Market Outlook August 2017 - Kotak Mahindra Bank · 2017. 8. 3. · *Source : NSE, BSE, SEBI, Internal calculation DII updated to 31 July, FII data updated till 28 July 2017 & MF

Market Outlook

August 2017

1

Equity Markets

2

Key Events

3

• Nifty hits 10000 mark after a stirring 22-year journey

• NDA consolidated its position, boosting chances of Modi re-election in 2019, as Nitish

Kumar joins back NDA and forms government in Bihar in alliance with BJP

• Corporate earnings – Some signs of GST implementation impact visible in Consumer

Durables, Building Materials , Pharmaceuticals , FMCG etc as channel inventory depletes.

Exporters still lagging domestic cycle in terms of earnings.

• Monsoon is progressing well with cumulative rainfall at 4% above Long Period Average

(LPA).

• US Fed kept rates unchanged.

• BJP nominee Mr Ram Nath Kovind, won the presidential election with 66% of the votes

cast and is sworn in as 14th President of India

• Reserve Bank of India (RBI) cut its key lending rate by 25 basis points to its lowest

since November 2010, in its latest Monetary Policy review

The journey of Nifty from 1K to 10K…

4 Source: NSE,MOSL

Performance Of Nifty & Sensex During July 2017

5

JDU forms new Government in Bihar with BJP

SEBI restricts use of P-Note derivatives

Source: Bloomberg, Kotak Institutional Equities

Nifty@10k? Should One Be Worried Or Is This Cycle Different?

6

Nifty @ 10,000 but, in USD terms, still below the 2007 peak

Lower bond yields partially justify valuations

Capex cycle at a decade-low Sticky domestic flows driving markets

7

Low earnings growth implies multiples on a low base Corporate profitability is at a low

RBI still amidst a rate-cut cycle Property price cycle is at a low

Nifty@10k? Should One Be Worried Or Is This Cycle Different?

Recent Developments In Bihar, Further Increases Probability Of Political

Stability In India

8

The BJP And Its Alliance Is Now In Power In 17 States,

Controlling 62% Of GDP

9 Source: CEIC, Lok Sabha, Rajya Sabha , Goldman Sachs Global Investment Research

By April 2018, Rajya Sabha Can Also Move Towards NDA Majority

10

The Upper House situation changes 70 upper house seats up for re-election by April 2018

*Three seats are vacant as on July 27, 2017

Source: Rajya Sabha , Goldman Sachs Global Investment Research

Government Intent On Reform Continues

11

Budgeted spend on roads, railways up3x Decline in Govt's subsidy over the years

Source: Union Budgets, Credit Suisse research

Quarterly Earnings Snapshot

12

• Given initial disruption due to GST, earnings expectation are benign

• Initial report of corporates announcing earnings suggest impact of GST in FMCG,

building material, durables etc

• Export companies (IT and Pharma) continue to show lackluster performance owing to

various headwinds

• Retail focused financiers, cement, auto companies maintained their earnings

momentum

Source: Bloomberg Company data, Citi Research

Monsoon Snapshot Monsoons in normal range…

13 Source: IMD, Goldman Sachs Global Investment Research

Market Performance

14

*As on 31st July 2017 Source: Axis Capital, Bloomberg

BSE Sectoral Indices

Strong Performance By Majority Sectors Over The Last 1 YearExporters lagging in returns

15

7.0 7.5 9.2 8.0 7.1

5.3 4.5

(3.2)

4.4 6.8 6.1

0.0

36.0 33.9

32.1 30.9

20.9

16.1 16.0 15.7 11.9

(0.9)

(3.5)

(12.9)

(20)

(10)

0

10

20

30

40

Realty Oil & Gas Metals Bankex PSU CapitalGoods

Auto FMCG Power Tech IT Services Healthcare

(%)

1m return % 1 yr return %

*As on 31st July 2017, Source: Bloomberg

Performance Across Market Cap -Strong performance down the capitalisation curve

16

5.8 4.4 4.4

16.7

25.3

30.7

9.3

19.5 17.9

14.0

20.9 19.8

8.3

11.6

7.9

0

5

10

15

20

25

30

35

Nifty Nifty Midcap S&P BSE Smallcap

1m returns 1y returns 3 yr CAGR 5 yr CAGR 10 yr CAGR

Most global markets had strong showing in the last year

Source: Bloomberg. Performance data in local currency

17 * As on 31st July 2017

(1.4)

6.5

9.6

11.0

12.0

14.3

15.6

15.9

16.1

16.1

16.7

17.7

18.4

19.2

20.3

20.9

24.8

2.0

(0.2)

0.8

1.3

0.2

4.1

0.2

0.8

0.3

3.2

5.8

(1.3)

2.3

0.5

(0.5)

4.5

6.1

(10) 0 10 20 30

Russia (MICEX)

Malaysia (KLCI - FTSE)

UK (FTSE 100)

Swiss (SMI)

Indonesia (JCI)

Brazil (IBOV)

France (CACS 40)

EURO (Euro Stoxx 50)

Taiwan (TSWE)

Singapore (Straits)

India (Nifty)

Germany (DAX)

US (Dow Jones)

Korea (Kospi)

Japan (Nikkei 225)

China (HSCEI)

HK (HSI)

1M 1Yr

Valuations

18

IT, Metal and Power at lower end of valuations, other sectors moving towards upper end of

valuation zone

Source: Axis Capital, Bloomberg Note: * Since April-2005

Sensex sectoral long-term valuation snapshot: Forward PE*

Stock Picking Will Be Critical

*As on 31st July 2017

19

0

10

20

30

40

50

60

70

Auto BFSI Engg FMCG IT Metals Oil Pharma Power Telecom Sensex

0

10

20

30

40

50

60

Auto BFSI Engg FMCG IT Services Metals Oil & Gas Pharma Power Telecom Sensex

-1 SD +1 SD Current Max Min

Top Quartile

Current

Lower Quartile

Min

Max

20

Focus Themes & Key Sectors

Unorganised to Organised

Banks, Home Building, Retailing, Auto components

Increased government

spending

Capital goods, rural sector, farm implements, construction, cement

Transmission of interest

rates

Infrastructure, asset owners, construction, metals, power, utilities

Clean-Green India

Gas, capital goods, renewable power

Physical to financial savings

Insurance, banks, capital market companies

P/E Multiple CY17 of Indices

Source: Internal Estimates , Bloomberg

* For India & Japan Fiscal year is FY18 while others it is CY17

Indian Valuation In A Global Perspective

21

*Source : NSE, BSE, SEBI, Internal calculation

DII updated to 31 July, FII data updated till 28 July 2017 & MF data updated till 27 July 2017

Strong purchase by Mutual funds and FII in July

Net Cash Market Purchase

22

Category (Rs cr) July - Month CY17 CY-16 CY-15

DII 4,786 26,126 37,125 66,816

MF 8,129 49,117 48,005 71,562

Insurance, Banks & Insurance (3,343) (22,991) (10,880) (4,746)

FII 3,706 60,198 18,783 18,356

Clients (1,375) (18,653) (336) (9,795)

NRI (37) (471) (714) (317)

Proprietary 140 1,601 464 1,191

Flows to equities

Domestic Flows May Sustain Into Equity Funds In FY 18

• Low FD Return

• Uncertain real

estate

environment &

Lower time limit

for LTCG

• Gold potentially

impacted by

drop in import

duties/US Fed

rate hikes

23

• Mature investor

base

understanding

the benefits of

compounding

of equities as

asset class

• SIP as a tool to

counter

volatility

Hope In Earnings Recovery For FY-18/19

Sensex – Earnings growth of 12.4 % in FY16-19E

Source: Kotak AMC

24

1,351 1,332 1,349

1,618

1,898

FY15 FY16 FY17 FY18E FY19E

FY93-97 FY98-03 FY05-09 FY10-17 FY18-19e

Se

ns

ex

‘EP

S’

Se

ns

ex

P/E

Source: MOSL

Past performance is not a reliable indicator of expected future performance

Markets Consolidating As It Awaits Economy To Take Off

25

Key Variables & Their Impact On Equities

Key Variables Short -term

Medium -term

Remarks

Economy GST to impact near-term activity especially informal

segment

Corporate EarningsImproving operating leverage, falling interest costs and

improvement in working capital can accelerate

earnings, but a bit back-ended (FY18). Key is

improvement in capacity utilisation

FII FlowIndia stands out among global asset classes with

prospects of strong long term growth. Our tax policy has

spooked FII couple off times. Budget FY 18 should

reassure them.

DII FlowFocus on improving financial savings of households

Supply of paperHigher disinvestment target and repair of leveraged

balance sheet to create supply in markets.

Interest Rates Transmission

Fall in interest rates to help revive demand and reduce

stress for companies with significant debt. Market

expecting better transmission of rates.

Policy/Reform Initiative

GST – landmark reform implemented, can result in

higher tax compliance

26

27

12-month forward Sensex P/B (x) India’s Market Cap to GDP (%)

15000

18000

21000

24000

27000

30000

33000

Jul-1

4

Jul-1

4

Aug-

14

Sep-

14

Oct

-14

Dec-

14

Dec-

14

Jan-

15

Feb-

15

Mar

-15

Apr-1

5

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Nov

-15

Dec-

15

Jan-

16

Feb-

16

Mar

-16

Apr-1

6

May

-16

Jun-

16

Jul-1

6

Aug-

16

Sep-

16

Oct

-16

Nov

-16

Dec-

16

Jan-

17

Feb-

17

Mar

-17

Apr-1

7

May

-17

Jun-

17

Jul-1

7

Cheap 9x-10x

Attractive 10x-12x

Fair 12x-16x

Fair Value Plus 16-18x

Stretched 18x-20x

12-month forward Sensex P/E (x)

Markets Fairly Valued Few Indicators Like PE Indicate Over-valuation, While Other Composite Indicators Like

P/B Or Market Cap To GDP Suggest Valuations Still Having Room To Expand

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Ma

r-91

Ma

r-92

Ma

r-93

Ma

r-94

Ma

r-95

Ma

r-96

Ma

r-97

Ma

r-98

Ma

r-99

Ma

r-00

Ma

r-01

Ma

r-02

Ma

r-03

Ma

r-04

Ma

r-05

Ma

r-06

Ma

r-07

Ma

r-08

Ma

r-09

Ma

r-10

Ma

r-11

Ma

r-12

Ma

r-13

Ma

r-14

Ma

r-15

Ma

r-16

Ma

r-17

Sensex P/B (x) - LHS

0

25

50

75

100

FY0

4

FY0

5

FY0

6

FY0

7

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8E

Average of 74% for the period

While Valuations Not Cheap, Market Not In A Bubble Zone

28

Corporate earnings, especially of domestic oriented companies

already showing improving trend

While equities may still be out-performing other

alternate asset classes, moderate return

expectations

Use intermittent volatility to

increase equity exposure

What can go wrong?

29

NPL ratios yet to come down and resolution may get delayed A potential rise in equity issuance might impact market liquidity

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 generalelections. One example of this is the rise in farm loan waivers in the past few months, partly driven by low agri productprices and weak monsoons in 2014- 15.

• The government has already readied its armour to take the fight against corruption to the next level with the law onbenami property. This law can be used to provisionally attach benami properties and eventually confiscated. The actcan help to improve transparency in property ownership but can cause economic disruption if used indiscriminately. Abig crackdown under the benami property law may yield political gains as seen with the demonetisation move.…though the probability of the same is low

• Geo-political risks - India-China border issue

Risk 1 – Continuity of reforms?

30

Stable government continues

General Elections

2019

2nd generation of reforms such as Labour,ease of doing business etc.

Reforms part 2

31

Risk 2 – US Fed rate hike & other geo political risks

India has been relatively resilient to US rate hikes & geo political risks in the

past

32

Risk 3 – GST disruption in the short term

• Inventory destocking

• Compensation to distributors for continuity of sales

Sensex - 300 bagger over 40 years!

But not without its share of ups and downs!

33

Date of Mkt Peak Date of Mkt Trough % Return Duration (days) Market Peak Market Trough

16-06-1979 14-12-1979 -13.9 181 132 113

04-01-1982 21-07-1982 -19.1 198 253 205

09-08-1985 30-09-1985 -18.4 52 533 435

27-02-1986 28-03-1988 -41.3 760 665 390

05-07-1989 13-02-1990 -15.6 223 798 673

09-10-1990 25-01-1991 -38.7 108 1559 956

22-04-1992 27-04-1993 -53.6 370 4467 2071

12-09-1994 20-10-1998 -40.3 1499 4631 2764

14-10-1999 01-11-1999 -15.9 18 5075 4271

11-02-2000 21-09-2001 -56.2 588 5934 2600

14-01-2004 23-06-2004 -25.0 161 6194 4644

08-02-2007 05-03-2007 -15.3 25 14652 12415

08-01-2008 09-03-2009 -60.9 426 20873 8160

05-11-2010 20-12-2011 -27.8 410 21005 15175

03-03-2015 25-02-2016 -22.4 359 29594 22976

S&P Sensex index Values, Source: ICRA

Key Recommendations

Key theme Remarks

Large Cap – play on buying sectoral leaders that

benefit from improving investment climate

Kotak 50

Diversified/Multicap – focus on sectors that are likely to

benefit the most across market cap

Kotak Select Focus

Infrastructure revival – “True-to-label” fund – recent

thrust of government to revive the infrastructure theme

Kotak Infrastructure & Economic

Reforms Fund

Through SIP in Midcap oriented scheme Kotak Emerging Equities Fund

ELSS – Equity allocation with ability to reduce tax

outgo

Kotak Tax Saver Fund

Balanced – benefit from debt and equity allocation Kotak Balanced Fund

We recommend investors to invest through SIP with a 5 years horizon.

34

Strategy For Investments In The Current Scenario

35

1- Kumbhkaran

(Invest & forget)

Or

2- Asset Allocation

Market Valuation/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

DEBT

MARKETS

36

How July 2017 Unfolded

• Central Banks Actions:

– Reserve Bank of India (RBI) cut its key lending rate by 25 basis points to its lowest since

November 2010, in its latest Monetary Policy review

– The Federal Reserve kept interest rates unchanged and said it expected to start winding down its

massive holdings of bonds "relatively soon" in a sign of confidence in the U.S. economy

– The European Central Bank left its ultra easy monetary policy stance unchanged as expected,

keeping rates at record lows and even leaving the door open to more asset buys if the outlook

worsens.

• India's annual retail inflation eased to a record low of 1.54 % during June, as prices of vegetables and

pulses and products further contracted. Factory output growth also slowed to 1.7 %in May.

• The index of industrial production in May rose 1.7 % compared to a year ago, slower than the 3.1 %

growth seen in April.

37

How July 2017 Unfolded

• India's export grew by 4.39 % to $ 23.56 billion in June. Import too rose by 19 % to $ 36.52 billion in June

from $ 30.68 billion in the year-ago month due to rise in inward shipments of oil and gold. A rise in import

shot up the country's trade deficit to $ 12.96 billion in the month under review from $ 8.11 billion in June

2016

• Foreign direct investment (FDI) grew by 23 % to USD 10.02 billion during April-May this fiscal

• Attracted by one of the highest yields in Asia, foreigners bid for 104.42 billion rupees ($1.6 billion) of

corporate debt quotas, exceeding the 74.18-billion rupee target and taking inflows to near the overall cap of

$51 billion.

• Japan and the European Union have formally agreed an outline free trade deal which will ease the

movement of goods between two of the world's largest economies.

38

Positive Monsoon

39 Source: CEIC, RBI, HDFC Bank

• Water storage availability in 91 major reservoirs of the country, as of 27th Jul-17, stood at 39% of totalcapacity – a rise of a sharp ~11% from previous week driven by replenishment of water levels in allregions, led by East.

• Compared to last year current storage levels are at 104% and versus last ten years storage is at 100%,and the pace of replenishment also surpasses that of last year

Reservoir replenishment undergoes a sharp improvement

Water Reservoirs: Current capacity as a % of live capacity

Gilt Yields in Policy Perspective

5.283

4

5

6

7

8

9

10

11

12

13

No

v-98

Mar

-99

Jul-

99

No

v-99

Mar

-00

Jul-

00

No

v-00

Mar

-01

Jul-

01

No

v-01

Mar

-02

Jul-

02

No

v-02

Mar

-03

Jul-

03

No

v-03

Mar

-04

NDA 1( 1998 to 2004)

“Remember Prime Minister Vajpayee did 5.6% - 6% loans and how it gave a boost everymiddle class, low-income person had the desire to own a house of his own” : Piyush Goyal,Minister, GOI.

40

As of 31th July 2017, Source Bloomberg

6.46

6

6.5

7

7.5

8

8.5

9

Au

g-1

4

Oct

-14

Dec

-14

Feb

-15

Ap

r-1

5

Jun

-15

Au

g-1

5

Oct

-15

Dec

-15

Feb

-16

Ap

r-1

6

Jun

-16

Au

g-1

6

Oct

-16

Dec

-16

Feb

-17

Ap

r-1

7

Jun

-17

NDA 2 (2014 to date)

Positive Real Interest Rates to Stimulate Financial Savings

41

• Earlier, negative real rates fueled inflation in physical assets as people chased assets

such as real estate and gold till 2014.

• With real rates in the positive territory now, money should move from physical to financial

assets.

4.68

-3

-2

-1

0

1

2

3

4

5

6Fe

b-1

2

Ap

r-1

2

Jun

-12

Au

g-1

2

Oct

-12

Dec

-12

Feb

-13

Ap

r-1

3

Jun

-13

Au

g-1

3

Oct

-13

Dec

-13

Feb

-14

Ap

r-1

4

Jun

-14

Au

g-1

4

Oct

-14

Dec

-14

Feb

-15

Ap

r-1

5

Jun

-15

Au

g-1

5

Oct

-15

Dec

-15

Feb

-16

Ap

r-1

6

Jun

-16

Au

g-1

6

Oct

-16

Dec

-16

Feb

-17

Ap

r-1

7

Jun

-17

Real Rates (%)

Note: Monthly 10 year Gilt Yield taken as average of their respective month. Source: Bloomberg

CPI Inflation: Actuals Much Docile Than Expected

Source: MOSPI

• The CPI inflation eased sharply to a fresh series-low 1.5% in June 2017 (+5.8% in June

2016) from 2.18% in May 2017 (+5.8% in May 2016), chiefly led by the deeper disinflation in

food and beverages.

• The core-CPI inflation (excluding food & beverages and fuel and light) also eased to 3.9% in

June 2017 from 4.3% in May 2017 with the broad based moderation across several

components . Also, core CPI inflation exceeded headline CPI inflation for the 10th Month in

the row.

42

1.54%

3.9%

0%

2%

4%

6%

8%

10%

12%

Au

g-1

2

Oct

-12

Dec

-12

Feb

-13

Ap

r-1

3

Jun

-13

Au

g-1

3

Oct

-13

Dec

-13

Feb

-14

Ap

r-1

4

Jun

-14

Au

g-1

4

Oct

-14

Dec

-14

Feb

-15

Ap

r-1

5

Jun

-15

Au

g-1

5

Oct

-15

Dec

-15

Feb

-16

Ap

r-1

6

Jun

-16

Au

g-1

6

Oct

-16

Dec

-16

Feb

-17

Ap

r-1

7

Jun

-17

CPI Core CPI

CPI Inflation to remain anchored below 4% considering all scenarios

Source: Bloomberg Intelligence Report, Ministry of statistics and programme Implementation

43

Will increasing digital payments lead to decline in Inflation in the long

term?

Source: SBI Research

44

• More money moving to formal economy would not only increase tax collections and help plug

fiscal slippages, but it would also lead to an efficient market (which was not the case in a cash

economy)

• Supply & Demand responses are quicker in an efficient market thus keeping prices in check

Crude Prices Remain Range Bound

Source:Bloombergas on 31st July 2017

• Crude Oil prices have remained range bound $45-55 during the month

• On a broader trend the brent crude prices are on the downward slide despite the production

cut by Oil producing countries.

• If oil remains between $50-60 a barrel, then it will be inline with the budgetary expectations.

45

52.65

40

42

44

46

48

50

52

54

56

58

Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17

Brent Crude (USD)

• 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.

Credit Growth Moderates This Month

Source: Bloomberg, Data as on 31st July 2017

46

64

66

68

70

72

74

76

78

80

6000000

6200000

6400000

6600000

6800000

7000000

7200000

7400000

7600000

7800000

8000000

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

No

v-1

5

Dec

-15

Jan

-16

Feb

-16

Mar

-16

Ap

r-1

6

May

-16

Jun

-16

Jul-

16

Au

g-1

6

Sep

-16

Oct

-16

No

v-1

6

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-1

7

May

-17

Jun

-17

Current Credit/ Deposit Ratio is ~72% (RHS)

Commercial Credit by Banks = Rs 77 lakh Crore (LHS)

Credit Growth (Weekly Data)

India Foreign Exchange Reserves – Stability Is Key

• India continues to attract capital flow resulting in healthy foreign exchange reserves.

• Indian foreign exchange reserves have grown by $ 31 billion in CY17 till date, indicating rising foreign

investor interest, and stronger rupee. This provides one additional reason for a rate cut if RBI wants to

constrain the Rupee rise further.

Source: Bloomberg

47

Source: Bloomberg, Data as on 31st July 2017,

$ 391.43 Billion

340000

350000

360000

370000

380000

390000

400000

Au

g-1

5

Sep

-15

Oct

-15

No

v-1

5

Dec

-15

Jan

-16

Feb

-16

Mar

-16

Ap

r-1

6

May

-16

Jun

-16

Jul-

16

Au

g-1

6

Sep

-16

Oct

-16

No

v-1

6

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-1

7

May

-17

Jun

-17

Jul-

17

India Forex Reserves($US Billion)

-4000

-3000

-2000

-1000

0

1000

2000

3000

4000

5000

6000

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3

Jul-

13

Oct

-13

Jan

-14

Ap

r-1

4

Jul-

14

Oct

-14

Jan

-15

Ap

r-1

5

Jul-

15

Oct

-15

Jan

-16

Ap

r-1

6

Jul-

16

Oct

-16

Jan

-17

Ap

r-1

7

Jul-

17

Total Liquidity

Total Liquidity in INR bn

The Game Changer

48

Source: Internal

Calculations

Although total liquidity has come down to Rs. 2.5 lakh crores from Rs. 3 lakh crores, it continues to

be net positive. We expect it to remain positive in the medium term

From Liquidity Deficit to Liquidity Positive

The Game Changer

Data as of 31st July 2017

5.5

5.7

5.9

6.1

6.3

6.5

6.7

6.9

7.1

7.3

7.5

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

Repo Rate Overnight Rate (MIBOR %)

Repo Rate in the last 1 year

RBI has managed to keep overnight rate close to the repo rate. Market is yet to believe that

surplus liquidity is here to stay for long, this will lead to flattening of the curve.

Source:Bloomberg

Date RepoReverse

RepoMSF SLF

Total Systemic

Liquidity

Government

Balances

31st July 2017 -42.10 2859.78 -6.75 -16.53 2794.40 0

Amount in Rs. billion.

Active Liquidity Management

As of 31st July 2017

49

Yield Curve (M-o-M Analysis)

• The yield curve steepened mildly. The belly of the curve which was an outperformer didn’t move much while the frontend of the

curve yields fell by 5-10 bps

• We believe in the near term the belly of the curve remains attractive and the illiquid gilt is likely to perform, as the spreads are

likely to compress

• The long end will take some time to make a decisive move

Source: Bloomberg

50

6

6.2

6.4

6.6

6.8

7

7.2

7.4

3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 16Y 17Y 18Y 25Y 27Y 28Y 30Y 35Y 40Y

INR India Sovereign Curve YTM INR India Sovereign Curve 01/07/17 YTM

-20

-15

-10

-5

0

5

3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 16Y 17Y 18Y 25Y 27Y 28Y 30Y 35Y 40Y

YTM (M-o-M Change)

India-US 10 Year Gilt- Narrowing spreads have more legs to run

51

The spreads have compressed due to expectations of a rate cut building in

domestic 10 year bond. In the near term we expect spread to remain at similar

levels or compress.

India-US 10 Year & CPI Spreads

Narrowing CPI spread makes Indian bonds attractive and therefore creates space for Indian

Gilt yields to fall.

52

Source: Bloomberg

-2

0

2

4

6

8

10

12

Jan

-12

Mar

-12

May

-12

Jul-

12

Sep

-12

No

v-1

2

Jan

-13

Mar

-13

May

-13

Jul-

13

Sep

-13

No

v-1

3

Jan

-14

Mar

-14

May

-14

Jul-

14

Sep

-14

No

v-1

4

Jan

-15

Mar

-15

May

-15

Jul-

15

Sep

-15

No

v-1

5

Jan

-16

Mar

-16

May

-16

Jul-

16

Sep

-16

No

v-1

6

Jan

-17

Mar

-17

May

-17

India-US CPI Spread India-US Gilt Spread

Note: 10 year Gilt Yield taken as average of their respective month . Data as of June 2017. Source: Bloomberg

Global Bond yields remain rangebound

53

• Global bond yields remained flat month on month and are expected to remain range bound in

absence of any fresh data

• Global bonds yields may trend lower in case the inflation continues to surprise on the downside

-0.5

0

0.5

1

1.5

2

2.5

3

Au

g-1

6

Sep

-16

Oct

-16

No

v-1

6

De

c-1

6

Jan

-17

Feb

-17

Mar

-17

Ap

r-1

7

May

-17

Jun

-17

Jul-

17

10 Years Gilt of Select Countries

US 10 Year

UK 10 Year

Germany 10 Year

Japan 10 Year

Fed Rate Hike Probability

The Fed Fund Futures are indicating a very low probability of hike in 2017.

54

5.6

94.4

0

20

40

60

80

100

120

Jan

-15

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

No

v-1

5

Dec

-15

Jan

-16

Feb

-16

Mar

-16

Ap

r-1

6

May

-16

Jun

-16

Jul-

16

Au

g-1

6

Sep

-16

Oct

-16

No

v-1

6

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-1

7

May

-17

Jun

-17

Jul-

17

Probability of Hike

Probability of No Change (1-1.25)

Historical Analysis of Meeting

Risks – Lot Many Googlies

55

Debt Market

Events

Key Variables & their Impact On Interest Rates in 2017

Key Variables Short - term (3-6 month)

Medium – term (6month – 2 years)

Inflation

Rupee

Credit Demand

Government Borrowing

RBI Policy

Global Event Risk

Corporate bond Spread

Debt FII flow

Liquidity

denotes fall in interest rates

56

Debt Outlook

• The RBI in the recent MPR delivered a much desired rate cut of 25 bps

• We believe that March 2018 inflation would be in the band of 3.5-4.00% vs RBI projection of 3.50-4.50%

and this would open up space for RBI to reduce policy rate by 25 bps.

• With the cut of 25 bps and neutral stance, the yield curve is likely to remain steep

• In the near term, we expect the 10 year gilt to trade in the 6.40-6.60% band till any further trigger

• The MSS limits have ben hiked to 2.5tn and therefore the OMO sale will slow down which will be positive

for rates

• Rate rally not over and spike in yields should be used to add duration by the investors who can take

volatility

• Short term curve was already discounting a rate cut , MSS issuance can put some pressure on 3-6m

yields

• The 6-24m yield curve is expected to remain steep and will start flattening once the expectation starts

building in.

57

Key Recommendations

Segment Scheme Rationale

Accrual

PlayKotak Income Opportunities Fund / Kotak Medium

Term Fund 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 Corporate Debt Fund

Kotak Equity Arbitrage Fund Higher post tax

return

Duration Play

Kotak Mahindra Bond Scheme Investment for

longer maturities

Kotak Bond Short Term/ Kotak Flexi Debt SchemeInvestment for

shorter

maturities

58

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

• 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 risk-

adjusted basis.

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%

One year average transition rates : between 1988 and 2014

59

Story in Accruals

• Accruals funds generate performance by purchasing high yielding assets

• 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.

60

Need to Watch Out for Opportunities

in Hybrid Space

61

Kotak MIP Performance*

Consistency In Growth

62

Past performance may or may not sustain in the future

* Less than 1 year Simple Annualized returns, Greater than or Equal to 1 year Compound Annualized returns. . Performance as of

30th June 2017

13.77

11.5 11.3612.07

10.56 10.15

0

2

4

6

8

10

12

14

1 Year 3 Years 5 Years

Kotak Monthly Income Plan Performance (%)

Kotak Monthly Income Plan - Reg - Growth Crisil MIP Blended Index

Particulars Nifty Level Net Assets in Rs Debt Equity

Start in Kotak MIP with ~ 20% equity exposure 10000 10 8.5 1.5

Equity markets drop by 15% (represented by Nifty 50) 8500 9.78 8.50 1.28

Shift to Kotak Equity Savings Fund which has ~ 25% unhedged

equity 8500 9.78 8.31 1.47


Shift to Kotak Balance with ~65% equity 7225 9.56 3.34 6.21


Shift to Equity fund with ~100% equity such as Kotak Select Focus 6141 8.62 0 8.62

Equity markets go up by 20% (represented by Nifty 50) 7370 10.35

Shift Back to Kotak MIP with ~20% equity exposure 7370 10 7.93 2.07

Why Kotak Monthly Income Plan- Growing Through Asset Allocation

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.

63

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

64

Have You Noticed The Regular Dividends In Kotak Balance ?

* 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

65

Record Date Rupees Per Unit Dividend Yield

25-July-17 0.12 0.70%

27-June-17 0.11 0.65%

25-May-17 0.11 0.65%

25-Apr- 17 0.11 0.66%

27-Mar- 17 0.11 0.67%

27-Feb-17 0.11 0.69%

25-Jan-17 0.11 0.69%

26-Dec-16 0.11 0.69%

01-Dec-16 0.11 0.69%

26-Oct-16 0.08 0.49%

27-Sep-16 0.08 0.49%

25- Aug-16 0.08 0.50%

25-Jul-16 0.08 0.50%

27-Jun-16 0.08 0.53%

25-May-16 0.07 0.48%

25-Apr-16 0.07 0.5%

29-Mar-16 0.07 0.5%

25-Feb-16 0.07 0.5%

27-Jan-16 0.07 0.5%

15-Dec-15 0.07 0.5%

Kotak Balance – Performance

Growth and Stability Together

66

Source: ICRA. Past performance may or may not sustain in the future. Scheme in inception since 29th Nov 1999. Performance

as of 30th June 2017

* Less than 1 year Absolute returns, Greater than or Equal to 1 year Compound Annualized returns

18.04

11.87

14.0713.85

9.08

11.73

0

2

4

6

8

10

12

14

16

18

20

1 Year 3 Years 5 Years

Kotak Balance Fund Performance (%)

Kotak Balance - Dividend CRISIL Balanced Fund - Aggressive Index

Why Kotak Mutual Fund Is Different From Others

67

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

The information contained in this (document) is extracted from different public sources. Allreasonable care has been taken to ensure that the information contained herein is notmisleading or untrue at the time of publication. This is for the information of the person towhom it is provided without any liability whatsoever on the part of Kotak Mahindra AssetManagement Co Ltd or any associated companies or any employee thereof.We are notsoliciting any action based on this material and is for general information only. Mutual Fundinvestments are subject to market risks, read all scheme related documents carefully.

Disclaimers & Risk Factors

About the scheme:

68

69

Performance (%) as on 30th June, 2017

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.

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.

`

Scheme Inception date is 02/12/2003. Mr. Abhishek Bisen has been managing the fund since 01/04/2008. Mr. Devender Singhal has been managing the fund since 25/08/2015

70

Other Funds Managed by Mr. Pankaj Tiberwal and Abhishek Bisen

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. Abhishek Bisen

Bottom 3 Funds Managed by Mr. Abhishek Bisen

Performance (%) as on 31st March, 2017 Source: ICRA

Name of the Scheme This product is suitable for investors who are seeking* Riskometer

Kotak Mahindra 50 Unit Scheme• long term capital growth• Investment in portfolio of predominantly equity & equity related

securities

Kotak Select Focus Fund • long term capital growth• Investment in portfolio of predominantly equity & equity related

securities generally focused on a few selected sectors

Kotak Emerging Equity Scheme• long term capital growth• Investment in equity & equity related securities predominantly in

mid & small cap companies.

Kotak Balance Fund

• Long term capital growth• Investment in equity & equity related securities balanced with

income generation by investing in debt & money market instruments

Kotak Opportunities• long term capital growth• Investment in portfolio of predominantly equity & equity related

securities

Kotak Gilt Investment• 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.

Kotak Bond• income over a long investment horizon

investment in debt & money market securities

Kotak Medium Term Fund

• Income over a medium term investment horizon• Investment in debt, government securities & money market

instruments with a portfolio weighted average maturitybetween 3-7 years

Kotak Low Duration Fund (Formerly known as PineBridgeIndia Short Term Fund)

• 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

Product Labeling

71


Kotak Equity Arbitrage Scheme• income from arbitrage opportunities in the equity market• investment in arbitrage opportunities in the cash & derivatives

segment of the equity market.

Kotak Income Opportunities Fund

• 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

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

Product Labeling

72

73


Kotak Monthly Income Plan

• income & capital growth over a long term horizon

• investment in a portfolio of debt instruments with a moderate exposure in equity & equity related instruments

Kotak Banking andPSU Debt Fund

• income over a short to medium term investment horizon• •Investment in debt & money market securities of PSUs, Banks &

government securities

Product Labeling

Documents

Market Outlook August 2017 - Kotak Mahindra Bank · 2017. 8. 3. · *Source : NSE, BSE, SEBI, Internal calculation DII updated to 31 July, FII data updated till 28 July 2017 & MF