Market Outlook. November- 2018

Transcription

1 Market Outlook November

2 Equity Market Outlook November 2018

3 STILL TIME TO BE CAUTIOUS BUT OPPORTUNITIES ARE FOUND IN EXTREME PESSIMISM Decline in stocks is not a surprising event. It recurs. If you live in cold climate, you expect freezing temperatures and when it drops below zero you don t think of this as the beginning of the next ice age. You know summer will be warm again. Stocks do the same Peter Lynch 3

4 Market Has Its Own Pulls And Pressure Oil Prices Trade wars Withdrawal of QE Credit Squeeze NPA cycle US bond yields Valuation Political Uncertainty Markets Domestic Growth Corporate Earnings Govt Reforms (IBC/GST etc) 4

5 Deteriorating Macro In Pictures 5

6 Q3FY19 Continues To See Incremental Pressure From Macro Factors Brent crude off-highs, avg Q3. still up 7% from Q2 So does USD/INR Source: Bloomberg, I-Sec Research 6

7 And The Pressure Keeps Increasing And aggregate commodity index Average Bond yields rose 5bps in Q3FY19 Source: Bloomberg, I-Sec Research 7

8 Fear Indicators Remain Elevated India and US VIX shoot up NIFTY 50 below 200-Day Moving Average Source: Bloomberg, CEIC, I-Sec Research 8

9 Fear Indicators Remain Elevated bps CDS spreads have been consistently rising up Gold price breaking out of range Source: Bloomberg, CEIC, I-Sec Research 9

10 Worsening Macros Likely To Take A Toll On Economic Growth Ahead % y-o-y 3mma Weighted average monthly activity indicator Nomura Composite Leading Index(CLI) and Non-Agriculture GDP growth Monthly Activity Indicator Note: The Monthly Activity Indicator is a weighted average of the 3-month moving average growth rates of 19 of 33 high frequency indicators in the heat-map. Weightings assigned to each indicator are based on the corresponding sector s share in GDP (of which it is an indicator). All indicators within a particular sector are assigned equal weighting. Source: CEIC and Nomura Global Economics Note: Data for Q are provisional estimates. Source: CEIC, Nomura Global Economic Estimates 10

11 Corporate Bond Funding Has Been Slowing For Nearly A Year During , Corporate Bond growth slowed down from ~20% to ~9% CAGR level similar to current slowdown Corporate Bond: Rates vs. Volumes Source: Bloomberg, IDFC, Bernstein analysis 11

12 NBFC Reliance On Mutual Fund CP Funding Shot Up Cheap short-term funding from Mutual Fund (MF) may reverse; however MF money switching to banks likely to result in higher bank funding to NBFCs. Mutual fund exposure to NBFCs via Commercial Paper, in INR bn ~95% maturing in Dec 18 quarter Represents ~65% of total CP funding of NBFCs Mutual Fund exposure to NBFCs via Commercial Paper, as a % of Total Debt AuM Over past 6.5 years MF Total Debt AuM: 3.5x MF exposure to NBFC CP: 6.6x Source: RBI, Bernstein analysis 12

13 Depreciating Rupee Is A Cause Of Concern CYTD performance South Africa India Russia Brazil Canada Singapore Japan Europe 5.8 (in %) (4.1) (3.5) (0.4) (15.2) (13.6) (12.1) (10.5) Source: Source: Bloomberg, Bloomberg As on 31st Oct

14 While Growth of ~33% in Forex Reserves in 8 Years 430 $ bn India s Forex Reserves Record Biggest Weekly Fall Since 2011 $5.1bn fall 5 th Oct th Oct th Oct th Jan 11 $5.7bn fall 11 th Nov 11 to 18 th Nov 11 Forex Reserves Are Down US$25.6bn From The Apr 18 Peak Source: RBI, Times of India; Data Period: 7 th Jan th Oct 18 14

15 The Rupee In 8 Years Has Plunged ~63% USD INR th Jan Source: Bloomberg, Times of India; Data Period: 7 th Jan st Oct st Oct 18 15

16 The Indian Rupee Story Destiny Of Rupee Is To Depreciate Inflation & Productivity Difference Rupee Movement is Market Driven Long Term Rupee solution is Oil Gold Electronics Coal Travel Education Chinese Dumping Image Courtesy: The Hindu Newspaper 16

17 Tariff War

18 Escalating Trade War Tensions: Trade Threats Are Becoming Reality Source: Goldman Sachs Global Investment Research 18

19 Institutional Holdings Analysis As a % of India Market Cap Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Sep-18 FPIs 19.70% 20% 19.20% 19.70% 18.50% 19.10% 18.80% Insurance Company 7.10% 7.30% 7.20% 7% 6.50% 6.50% 6.60% MFs 4.30% 4.50% 4.80% 5.30% 5.90% 6.40% 6.40% FDI Investments 4.80% 4.80% 4.80% 4.80% 4.90% 5.30% 5.20% Foreign Depository 2.40% 2.40% 2.30% 2.30% 2% 2.10% 2.20% Other Institutions 3.20% 3.10% 3.30% 3.30% 3.70% 4.00% 3.60% Institutional Investment 41.40% 42.10% 41.60% 42.40% 41.50% 43.30% 42.90% Continuous flow in MFs has led to a systemic rise in MF share of total investment from 4.3% of 6.4% Source: I-Sec 19

20 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 FII Flows Across Debt And Equity Trend In Monthly FII Flows (US$ mn) ource: Bloomberg, Kotak Institutional Equities 20

21 Banks IT Auto Industrials Energy Consumer Staples Telecom Consumer Disc Retail Real estate Airlines Materials Metals Others Media NBFC Pharma Utilities FII Sectoral Flows From 1 st Sept 18 to 15 th Oct 18 Total FII flows across sectors (1 st Sep to 15 th Oct 2018) 2, ,000-4,000-6,000 Gradual buying in Utilities, Pharma and value buying in NBFC -8,000-10,000-12,000 Big selling in Banks, IT, Auto and Industrials Source:I-Sec 21

22 MF Inflows Have Been Resilient In Spite Of Market Weakness Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 US $mn 4,500 Net Inflows in MF Equity Schemes 4,000 3,760 3,894 3,500 3,491 3,201 3,048 3,035 3,000 2,500 2,000 1,500 1,000 1,699 2,237 2,044 1,357 1,568 1,096 1, Source: AMFI, CLSA 22

23 Upcoming State Elections: A Politically Charged Nov 18 Election Results Due On 11 th Dec State Elections Due Ruling Party States 12 th & 20 th Nov Bharatiya Janata Party Chhattisgarh 28 th Nov Bharatiya Janata Party Madhya Pradesh 28 th Nov Indian National Congress Mizoram 7 th Dec Bharatiya Janata Party Rajasthan 7 th Dec Telangana Rashtra Samithi Telangana Apr-19 Telugu Desam Party Andhra Pradesh Apr-19 Bharatiya Janata Party + Arunachal Pradesh Apr-19 Biju Janata Dal Odisha Apr-19 Sikkim Democratic Front Sikkim May-19 Bharatiya Janata Party + General Elections Source: Morgan Stanley Research; Bharatiya Janata Party + indicates the ruling party consists of BJP with an alliance with other party 23

24 Navigating The Macro Worries. Some Solutions Worries For The World Reforms Prescription For India High Fuel Prices Tightening Financial Conditions Higher Interest Rates Trade-Related Disputes 1. Reviving Bank Credit 3. Improving Governance of PSBs 5. Lowering Subsidies 2. Accelerating Cleanup Of Bank & Corporate Books 4. Focus on Debt Reduction 6. Enhanced Compliance with GST Source: Economic Times Publication Date: 9 th Oct

25 ON THE OTHER HAND 25

26 Market Snapshot Dec-07 May-13 Oct-18 Dec-07 May-13 Oct-18 Macro Indicators 10-Yrear Govt Bond Yield Capacity Utilisation (Mar-18) 91.7% 71.6% (Jun-13) 75.2% India 7.8% 7.2% 7.9% Credit Growth (as on 30 Sept 2018) 22.0% 14.4% 13.6% USA 4.0% 2.1% 3.1% ROE Nifty 50 (Oct 18) 25.5% 17.1% (Mar-13) 13.0% Japan 1.5% 0.9% 0.1% Net FII Flows (12M - Rs. Cr - Oct) 71, ,110-26,317 Europe 4.3% 1.5% 0.4% IIP - Aug % 1.0% 4.3% China 4.5% 3.4% 3.5% GDP Growth (Apr - Jun 18) 9.6% 6.4% 8.2% Dec-07 May-13 Oct-18 Dec-07 May-13 Oct-18 Valuations Returns of Nifty 50 (CAGR) Trailing P/E Nifty Last 1 Yr Return 54.8% 21.6% 0.5% Trailing P/B Nifty Last 2 Yr Return 47.1% 3.8% 9.7% Last 3 Yr Return 43.4% 5.6% 8.8% Source: Bloomberg, Axis Capital 26

27 Capacity Utilization Inched Modestly Higher; Will It Sustain? Source: CMIE, RBI, Edelweiss Research 27

28 Flipkart: Sale Season Attracting New Customers Key Variables From The 2018 Festive Season Sale (Oct 10-14, 2018) 70% % % YoY Growth over 2017 Sale 60% Tier 2&3 locations and affordability schemes helping in new customer acquisition 60% 100% Growth in key metrics during 2018 sale compared to last year s sale season 100% 50% 45% 45% 80% 80% 40% 30% 33% 60% 50% 20% 40% 10% 20% 0% % of Sales from tier 2 &3 cities* % of Sales driven by affordability schemes 0% % Growth in New Customers Source: Economic times, Moneycontrol.com, Yourstory, Morgan Stanley Research. * Flipkart sale was completed on 14 Oct 2018 but % of sales from tier 2 & 3 cities for 2018 are from media report dated 12 Oct 2018 during which time the sale was still running % Growth in GMV % Growth in Unit Sold 28

29 Ease of Doing Business 2019: India jumps 23 spots to 77th rank in World Bank's latest report Source: Economic TImes 29

30 Second Quarter Earnings Season Has Been Mixed So Far NIFTY Earnings Trend Strong In Line Weak Source: Data Compiled by BloombergQuint Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 30

31 NIFTY Earnings Heat Map STRONG IN LINE WEAK Source: Data Compiled by Bloomberg Quint 31

32 Barring GFC, FII Outflows Are Reaching Levels As % Of Market Cap Where They See A Reversal. ource: Goldman Sachs; GFC- Global Financial Crisis 32

33 Join The Ride, Lock The Belt!

34 MARKET PERFORMANCE 34

35 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Divergence In Market Performance YTD 120 NIFTY Midcap 100 NIFTY Smallcap 100 NSE Nifty Source: Bloomberg, Data from 1 st Jan 18 to 31 th Oct 18 35

36 Performance Across Market Cap - Midcaps and Smallcaps corrected sharply during month In percent (5) (5.0) (10) (1.6) (15) (20) (25) (12.2) (19.3) Nifty Nifty Midcap S&P BSE Smallcap 1m returns 1y returns 3 yr CAGR 5 yr CAGR 10 yr CAGR *As on 31 October 2018, Source: Axis Capital, Bloomberg, Past Performance may or may not sustain in the future 36

37 Small & Mid Cap - Back to the Past Nifty 50 Index Nifty Mid Cap Index Nifty Small Cap Index Oct-18 10,387 17,189 6,063 Apr-17 9,136 17,796 7,319 Sept-16 8,952 15,745 6,368 Source: Bloomberg, As on 31 st Oct

38 There Is Carnage In Small And Mid Cap Drawdown from 52 Week High Less than 10% Between 10% and 20% Between 20% and 30% Between 30% and 50% More than 50% No. of Stocks % of Top 1000 stocks 43 4% % % % % Median Correction from 52 Week High by Market Cap Top 10-14% 10 to % 100 to % 500 to % Overall : Top % Drawdown from 52 Week High Nifty 50-12% Nifty Midcap % Nifty Smallcap % Source: Bloomberg, As of 31 st Oct

39 VALUATIONS 39

40 Large Cap, Mid Cap and Small Cap Valuation BSE Sensex 16 Jan 2018 BSE Mid Cap BSE Small Cap 10 Y Avg Price to Book Ratio Current Price to Book Ratio Price to Book Ratio Premium 10% 33% 34% 31 Oct Y Avg Price to Book Ratio Current Price to Book Ratio Price to Book Ratio Premium -2% 11% -5% 40 Source: Bloomberg

41 Oct-1 1 Apr-12 Oct-1 2 Apr-13 Oct-1 3 Apr-14 Oct-1 4 Apr-15 Oct-1 5 Apr-16 Oct-1 6 Apr-17 Oct-1 7 Apr-18 Oct-1 8 Midcap Valuations Now Approaching Parity with Large Caps 12 Month Forward PE (x) NIFTY Midcap 100 Nifty Source: Axis Capital, As on 31 st Oct

42 Oct-91 Oct-92 Oct-93 Oct-94 Oct-95 Oct-96 Oct-97 Oct-98 Oct-99 Oct-00 Oct-01 Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Oct Sensex Above Fair Value Plus 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 Average of 78% of the period Source: Axis Capital 42

43 Indian Markets Higher Than Most Peers On Valuation P/E Multiple CY18/FY19 of Indices US (Nasdaq) India (Sensex) Malaysia (KLCI - FTSE) US (Dow Jones) Japan (Nikkei 225) Thailand (SET) Brazil (IBOV) UK (FTSE 100) Singapore (Straits) HK (HSI) Korea (Kospi) China (HSCEI) (x) Source: Axis Capital, Bloomberg * For India & Japan Fiscal year is FY19 while others it is CY18 43

44 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 Jan-18 Feb-18 Mar- 18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Sensex Above Fair Range month Forward Sensex P/E (X) Stretched 20x - 24x Fair Value Plus 17x - 20x Fair 13x - 17x Attractive 10x - 13x Cheap 8x - 10x Source: Axis Capital 44

45 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) USD m FPIs DIIs MFs CY2000 1,535 NA (175) CY2001 2,738 NA (1,066) CY NA (620) CY2003 6,719 NA 98 CY2004 8,640 NA (254) CY ,081 NA 3,013 CY2006 8,038 NA 3,402 CY ,810 6,039 1,625 CY2008 (12,173) 16,940 3,325 CY ,639 5,334 (1,169) CY ,322 (4,750) (6,052) CY2011 (512) 5,943 1,273 CY ,548 (10,859) (3,880) CY ,987 (13,042) (3,602) CY ,162 (4,999) 3,915 CY2015 3,275 10,201 11,071 CY2016 2,902 5,434 7,092 CY2017 7,716 14,042 18,324 CY2018 (5,495) 15,575 15,924 Jan-18 2, ,418 Feb-18 (1,931) 2,758 2,504 Mar-18 2,057 1,029 1,424 Apr-18 (983) 1,295 1,718 May-18 (1,427) 2,224 2,013 Jun-18 (377) 2,085 1,312 Jul Aug-18 (278) Sep-18 (1,314) 1,725 1,608 Oct-18 (3,490) 3,382 2,760 FIIs net sellers CYTD Notes: (a) DII -Domestic Institutional Investors (Includes Bank, DFIs, Insurance, New Pension Scheme and MF). (b) FII data is till 29 Oct, MF data is till 29 Oct and DII data is till 30 th Oct Source: Bloomberg, Axis Capital done DIIs net buyers CYTD 45

46 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 46

47 Key Variables & Their Impact On Equities Key Variables Short - term Medium term Remarks Economy 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 Growth in FII flows to moderate 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 Signify Growth 47

48 Avoid Self Destructive Investor Behavior 15.00% 10.00% 5.00% Nifty 50 vs. Average Fund Investor Return (Oct Aug 2018) 12.24% The "Investor Behaviour" Penalty 6.48% Individuals who cannot master their emotions are ill-suited to profit from the investment process - Benjamin Graham 0.00% Nifty 50 Average Fund Investor Return Source: Internal Calculations of NJ 48

49 Strategy For Investments In The Current Scenario 1- Kumbhkaran (Invest & forget) Or 2- Asset Allocation 49

50 Kotak Balanced Advantage Fund An All Weather Fund That Gives You Freedom From Managing Equity & Debt Allocation Manually Be it a first time investor, a market timer or a long term investor, here is a fund that can help meet everyone s need Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully. 50

51 31-Aug Sep Sep Sep Oct Oct Oct-18 Kotak Balanced Advantage Fund Asset Allocation 55 KBAF It s Automatic Nifty Index KBAF Net Equity Nifty 50 TRI Source: Internal Source 51

52 Key Recommendations Key theme Dynamic Equity Allocation Freedom from managing equity debt allocation manually 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 Opportunities in smallcap segment 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 Smallcap Fund Kotak Equity Hybrid Fund (Erstwhile Kotak Balanced Fund) We recommend investors to invest through SIP with a 5 years horizon. 52

53 Debt Market Outlook November

54 How October 2018 Unfolded GoI s fiscal deficit rises by 19.2% YoY to Rs. 5.9 trillion in H1 FY2019, stands at 95.3% of budget estimate for FY2019 CPI inched up to 3.8% in Sept 2018 caused by low food price inflation, weaker currency and higher oil prices The benchmark yield fell by ~15 basis points in Oct, its largest fall since March. The yield also fell for the first time in three months. Brent crude tumbled more than $11 from its Oct. 3 high at $86.74, falling nearly 9 percent this month. That's the worst drop since July 16 Fiscal Deficit Rises CPI Rises Yield Sharpens Brent Crude Climbs India's exports contract by 2.15%, but trade deficit falls to five-month low to $13.98 billion in Sept 18. It was at $17.4 billion in August 18 Trade Deficit Narrows INR touched all-time closing low of in October, closed the month at with total losses of 104 paise or 1.43% due to global tensions Falling Rupee Oct 18 RBI bought government bonds worth around Rs crore via OMOs. RBI will conduct OMOs worth Rs 40,000 crore in Nov 18 RBI Infuses Liquidity MPC voted for pause in repo rate at 6.50%, while changing stance from neutral to calibrated tightening in its Monetary Policy Review on 5 th Oct 2018 Repo Rate Unchanged Data as of October 2018, Source: News Media, ICRA 54

55 1-Oct 2-Oct 3-Oct 4-Oct 5-Oct 6-Oct 7-Oct 8-Oct 9-Oct 10-Oct 11-Oct 12-Oct 13-Oct 14-Oct 15-Oct 16-Oct 17-Oct 18-Oct 19-Oct 20-Oct 21-Oct 22-Oct 23-Oct 24-Oct 25-Oct 26-Oct 27-Oct 28-Oct 29-Oct 30-Oct 31-Oct 10 Year Gilt Yield October Rise in Crude Oil Prices Monetary Policy Review In the month of October, Rs. 36,000 Cr OMOs have been conducted by the RBI % Fall in Crude Oil Prices RBI announced OMO of Rs. 40,000 Cr in Nov 18 Speculation of RBI Governor Resigning Source: Bloomberg, Data as of 31 st Oct

56 Yield Curve (M-o-M Analysis) 8.5 Status Quo on Repo rates and OMO conducted by the RBI led to the drop in yields. However, the RBI purchase was largely in the 3-6 year segment - we saw larger movement in the shorter end of the yield curve M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 13Y 15Y 17Y 27Y 30Y 40Y Source: Bloomberg. As on 31 st Oct 2018 The yield curve steepened in the month of Oct-18 YTM (M-o-M Change) INR India Sovereign Curve 31/10/2018 (Current) INR India Sovereign Curve 30/09/18 3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 13Y 15Y 17Y 27Y 30Y 40Y 56

57 Emerging Market Economies: External Debt (% of GDP) Prudent Debt Levels For India Malaysia Poland Turkey S. Africa Argentina Colombia Mexico Indonesia Taiwan Russia Thailand Korea Brazil Philippines India China 14% Source: CEIC, Haver, Morgan Stanley Research; Data as of 2Q18. 19% 22% 38% 37% 34% 34% 32% 31% 28% 27% 42% 50% 52% 63% 69% 57

58 India s Current Account Deficit: 2.4% Of GDP In Q1 FY2019 India s wider current account deficit stems from reduced savings and higher investment Higher oil prices drove down savings and put downward pressure on India s CAD ource: CEIC, Morgan Stanley Research. "E=Morgan Stanley Estimates" 58

59 What Is Driving The Widening In Current Account Deficit From The Low Point Of FY2017? Source: CEIC, Morgan Stanley Research, *Morgan Stanley Estimates, 59

60 % of GDP Gold & Electronic Imports Net Gold Imports Remained in Check Net Electronic Imports Have Been Rising Source: CEIC, Morgan Stanley Research 60

61 FACTORS IMPACTING THE MARKETS 61

62 CPI Inflation: Remained Below MPC s Medium-Term Target Of 4% For Second Month In A Row 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 Jan-18 Mar-18 May-18 Jul-18 Sep % 10.0% Post the Sept CPI, the probability of December rate hike has reduced significantly 8.0% 6.0% 5.70% 4.0% 2.0% CPI Core CPI 3.80% 0.0% The CPI inflation inched up to 3.8% in September 2018 (+3.3% in September 2017) from 3.7% in August 2018 (+3.3% in August 2017). The core-cpi inflation eased to 5.7% in September 2018 from 5.9% in August 2018, led primarily by the base effect led easing in housing inflation. The inflation for food and beverages recorded a modest uptick to 1.1% in September 2018 (+1.8% in September 2017) from the 13-month low 0.8% in August 2018 (+2.0% in August 2017) The urban CPI inflation posted an uptick to 4.3% in September 2018 from the 10-month low print of 4.0% in August 2018 The rural CPI inflation softened mildly to an 11-month low 3.3% in September 2018 from 3.4% in August 2018 Source: MOSPI, ICRA Source: MOSPI, ICRA 62

63 Current Liquidity Crisis - Higher Rates, Higher Spreads Since late September, government yields eased slightly but corporate spreads continued to widen triggered by credit concern due to IL&FS defaults 3 Month Rates 3M CP 3M T-Bill 63 Note: 1. CP = Commercial paper 2. HFC = Housing Finance Company Source: Bloomberg, IDFC, Bernstein analysis, AB Bernstein Research Publication Indian Financials - Opportunities Amidst Mayhem

64 Debt Market Has Seen Spreads Harden Considerably AAA Gilt Spreads Date Oct-18 Sep-18 Jun-18 3M M Y Y Y Y Y Y Y Y Y Y The spreads have widened in Oct 18 over Sept 18 because G-Sec yields have come down due to OMOs conducted by RBI Source: Bloomberg, As on 30 th Oct 18; Color Scheme: Red Worse, Green Better, Yellow - Neutral AA (Corp) AAA (Composite) Spreads Date Oct-18 Sep-18 Jun-18 2Y Y Y Y Y Y Y Y Y Spreads spiked in Sept 18 due to credit concern and have largely remained at those levels in Oct 18 64

65 Aug-18 Sep-18 Oct-18 Liquidity Conditions Total Liquidity in INR bn Total Liquidity RBI liquidity infusion of Rs. 36,000 Cr got neutralized on account Currency in Circulation(CIC) outflow and Forex outflow (1,012.79) RBI has managed to keep overnight rate close to the repo rate. As the currency is under pressure, RBI may go a little slow on the OMO purchases for adding durable liquidity. However, the overnight rate is likely to remain around repo rate. Source: RBI, As on 31 st Oct

66 CIC and FX Reserves Impact on Liquidity (In Rs Crs) Date CIC FX Reserves Change in liquidity due to CIC Change in liquidity due to FX Reserves 21 st Sept 18 19,43,670 28,80,820 4,880 10, th Oct 18 19,61,260 28,71,270 7,500 (12,720) Source: RBI, Unit: INR Crores 66

67 India s Fiscal Deficit Touched 95.3% of Its Full Year Target Ending 30 th September 2018 The main source of stress in revenue receipts comes from lower receipts from stake sales in central public sector enterprises (CPSEs). Government Disinvestment Target 80,000 crore ( ) Divestment of CPSE Equities as of 30 th September % Government Disinvestment Target 72,500 crore ( ) Divestment of CPSE Equities as of 30 th September % Source: Live Mint - Publication Date: 25 th Oct

68 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 Jul-18 Aug-18 Sep-18 Oct-18 Bank Lending Offtake Picking Up 90 Lakh Crore % Commercial Credit by Banks = Rs lakh Crore (LHS) Current Credit/ Deposit Ratio is ~76.3% (RHS) Source: Bloomberg, Data as on 12 th Oct

69 YIELD & ITS METRICS 69

70 Indian Bond Market Performance vis-à-vis Emerging Market Asia Bond Market Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct EM Asia Government Bond Index India Government Bond Index Source: Bloomberg, Normalised As of 29 th Dec Data as of 30 th Oct

71 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 % Global Bond Yields US 10 Year UK 10 Year Germany 10 Year Japan 10 Year Source: Bloomberg, As of 31 st Oct

72 Feb-07 Jun-07 Oct-07 Feb-08 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 Oct-18 % Spreads Between 10 Year & Repo -10 year bond yield spread over repo similar to the 2013 rate hike cycle % Yr Gilt (LHS) Repo (LHS) Spread (RHS) Source: Bloomberg, Citi Research: As on 31 st Oct

73 Positive Real Interest Rates to Stimulate Financial Savings 6 5 % Jul-18 Apr-18 Jan-18 Oct-17 Jul-17 Apr-17 Jan-17 Oct-16 Jul-16 Apr-16 Jan-16 Oct-15 Jul-15 Apr-15 Jan-15 Oct-14 Jul-14 Apr-14 Jan-14 Oct-13 Jul-13 Apr-13 Jan-13 Oct-12 Jul-12 Apr-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 Note: Monthly 10 year Gilt Yield taken as average of their respective month. Oct-18 CPI is assumed to be same as Sept-18 and Real Interest rate is calculated. Source: Bloomberg 73 Oct-18

74 Inflation Adjusted Yields In India Is Attractive % India-US CPI Spread India-US CPI and Yield Spread Narrowing CPI spreads and widening bond spreads make Indian fixed income attractive therefore risk of sharp outflow due to rates differential is unlikely India-US Gilt Spread Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Note: 10 year Gilt Yield taken as average of their respective month. Data as of Oct 2018 (Oct 2018 CPI is assumed to be same as Sept Source: Bloomberg Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun Aug-18 Oct-18

75 Key Variables & Their Impact On Interest Rates In 2018 Key Variables Inflation Rupee Credit Demand Government Borrowing RBI Policy Global Event Risk Corporate bond Spread Debt FII flow Liquidity Short Term (3-6 months) Medium Term (6months 2 years) denotes fall in interest rates 75

76 Debt Outlook Long End A depreciating INR, volatile crude oil prices and other global uncertainties may force the RBI to remain guarded. A rate hike in December remains a possibility if not a certainty We expect headline CPI to start rising towards 4% in the coming month and subsequently to 5%. With a normal monsoon, we expect food supply to provide some cushion from oil price inflation RBI has become more aggressive on OMO s and has conducted Rs36,000 Cr OMO in Oct and announced Rs40,000 Cr additional support in the month of Nov. We maintain that the RBI needs to do a total of Rs200,000 Cr OMO but timing and choice of stock is critical. The 10 year yield is not easing below 7.80% - this despite declining crude prices, relatively stable INR, Rs.86,000 Cr liquidity infusion by RBI and the announcement of additional OMOs worth Rs. 40,000 Cr in Nov. We believe that upside risk in yield may be more in bonds. Therefore we would preferably stay away from duration and concentrate on carry. Currently our portfolios are running low average maturities. This enables us to allocate in higher duration easily whenever the market may provide buying opportunities. Over the next 6 months, markets may discount most of the negative surprises. This may eventually provide prospective buying opportunities at attractive levels. 76

77 Debt Outlook Short End RBI surprised the market by keeping status quo on rates and RBI also infused liquidity through OMO. We saw bps downward movement in yield as the market was discounting 25 bps rate hike However the yield curve up to 1 year was steep due to credit concern. We expect term spreads up to 1 year to reduce as credit concern abate and market gets confirmation of long pause in interest rates 77

78 Our Duration Strategy We are managing the duration actively. By means of active duration management, we can reduce the Mark-to- Market (MTM) risk as need arises. 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 that may have occurred due to sharp rise in yields. We will increase the duration gradually when the markets have stabilized. We may allocate at high duration when there are some signs of peaking in interest rates and/or a directional rally. Till then, we will keep trading in the range with low exposures given the present risk. 78

79 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 79

80 Why Accrual Funds? Default Risk - Very Low - CRISIL s average 1 year transition rates for long term ratings between 2007 and 2017 Ratings AAA AA A BBB BB B C D AAA 97.78% 2.22% 0% 0% 0% 0% 0% 0% AA 1.19% 95.27% 3.04% 0.47% 0.16% 0.03% 0.02% 0.02% A % 91.70% 4.97% 0.27% 0.03% 0.05% 0.22% The probability of default of AAA rated firms are very low AAA continue to hold its rating 97.78% of times, AA around 95.27% of times, A holds the rating around 91.70% 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 *Unrated papers that we invest in is generally very low and has implied credit risk which is moderate to low 80

81 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. 81

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84 Want To Do Financial Planning, But Confused?? Sharpen your Financial Planning skills!! Kotak Mutual Fund launches its first Video Learning Module on Financial Planning for IFA s Now Learn Anywhere Anytime!!! If you are empanelled with Kotak AMC & have updated your mobile number & id, follow the process mentioned ahead. 84

85 Process For ProStart Video Learning Login Go to Click on SIGN-UP. Enter ARN (only number). Click SUBMIT OTP is generated Enter OTP number Generate New Password which has minimum 8 characters (1 Caps, 1 Number, 1 Special Character. Message: USER ALREADY EXISTS Click on LOGIN. Enter User Id ( ARN-xxxx format). Click on FORGET PASSWORD. OTP is generated Click on LOGIN. Enter User Id (ARN-xxxx format). Enter PASSWORD. Select Module and Language. Select Video to view. Enter OTP number In case you are still unable to access videos kindly send a message or to or kmamc.trainingqueries@kotak.com, mention your Name, ARN number & mobile number. 85

86 Topics Covered In The Module CASE STUDY -2 CHILD MARRIAGE PLANNING INTRODUCTORY VIDEO TIME VALUE OF MONEY BASICS CASE STUDY -4 RETIREMENT PLANNING CASE STUDY -6 RETURNS CALCULATIONS CASE STUDY -3 RETIREMENT PLANNING CASE STUDY -1 CHILD EDUCATION PLANNING CASE STUDY -7 FULL CASE STUDY CASE STUDY -5 ANNUAL VACATION PLANNING FINANCIAL PLANNING CONCEPTS 86

87 WHATS MORE!! AVAILABLE IN 2 LANGUAGES: ENGLISH & HINDI GET A COPY OF EXCEL CALCULATORS ON COMPLETION OF MODULE VIWERSHIP HAS CROSSED LOGIN NOW & START LEARNING 87

88 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 88

89 Go Digital Make your Digital Footprint 990 Distributors on Go Digital & Counting 89

90 ANNEXURES 90

91 Performance of Sensex and Nifty Indices Source: Source: Bloomberg, Bloomberg, Kotak Institutional Kotak Institutional Equites 91

92 Key Events October 2018 India has jumped 23 spots in the new World Bank Ease of Doing Business (EODB) 2019 rankings to take up the 77th spot, with a score of GST collections in October crossed the Rs 1 lakh crore mark Reserve Bank of India s monetary policy committee (MPC) kept repo rate unchanged at 6.5% in its fourth bi-monthly monetary policy review for this fiscal year. Sep trade deficit narrowed to lowest levels in 5 months to $14bn from $17.4bn previously with deceleration in both exports (-2.2% YoY from 19.3% Aug) & imports (10.5% from 25.4%). Major commodity groups showed positive export growth with petroleum products (26.8%) & inorganic chemicals leading the pack (16.9%) Sep CPI print remained unchanged at 3.8%, despite a surge in global oil prices, sharp increase in winter crops MSP & below normal monsoons. Food inflation stood at 1.1%, showing little MSP pass-through yet, while core inflation (ex- transport) remained elevated at 5.7%. WPI rose to 5.13% in Sep with hardening of food & fuel prices The five crucial states of MP, Chhattisgarh, Rajasthan, Telangana and Mizoram are headed into elections starting mid-nov with 83 LS seats at stake. Indian equities continued to be weak through October (-5%) in the backdrop of worries around liquidity tightness in the credit markets, fear of defaults, rupee depreciation and a global risk-off. 92

93 Sensex P/E Sensex EPS Earnings Growth Visibility Is Key Done FY93-97 FY98-03 FY05-09 FY10-17 FY18-20e Source : Internal Calculation, Past performance is not a reliable indicator of expected future performance 93

94 Disclaimers & Disclosures 94

95 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. 95

96 Product Labeling * Investors should consult their financial advisers if in doubt about whether the product is suitable for them 96

97 Product Labeling * Investors should consult their financial advisers if in doubt about whether the product is suitable for them 97

98 Product Labeling * Investors should consult their financial advisers if in doubt about whether the product is suitable for them 98