over FY19 onwards. Investment horizon of more than three years is a must. Risk to the strategy is regulatory changes not priced by the market, inability of Indian Companies to meet US FDA standards, longer recovery cycle than priced by the market.

30 PHARMA SECTOR HAS MORE DOLLAR BILLIONAIRES THAN ANY OTHER SECTOR 30

31 India remains Favorite Destination for Foreign Direct Investment

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

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

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

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

36 INFRASTRUCTURE HEAT MAP ACTIVITY LEVELS SHOWING IMPROVING TRENDS Weak Strong

37 INFRASTRUCTURE HEAT MAP ACTIVITY LEVELS SHOWING IMPROVING TRENDS Weak Strong

38 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 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 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 ASSET ALLOCATION This asset allocation guide helps you to determine the suggested equity exposure at different valuations levels based on the Sensex Stretched 18x-20x Fair Value Plus 16-18x Fair 12x-16x Attractive 10x-12x Cheap 9x-10x Valuation levels of the Sensex based on rolling 12month fwd EPS estimate of 1680 Market Cheap Attractive Fair Fair Value Plus Stretched Bubble Over Invested Neutral + Neutral Neutral - Under Invested Exit Equity Allocaion 80% - 90% 65% - 75% 50% 35% - 45% 15%- 25% 5% - 10% Suggested equity allocation (Assuming 50% equity allocation as neutral)

39 STRATEGY FOR INVESTMENT Assuming an agnostic perspective on risk, the following recommendations can be prescribed:- Around half the money in SIP with 5 year horizon The rest of the corpus can be placed aside for event related volatility, such as: US Election Results US fed raising interest rates India Quarterly Earnings Declaration UP Election Outcome European Banking Crisis China Slow down GST Roll Out In the absence of significant event risk, one can look at fresh issuance opportunities with attractive valuations in IPO, OFS and FPO Any IPO in which NBFC are providing leveraged financing for applications might be a good bet for retail application

40 KEY RECOMMENDATIONS Key theme Large Cap play on buying sectoral leaders that benefit from improving investment climate Diversified/Multicap focus on sectors that are likely to benefit the most across market cap Infrastructure revival True-to-label fund recent thrust of government to revive the infrastructure theme Remarks Kotak50 Kotak Select Focus Kotak Infrastructure & Economic Reforms Fund Through SIP in Midcap oriented scheme Kotak Emerging Equities Fund Thematic opportunity through PMS Kotak Pharma PMS We recommend investors to invest through SIP with a 5 years horizon.

41 HAVE YOU NOTICED THE REGULAR DIVIDENDS IN KOTAK BALANCE? Record Date Rupees Per Unit Dividend Yield 26-Oct % 27-Sep % 25- Aug % 25-Jul % 27-Jun % 25-May % 25-Apr % 29-Mar % 25-Feb % 27-Jan % 15-Dec % 28-Sep % 25-Mar % 24-Sep % 25-Mar % 30-Sep % 25-Mar % 27-Sep % 26-Mar % 27-Sep % 28-Mar % 29-Sep % 25-Mar % 25-Sep % 25-Mar % 25-Sep % 27-Sep % 27-Mar % 12-Dec % 16-May % * After payment of the dividend, the per Unit NAV falls to the extent of the payout and statutory levy (if applicable) ^Past performance may or may not be sustained in the future. Inception Date: November 25, 1999 All dividends are on face value of Rs.10 per unit

42 DEBT MARKETS

43 HOW OCTOBER 2016 UNFOLDED -Key Events Of The Month Retail inflation fell to a 13-month low of 4.31% in Sept as against 5.05% in August (aided by lower food prices especially those of vegetables) and wholesale inflation was at 3.57%, creating headroom for further rate cuts by the Reserve Bank of India in coming months. Crude Oil prices dropped to $48.3/barrel (-5.09% MoM) during the month on doubts about OPEC's ability to implement its planned production cuts, with the market further weighed by expectations that the cartel had record output in October. Presentation of the Union Budget has been advanced by a month to ensure speedier implementation of projects and programmes The Union Cabinet gave in-principle approval to Niti Aayog's proposal for strategic sale in over a dozen public sector undertakings (PSUs) including those that are making profits. In September, India s exports grew 4.62% year-on year to $22.8 billion with 18 of the 30 exporting sectors showing growth. This is the second instance of growth this year after June when exports had risen 1.27% after declining for 18 months in a row. With a 2.5% fall in imports to $31.2 billion, the trade deficit stood at $8.33 billion

44 HOW OCTOBER 2016 UNFOLDED -Key Events Of The Month RBI allowed banks to classify government securities borrowed from the central bank in the daily liquidity adjustment facility (LAF) under the statutory liquidity ratio (SLR), making liquidity management for banks easier The September meeting minutes of the Federal Open Market Committee (FOMC) revealed that most members were in favour of a rate hike in the later part of the calendar year. Saudi Arabia has raised $17.5 billion in the biggest-ever bond sale by an emerging-market nation as it seeks to shore up finances affected by the slide in oil prices. ECB left its ultra-loose monetary policy unchanged but kept the door open to more stimulus in December, with ECB President Mario Draghi dousing recent market speculation that the central bank may begin tapering its 1.7 trillion euro asset-buying programme.

45 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 INFLATION MODERATED 12.00% Source: MOSPI 10.00% 8.00% CPI Core CPI 6.00% 4.00% 2.00% 4.9% 4.3% 0.00% CPI inflation declined to a 13-month low 4.3% in September 2016 from 5.0% in August 2016, benefitting from a considerable softening in the inflation for food and beverages, as well as a mild easing in the same for housing, which outweighed the uptick in the inflation for fuel & light and miscellaneous items. Core-CPI inflation rose to 4.9% in September 2016, the highest print in five months, from 4.7% in August As a result, core-cpi inflation exceeded the headline CPI inflation after a gap of twelve months. On an MoM basis, core-cpi increased by 0.5% in September 2016, similar to the rise in September 2015 (0.4%). We expect the average inflation rate from Oct to March 2017 will be around 4.5%. This will provide more than expected space for further rate cut.

46 CRUDE PRICES REMAIN RANGE BOUND -BRENT CRUDE OIL PRICES (USD) Brent Crude (USD) Brent Crude (USD) Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 as on 31 st Oct 2016 Source:Bloomberg Crude Oil prices dropped to $48.3/barrel (-5.09% MoM) during the month on doubts about OPEC's ability to implement its planned production cuts, with the market further weighed by expectations that the cartel had record output in October. Broadly, prices continue to remain range-bound between levels.

47 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 CREDIT GROWTH MODERATES THIS MONTH Credit Growth (Weekly Data) Commercial Credit by Banks= Rs. 74 Lakh Crore (approx)(lhs) Current Credit/ Deposit Ratio is ~74% (RHS) Credit growth continues to falter due to lack of large-ticket project funding and corporates moving increasingly to bond markets which has seen significant monetary transmission. Source:Bloomberg

48 INDIA FOREIGN EXCHANGE RESERVES STABILITY IS KEY India Foreign Exchange Reserve (in$us Billion) $ Billion FCNR(B) Payouts Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Source:Bloomberg In line with our expectations, forex reserves declined in Oct as FCNR (B) deposits partly matured, without any sharp volatility in the currency markets.

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

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

51 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 THE GAME CHANGER From liquidity deficit to liquidity Positive Total Liquidity Data as of 2nd Nov Total Liquidity in INR bn Source: Internal Calculations In line with its guidance, RBI has been actively providing liquidity when needed and has gradually taken systemic liquidity into positive territory

52 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 FACTORS FOR FUTURE RALLY IN GILT -MULTIPLE FACTORS COME TOGETHER year Gilt Yields Source: Bloomberg As of 31 st Oct Inflation Overall normal monsoon effect on the supply will be seen in the coming months such as strong sowing trends can tame pulses inflation down from 35% YOY levels and can bring down CPI by bps. Our estimates for average CPI till March is around 4.50% and thus market will discount one more rate cut in December or Feb MPR - The global bond yields have shot up bps in last one month forcing the Indian bonds to react, however as the data unfolds and RBI resorts to OMO to infuse liquidity, yields will ease further. - Based on future rate cuts and OMO we expect the 10 year gilt to reach 6.50% by March 2017

53 YIELD CURVE (M-O-M ANALYSIS) Source: Bloomberg INR India Sovereign Curve YTM(on 1/11/16) INR India Sovereign Curve YTM (01/10/16) 3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 16Y 17Y 18Y 19Y 25Y 27Y 28Y 29Y 39Y I180 Mid YTM (Last-01/10/16) 3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 16Y 17Y 18Y 19Y 25Y 27Y 28Y 29Y 39Y I180 Mid YTM (Last-01/10/16) The curve has steepened as the long bonds were rising due to the global factors while the shorter end was protected by the liquidity and domestic interest rate outlook We expect the curve to be in bull steepening mode going ahead i.e Yields will fall in almost all segment

54 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 ACTIVE LIQUIDITY MANAGEMENT -LIQUIDITY SCENARIO Repo Rate In the Last 1 year As of 31 st Oct Repo Rate % Overnight Rate (MIBOR %) Amount in Rs. billion. Source:Bloomberg Date Repo Reverse Repo MSF SLF Total Systemic Liquidity Government Balances 31 st Oct The systemic liquidity surplus has reduced significantly and has been hovering around neutral zone. Last month the increase currency in circulation took away liquidity from the system. This month we expect overnight rates to be volatile as there are many factors impacting the liquidity and it takes time for the RBI to respond.

55 WORLD FLOATING ON EASY MONEY -JAPAN YIELDS REMAIN NEGATIVE TERRITORY 2.5 Global 10 Year Bond Yields(%) 2 US 10 Year UK 10 Year 0.5 Germany 10 Year 0 Japan 10 Year -0.5 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Source:Bloomberg Global bond yields have moved up as rate hike by Fed in December 2016 seems increasingly likely German bond yields have moved into positive territory while Japan continued to be in negative territory.

56 Jan-15 Jan-15 Feb-15 Mar-15 Mar-15 Apr-15 May-15 May-15 Jun-15 Jul-15 Jul-15 Aug-15 Sep-15 Oct-15 Oct-15 Nov-15 Dec-15 Dec-15 Jan-16 Feb-16 Feb-16 Mar-16 Apr-16 Apr-16 May-16 Jun-16 Jul-16 Jul-16 Aug-16 Sep-16 Sep-16 Oct-16 FED RATE HIKE PROBABILITY 120 Historical Analysis of Meeting The Fed Fund Futures are indicating strong probability of Fed Rate Hike in 2016, increasing from 60% in Sep-end to currently around 68%.

57 SCOPE FOR MORE -10 YEAR GILT YIELDS OF SELECT NATIONS Indonesia United states Canada India Brazil China UK Thailand France South Korea Germany Australia Switzerland Japan As of 31 st Oct, Source: Bloomberg. Globally the yields are converging towards the centre while India remains one of the few exceptions (amongst countries experiencing lower inflation) hovering around ~7% yield.

58 KEY VARIABLES & THEIR IMPACT ON INTEREST RATES Key Variables Inflation Rupee Credit Demand Government Borrowing Short - term (3-6 month) Medium term (6month 2 years) RBI Policy Global Event Risk Corporate bond Spread Debt FII flow Liquidity denotes fall in interest rates

59 DEBT OUTLOOK The liquidity infusion created demand for short term bonds. Thus, the month of October witnessed steepening of the sovereign yield curve as yields of less than 10 year maturity came off by 5-10 bps; the yields of maturity above 10 year went up marginally. 10 year benchmark yields remained flat. The RBI announced OMO worth Rs 10,000 cr but was unable to bring any significant cheer to the market The Government also bought back bonds maturing worth Rs 20,000 cr in order to infuse liquidity CPI data came better than market per expectation at 4.31 and expected to go down further in next few prints before going up in Jan- March. We expect the CPI to average around % for the remaining part of the year. Global bond yields went up significantly putting upward pressure on the Indian yield. So far Indian yields vs global yields the spreads have compressed making india bonds a better performer Easing of CPI will open up more space for monetary easing and we expect one more rate cut either in December or in Feb s Monetary policy Review. FCNR redemptions might stress liquidity, forcing RBI to do more OMO to normalize situation Short term bond yields have gone up due to liquidity tightness and increased supply of bonds leading to the spike in yields We expect the same to normalize by the end of the month and expect the new 10 year gilt to inch towards 6.50% yield in the coming months in expectation of rate cut

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

61 WHY ACCRUAL FUNDS? India is one of the fastest growing economy in the world and this will translate into revenue and profitability for India Inc. Commodity & oil price decline has reduced input cost and increased margin support RBI has slashed repo by 125 bps in 2015 and more cuts are expected in the next months. Though transmission has been slow, proposed calculation of base rate on marginal cost basis will ensure faster transmission and lower base rates (and hence lower cost of capital for borrowers). Kotak AMC has strong fundamental processes in place to manage and mitigate credit risk Kotak AMC does not invest below A category rating. Our robust monitoring ensures that we do not take exposure even in AA & A ratings from sensitive sectors One year average transition rates : between 1988 and 2014 Ratings CRISIL AAA CRISIL AA CRISIL A CRISIL BBB CRISIL BB CRISIL B CRISIL C CRISIL D CRISIL AAA 97.28% 2.72% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% CRISIL AA 1.41% 92.26% 4.78% 0.58% 0.19% 0.03% 0.02% 0.03% CRISIL A 0.00% 3.31% 87.79% 5.95% 1.88% 0.15% 0.30% 0.63% AAA rate firms have never ever defaulted. The risk of default of AA is only 0.03% and of A is only 0.63%. Not Just that, the AAA continue to hold their rating 97% of times, AA around 92% of times, anda around 88% of times With efficiently managed credit risk, yields on accrual funds are attractive even on risk-adjusted basis.

62 STORY IN ACCRUALS Accruals generate performance by purchasing high yielding assets The market is currently tilted towards the buyers Corporates have alternative in NBFCs for funding. But such corporates would need to provide high collateral in keeping with the RBI guidelines regarding loan against shares. Thus, creditable and quality corporates has to shell out high rates to attract capital Retail Investors can consider accrual funds like Kotak Income Opportunities / Kotak Medium term to gain from the potential high yields in the market.

63 WHY KOTAK MONTHLY INCOME PLAN - Growing Through Asset Allocation Particulars Nifty Level Net Assets in Rs Debt Equity Start in Kotak MIP with ~ 20% equity exposure Equity markets drop by 15% (represented by Nifty 50) Shift to Kotak Equity Savings Fund which has ~ 25% unhedged equity Equity markets drop by 15% (represented by Nifty 50) Shift to Kotak Balance with ~65% equity Equity markets drop by 15% (represented by Nifty 50) Shift to Equity fund with ~100% equity such as Kotak Select Focus Equity markets go up by 20% (represented by Nifty 50) Shift Back to Kotak MIP with ~20% equity exposure The above illustration is only to explain how various types of funds can be considered for asset allocation in various equity market scenarios. This should not be construed as an advice and indication of performance of the mentioned funds. The level of equity allocations mentioned are as per current scenario and only an approximation. The exact allocation to equity in various funds would be different and as per the asset allocation provided in the SID of each fund.

64 TACTICAL ASSET ALLOCATION THROUGH MIP - Growing Through Asset Allocation Kotak Monthly Income Plan can be used as a de-risking strategy o The scheme invests upto 20% in equity & equity related instruments & rest in debt instruments o Thus, an investor could consider Kotak MIP as a starting point for a moderate exposure to equity and use it as de-risking strategy by shifting into funds with higher equity allocations as valuations become attractive o The same has been explained below with an illustration Whom is the Fund Ideal for? Investors seeking regular income over short term Investors seeking income through fixed income securities and marginal gains from equities Investors with 1-3 year investment horizon Those who are unwilling to assume the full equity risk Those who have low appetite for credit risk

65 KOTAK MIP PERFORMANCE* Consistency In Growth Source:ICRA As of 31 st Oct Month 3 Months 6 Months 1 Year 3 Years 5 Years Since Inception Kotak Monthly Income Plan - Reg - Growth Crisil MIP Blended Index * Less than 1 year Simple Annualized returns, Greater than 1 year Compound Annualized returns Past performance may or may not sustain in the future

66 KOTAK MONTHLY INCOME PLAN * PERFORMANCE (%) AS ON 30TH SEPTEMBER, 2016 Scheme Inception date is 02/12/2003. Fund Managed by Mr. Devender Singhal & Mr. Abhishek Bisen. ^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: Absolute; 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. Classification of schemes in short term & long term is based on the average maturity of the scheme. # Name of Scheme Benchmark. ## Name of Additional Benchmark. Please refer page no. 66 for top 3 and bottom 3 schemes managed by Mr. Abhishek Bisen & Mr. Devender Singhal.

67 Top 3 Funds Managed by Mr. Abhishek Bisen Scheme Inception date is 27/07/2007. Fund Managed by Mr. Abhishek Bisen. Scheme Inception date is 25/03/2011. Fund Managed by Mr. Abhishek Bisen Scheme Inception date is 25/11/1999. Fund Managed by Mr. Pankaj Tibrewal & Mr. Abhishek Bisen

68 Bottom 3 Funds Managed by Mr. Abhishek Bisen Scheme Inception date is 25/11/1999. Fund Managed by Mr Abhishek Bisen Scheme Inception date is 21/01/2011. Fund Managed by Mr. Abhishek Bisen & Mr. Deepak Gupta Scheme Inception date is 13/10/2014. Fund Managed by Mr Deepak Gupta & Mr Abhishek Bisen.

69 DISCLAIMERS & RISK FACTORS The information contained in this (document) is extracted from different public sources. All reasonable care has been taken to ensure that the information contained herein is not misleading or untrue at the time of publication. This is for the information of the person to whom it is provided without any liability whatsoever on the part of Kotak Mahindra Asset Management Co Ltd or any associated companies or any employee thereof.we are not soliciting any action based on this material and is for general information only. Mutual Fund investments are subject to market risks, read all scheme related documents carefully. About the scheme:

70 PRODUCT LABELING Name of the Scheme This product is suitable for investors who are seeking* Riskometer Kotak Mahindra 50 Unit Scheme Kotak Select Focus Fund Kotak Emerging Equity Scheme Kotak Opportunities Kotak Gilt Investment Kotak Bond Kotak Medium Term Fund Kotak Low Duration Fund (Formerly known as PineBridge India Short Term Fund) long term capital growth Investment in portfolio of predominantly equity & equity related securities long term capital growth Investment in portfolio of predominantly equity & equity related securities generally focused on a few selected sectors long term capital growth Investment in equity & equity related securities predominantly in mid & small cap companies. long term capital growth Investment in portfolio of predominantly equity & equity related securities income over a long investment horizon Investments in sovereign securities issued by the Central and/or State Government(s) and / or reverse repos in such securities. income over a long investment horizon investment in debt & money market securities Income over a medium term investment horizon Investment in debt, government securities & money market instruments with a portfolio weighted average maturity between 3-7 years Regular Income over short term Income by focusing on low duration securities * Investors should consult their financial advisers if in doubt about whether the product is suitable for them

71 PRODUCT LABELING Name of the Scheme This product is suitable for investors who are seeking* Riskometer Kotak Equity Arbitrage Scheme Kotak Income Opportunities Fund income from arbitrage opportunities in the equity market investment in arbitrage opportunities in the cash & derivatives segment of the equity market. Income over a medium term investment horizon Investment in debt & money market securities Kotak Treasury Advantage Scheme Income over a short term investment horizon investment in debt & money market securities Kotak Infrastructure & Economic Reform Fund (formerly known as PineBridge Infrastructure & Economic Reform Fund ) long term capital growth long term capital appreciation by investing in equity and equity related instruments of companies contributing to infrastructure and economic development of India * Investors should consult their financial advisers if in doubt about whether the product is suitable for them