Market Outlook April 2017 - Kotak Asset Managementassetmanagement.kotak.com/documents/19/4008011... · Indian Markets Among Top Performer In Terms Of 1yr Return Source: Bloomberg

Market Outlook

April 2017

1

EQUITY

MARKETS

2

Key Developments

3

How March 2017 Unfolded -Key Events of Mar ‘17

• BJP registered a commanding victory in the UP Elections and formed government in 4 states , setting the

stage for a likely rejuvenated focus on long-term reforms and bold policy actions.

• The Union Cabinet approved the four Goods and Services Tax (GST) related bills on 20 March 2017,

namely, the Central Goods and Services Tax Bill 2017, the Integrated Goods and Services Tax Bill 2017,

the Union Territory Goods and Services Tax Bill 2017 and the Goods and Services Tax (Compensation to

the States) Bill 2017, moving closer to implementation of the tax from July this year.

• India's GDP surprisingly grew 7% in the December 2016 quarter, much higher than the widely forecast 6%

growth. Still, it was slower than the 7.4% growth the country had seen in the September 2016 quarter.

• India's current account deficit stood at $7.9 billion (1.4% of GDP) in the third quarter of this financial year.

That was higher than $7.1 billion (1.4% of GDP) in the year-ago quarter and $3.4 billion (0.6% of GDP) in

the preceding quarter.

• The government's revenue collection from indirect tax during April-February grew by an impressive 22.2

per cent while that of direct tax rose by 10.7 per cent.

• Markets continued to move up in March by 3.3% (Nifty) due to state election win, global risk-on sentiment

and flows from both FII and domestic investors.

• During FY17 the significant events of note were: Raghuram Rajan exit, Brexit, Trump Electoral win and

more importantly demonetisation, in this backdrop, Nifty registered 18.5% upmove for FY17, underscoring

strong flows relying on improving fundamentals

5

Massive Wins by BJP In State Elections -Setting the stage for long-term reform and policy continuity

The BJP governments controls more than half of India’s GDP at the state level

6

Gujarat Is Next Big State Election

7

Despite the significant state wins, NDA to be short of majority in Rajya Sabha

Projection for the BJP* and Allies seats in Rajya Sabha (Upper House)

8

GST – With Passage Of Laws, Moving A Step Closer To Implementation

Advantages of GST

9

Key risks and issues under GST

However, Few More Issues To Be Sorted

10

Big Thrust For Affordable Housing

11

With Tweaks In Credit-linked Subsidy For Affordable Housing

Implying 4-12% discount on property prices

12

The impact on EMI is meaningful for loans up to INR 2.5-3mn; Benefits much lower for larger loans

Affordable Housing – Interest subsidy scheme for MIG targets wide home buyer base

13

Early Forecast Of Monsoon – Skyment Forecast Slightly Below Normal

But it is still early days yet…

14

The Flow Show Continues As Indian Macro Shines Through

7.4

In p

erc

ent

15

FDI Inflows Continue To Remain Strong

16

Domestic Flows Benefiting From Demonetization/High Real Rates

Cumulative net inflows in Domestic Equity Mutual Funds (Rs bn)

17

Citi India Sentiment Indicator – Still In Neutral + Zone

Market performance

18

*As on 31 March 2017 Source: Axis Capital, Bloomberg

BSE Sectoral Indices

(0.7)

0.2 1.6 4.0

7.0 3.6

7.3

2.5 5.3

(0.5)

0.1

(0.1)

56.5

48.0

40.8

32.8 30.3

28.1 27.9

22.3 20.5

1.1

(5.5) (9.0)

(20)

(10)

0

10

20

30

40

50

60

Metals Oil & Gas PSU Bankex Realty Power CapitalGoods

Auto FMCG Healthcare Tech IT Services

(%)

1m return % 1 yr return %

Strong Performance By Majority Sectors Over The Last 1 Year

19

*As on 31 March 2017 ,Source: Bloomberg

Performance Across Market Cap

3.3 4.3

5.4

18.5

34.9 36.9

11.0

25.9 25.3

11.6

17.4 16.1

9.2

13.5

9.2

0

5

10

15

20

25

30

35

40

Nifty Nifty Midcap S&P BSE Smallcap

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

20

Indian Markets Among Top Performer In Terms Of 1yr Return

Source: Bloomberg. Performance data

1.3

8.1

8.2

11.5

11.8

12.2

12.8

14.1

14.9

15.9

16.1

16.1

17.2

18.5

19.3

23.0

30.4

2.7

(0.7)

3.3

1.9

2.5

0.6

(1.1)

(0.2)

3.4

4.9

1.6

4.8

(0.4)

3.3

1.5

3.6

(2.1)

(20) 0 20 40

Malaysia (KLCI - FTSE)

Russia (MICEX)

Korea (Kospi)

Swiss (SMI)

Singapore (Straits)

Taiwan (TSWE)

Japan (Nikkei 225)

China (HSCEI)

Indonesia (JCI)

EURO (Euro Stoxx 50)

HK (HSI)

France (CACS 40)

US (Dow Jones)

India (Nifty)

UK (FTSE 100)

Germany (DAX)

Brazil (IBOV)

1M 1Yr

21

*As on 31 March 2017

22

Key Trends In Consumption

Source: various national sources, CEIC, MoSL

% YoY Currency Auto sales1 Petrol sales

Rural wages

2

Passenger traffic

3

Revenue spending

4

Imports5

Foreign tourists arrival

6

Consumer durable goods

Personal credit

Feb-16 13.3 11.0 12.9 0.2 4.8 2.5 (4.5) 4.4 10.4 19.2

Mar-16 14.9 10.0 21.5 0.8 (0.6) 23.9 (22.9) (1.1) 10.1 19.4

Apr-16 15.1 19.8 11.9 0.3 0.2 12.5 (23.1) (0.3) 11.8 19.7

May-16 14.7 9.3 13.6 (0.2) 1.5 30.0 (13.7) 1.0 5.9 19.1

Jun-16 15.7 10.9 4.4 (0.2) (0.7) 43.6 (7.4) (1.2) 5.4 18.5

Jul-16 16.7 14.0 14.7 (1.0) 1.1 (17.7) (18.9) 0.6 5.8 18.8

Aug-16 17.4 24.9 24.9 (0.2) 2.3 1.6 (14.2) 1.9 2.1 18.1

Sep-16 15.2 21.4 (3.4) 0.6 0.4 33.1 (2.5) (0.1) 13.9 19.7

Oct-16 17.2 8.1 13.8 1.8 (0.4) 52.7 8.0 (0.9) 0.6 17.0

Nov-16 (23.6) (4.7) 14.3 2.5 7.3 15.9 10.4 7.0 9.4 15.2

Dec-16 (39.9) (18.6) 7.9 2.9 (0.9) (8.0) 0.5 (1.5) (10.3) 13.5

Jan-17 (37.8) (4.2) (0.6) 3.57

1.9 33.0 10.7 1.3 3.87

12.9

1=Includes passengers vehicles and two wheelers

2=rural wages, deflated by CPI for rural workers

3=Railways and Aviation

4=Excluding interest payments(only for central government

5=Imports of agricultural items, leather product, news print

and electronic goods, textiles(excluding gold, silver and

precious metals

6=In persons unit

7=Our forecast for Jan 2017

23

Key Trends In Investment

Source: various national sources, CEIC, MoSL

1=Includes railways and waterways

2=Include commercial vehicles and three wheelers

3=Capital spending by Central Government

4=Machinery & Equipment ,transport equipment,

machine tools and project goods.

5=Our forecasts for Jan 2017

% YoY Cargo traffic

1

Electricity Industrial

credit Auto sales

2

Govt capex

3 Diesel sales

Capital goods’

imports4

Cement Production

IIP: Non-metallic products

IIP: Capital goods

Feb-16 3.5 9.2 5.4 24.7 (44.9) 10.8 18.7 13.5 11.1 (9.3)

Mar-16 1.1 11.3 2.7 21.4 (52.9) 15.4 6.3 11.9 9.3 (15.3)

Apr-16 1.0 14.7 0.1 25.4 (20.5) 4.3 (27.8) 4.4 3.4 (25.3)

May-16 0.8 4.6 0.9 21.4 7.5 8.1 (1.9) 2.4 1.0 (12.5)

Jun-16 4.0 8.1 0.6 7.7 (24.4) 1.5 1.7 10.3 5.5 (16.1)

Jul-16 (0.2) 1.6 0.6 1.0 (18.7) 1.8 (7.1) 1.4 (0.7) (29.4)

Aug-16 (1.6) 0.1 (0.2) 5.0 239.1 13.0 (10.5) 3.1 2.2 (22.4)

Sep-16 1.0 2.2 0.9 1.1 20.3 (11.4) (4.7) 5.5 3.5 (21.6)

Oct-16 2.8 2.8 (1.7) 8.3 (165.7) 5.2 7.7 6.2 3.2 (26.9)

Nov-16 7.2 10.2 (3.4) (18.3) 11.5 10.6 (11.3) 0.5 (0.7) 15.0

Dec-16 4.7 6.0 (4.3) (19.1) 32.7 1.1 5.1 (8.7) (9.2) (3.0)

Jan-17 1.5 4.8 (5.1) (12.1) 7.2 (7.8) 1.8 (13.3) (13.9)5

3.35

24

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

Valuations

25

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

IT 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


26


Source: Axis Capital, Bloomberg

Key Indices: Forward P/E

Large Caps at a Discount

-More Bang For The Buck!

Trailing ROE (%)

6.0

12.0

18.0

24.0

30.0

36.0

Ma

r-0

7

Ma

r-0

8

Ma

r-0

9

Ma

r-1

0

Ma

r-1

1

Ma

r-1

2

Ma

r-1

3

Ma

r-1

4

Ma

r-1

5

Ma

r-1

6

Ma

r-1

7

BSE Sensex ROE (%) BSE Midcap RO E (%)

Trailing PB (X)

0

10

20

30

Ma

r-0

7

Ma

r-0

8

Ma

r-0

9

Ma

r-1

0

Ma

r-1

1

Ma

r-1

2

Ma

r-1

3

Ma

r-1

4

Ma

r-1

5

Ma

r-1

6

Ma

r-1

7

Sensex CNX Midcap 100

27

0.5

2.0

3.5

5.0

6.5

8.0

Ma

r-0

7

Ma

r-0

8

Ma

r-0

9

Ma

r-1

0

Ma

r-1

1

Ma

r-1

2

Ma

r-1

3

Ma

r-1

4

Ma

r-1

5

Ma

r-1

6

Ma

r-1

7

BSE Sensex PB (x) BSE Midcap PB (x)

P/E Multiple CY17 of Indices

Source: Axis Capital , Bloomberg

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

Indian Valuation In A Global Perspective

28

7.6

9.3

11.0

11.0

13.7

13.8

13.9

15.5

15.6

16.3

18.1

19.3

6 8 10 12 14 16 18 20

China (HSCEI)

Korea (Kospi)

Brazil (IBOV)

HK (HSI)

Singapore (Straits)

UK (FTSE 100)

Thailand (SET)

Malaysia (KLCI - FTSE)

US (Dow Jones)

Japan (Nikkei 225)

India (Sensex)

US (Nasdaq)

(x)

*Source : NSE, BSE, SEBI, Internal calculation

FII & MF data updated upto 30 March 2017

Strong purchase by FII in March – almost 1.6 times of

CY2016 flows in a single month!

Net Cash Market Purchase

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

DII (4,396) 1,289 37,125 66,816

MF 2,368 9,456 48,005 71,562

Insurance, Banks & Insurance (6,763) (8,167) (10,880) (4,746)

FII 30,876 41,314 18,783 18,356

Clients (8,667) (12,963) (336) (9,795)

NRI 9 (102) (714) (317)

Proprietary 371 772 464 1,191

29

Flows to equities

Domestic Flows May Sustain Into Equity Funds In 2017

• Low FD Return

• Uncertain real

estate

environment &

Lower time limit

for LTCG

• Gold potentially

impacted by

drop in import

duties/US Fed

rate hikes

30

• Mature investor

base

understanding

the benefits of

compounding

of equities as

asset class

• SIP as a tool to

counter

volatility

…But Based On Hope In Earnings Recovery For FY-18/19

Rather Than Greed

Sensex – Earnings growth of 14.5 % in FY16-19E

Source: Motilal Oswal

31

Key Variables & Their Impact On Equities

Key Variables Short -term

Medium -term

Remarks

Economy Demonitisation to impact near-term growth but by

March 17 normalcy to return.

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 is key reform for government to focus on; if it gets

passed, can provide a significant fillip

32

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

Se

ns

ex

‘EP

S’

Se

ns

ex

P/E

Source: MOSL

Past performance is not a reliable indicator of expected future performance

Markets At Fair Value Plus Zone, After Rebound -Consolidating As It Awaits Economy To Take Off

81 12

9

18

1

25

0

26

6

29

1

27

8

28

0

21

6

23

6

27

2

36

1

44

6

54

0

72

0

83

3

82

0

83

4

1,0

24

1,1

20

1,1

81

1,3

37

1,3

56

1,3

24

1,3

17

1,6

50

1,9

89

FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

E

FY18

E

FY19

E

FY93-96: 45% CAGR

FY96-03: 1% CAGR

FY03-08: 25% CAGR

FY08-17:5% CAGR

FY17-19E: 23% CAGR

FY93-FY16: 13% CAGR

19.9321.58

9.29

24.04

6

12

18

24

30

Jan

-93

Jan

-94

Jan

-95

Jan

-96

Jan

-97

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan

-12

Jan

-13

Jan

-14

Jan

-15

Jan

-16

Jan

-17

Sensex P/E (x)

Sensex CAGR 14% Sensex CAGR -1% Sensex CAGR 39%

Sensex CAGR -1%

Average of 15.3x

Ma

r-17

Ma

r-18

Ma

r-19

Asset Allocation

This asset allocation guide helps you to determine the suggested equity exposure at different

valuations levels based on the Sensex.

Valuation levels of the Sensex based on rolling 12month fwd EPS estimate of 1650

Suggested equity allocation (Assuming 50% equity allocation as neutral)

Market Cheap Attractive Fair Fair Value Plus Stretched Bubble

Over Invested Neutral + Neutral Neutral - Under Invested Exit

80% - 90% 65% - 75% 50% 35% - 45% 15%- 25% 5% - 10%Equity Allocaion

34

Strategy For Investment in 2017

• 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 fed raising interest rates

• India Quarterly Earnings

• 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

35

36

Strategy To Participate In A Market Pendulum

FEARGREED

Opportunistic buying at these levels

may improve short term return

potential

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.

37

DEBT

MARKETS

38

Market Outlook

April 2017

39

How March 2017 Unfolded-Key Events Of The Month

• India’s fiscal deficit in the April-February period of the current fiscal touched Rs 6.06 lakh crore or 113.4 %

of Budget estimates for 2016-17 – as against 107.1 % of Budget in the same period of last year, government

data showed.

• India's current account deficit stood at $7.9 billion (1.4% of GDP) in the third quarter of this financial year.

That was higher than $7.1 billion (1.4% of GDP) in the year-ago quarter and $3.4 billion (0.6% of GDP) in the

preceding quarter.

• The government moved a fresh proposal to cap cash transactions at Rs 2 lakh. It also proposed making

Aadhaar mandatory for filing of income-tax returns as well as for obtaining and retaining the permanent

account number (PAN).

• The CPI inflation increased for the first time in seven months to 3.65% in February 2017 from 3.17% a month

earlier, which was led by an increase in the inflation for food & beverages and fuel & light.

40

How March 2017 Unfolded-Key Events Of The Month

41

• India’s wholesale price index(WPI) based inflation flared up to two-and-a-half years high of 6.55% in

February from 5.25% in January mainly due to a spurt in mineral and fuel prices while food prices started

rising following rapid remonetisation.

• Industrial production in India bounced back in January expanding by 2.7% Y-o-Y mainly due to better

performance by the capital goods segment, a barometer of investment activities.

• India’s exports grew at its fastest pace in multiple years by 17.5% at $24.49 billion in February while

imports were up 21.8% at $33.39 billion leaving a trade deficit of $8.9 billion.

• The government's revenue collection from indirect tax during April-February grew by an impressive

22.2% while that of direct tax rose by 10.7 %.

• India's manufacturing activity to have expanded for the second straight month in February, with the

Nikkei Manufacturing Purchasing Managers' Index rising to 50.7 in February, up from 50.4 a month earlier

• US Federal Reserve hiked interest rate by 25 bps, in line with expectations. The fed projected two

more increases this year and said that it would raise the benchmark federal-funds rate to a range between

0.75% and 1%.

42

Interest Rate Outlook

Inflation forecast

RBI seems to be targeting the medium term CPI objective of 4%. The

Central banker is expecting an uptick in inflation by

middle of FY18

Growth Outlook

While growth in FY17 may moderate, RBI expects the

GVA growth rate for FY18 to recover sharply to 7.4%.

(Kotak MF estimates FY18E growth of 7%)

US Federal Reserve Action

The central banker is expecting normalisation in

interest rates of major economies(Read US Fed). For this reason, RBI wants to maintain neutral policy stance to take corrective

measures when necessary

Why RBI Kept rates unchanged in the last monetary policy?

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

every middle class, low-income person had the desire to own a house of his own” :

Piyush Goyal, Minister, GOI.

43

As of 31st March 2017, Source Bloomberg

6.68

6

6.5

7

7.5

8

8.5

9

9.5

Jul-1

4

Sep

-14

No

v-14

Jan-1

5

Ap

r-15

Jun

-15

Au

g-15

Oct-1

5

Jan-1

6

Mar-1

6

May-1

6

Jul-1

6

Oct-1

6

De

c-16

Feb

-17

NDA 2 (2014 to date)

Positive Real Interest Rates to Stimulate Financial Savings

44

3.09%

-3

-2

-1

0

1

2

3

4

5

6M

ar-1

2

May

-12

Jul-

12

Sep

-12

No

v-12

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-15

Jan

-16

Mar

-16

May

-16

Jul-

16

Sep

-16

No

v-1

6

Jan

-17

Real Rates

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.

45

10 Year Gilt Yield in March

• Market was looking for incremental bad news for the high yields to sustain. However its absence led to short squeeze in

beginning of March

• The FED commentary was relatively dovish incrementally, which led to the US Tbill declining to 2.40%

• The dollar weakened and the crude Inventory data was strong which led to sharp fall in the Brent prices to 52$ mark

• Strong mandate in the UP election makes the way for the government to continue with its reforms agenda. This also gives

strong message to the rating agencies about the stability and continuity of the current government

• FII pumped in ~5 bn USD in the Gilt and corporate bonds adding to INR strength

• The Concept of SDF has potentially eliminated any CRR hike or MSS sale. SDF can potentially bring down overnight rates

and led to short covering thus rally in the benchmark Gilt

• All put together, the short seller had no legs to stand on; and the short squeeze led to a rally in the benchmark 10 year Gilt

6.928

6.68

6.5

6.6

6.7

6.8

6.9

7

1-Mar 6-Mar 11-Mar 16-Mar 21-Mar 26-Mar 31-Mar

India 10 year Yield

CPI marginally rises to 3.65% in Feb-17

Source: MOSPI

• The CPI inflation increased for the first time in seven months to 3.65% in February 2017. The sequential

pickup in the CPI inflation in February 2017 was led by an increase in the inflation for food & beverages and

fuel & light.

• Encouragingly, the generally sticky core-CPI inflation eased to 4.8% in February 2017 from 5.0% in January

2017. The moderation in core CPI inflation was fairly broad-based, with even services such as health and

education displaying a downtrend in inflation

• On an MoM basis, the core-CPI sub-index increased by 0.4% in February 2017, lower than the rise of 0.5%

in January 2017 and 0.6% in February 2016. Notably, the core-CPI inflation exceeded headline CPI inflation

for the sixth month in a row, although the wedge between the two narrowed significantly in February 2017

46

3.65%

4.8%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

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

CPI Core CPI

Crude Prices Remain Range Bound

-Brent Crude Oil Prices (USD)

Source:Bloombergas on 31st March 2017

• Crude Oil prices have fallen sharply during the month due to concerns over the ‘Trump Trade’ and

weakening dollar

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

Though lower will be good (and vice versa)

47

52.83

35

40

45

50

55

60

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

Brent Crude(USD)

• Credit/Deposit Ratio has marginally increased in Feb MoM

• 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.

• Tepid credit growth continued at 6.7% yoy, down from 10.5% a year ago.

Credit Growth Moderates This Month

Source: Bloomberg, Data as on 31st March 2017

48

7.56 M

71.77

64

66

68

70

72

74

76

78

80

6000000

6200000

6400000

6600000

6800000

7000000

7200000

7400000

7600000

7800000

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

Credit Growth (Weekly Data)

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

Commercial Credit by Banks = Rs 75 lakh Crore (LHS)

• Resultant higher bank deposit growth

will lead to higher Gilt demand

• Demonetisation has accelerated

deposit growth in the banking system

• Large deposits will be withdrawn by

public and we expect that about 15-

20% will stay back and will keep

system flush with liquidity

Higher Gilt Demand Likely In The Long Term

• Subdued Credit growth will also

favor higher Gilt demand

Source:RBI

8

9

10

11

12

13

14

15

16

17

FY 11 FY 12 FY 13 FY 14 FY 15 FY 16

Bank Credit Growth %

0

2

4

6

8

10

12

FY 11 FY 12 FY 13 FY 14 FY 15 FY 16

CPI % CAD (% GDP)

49

India Foreign Exchange Reserves – Stability Is Key

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

Source: Bloomberg

50

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

$367.93 Billion

335

340

345

350

355

360

365

370

375

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

India Foreign Exchange Reserve($ US Billion)

The Game Changer

51

Source: Internal Calculations

• Cash withdrawals post removal of withdrawal restrictions have remained lower than expected• Many bankers expect liquidity glut to continue for a few more months• Due to strengthening INR and RBI intervention by buying USD, liquidity is being further increased• There is talk of a Standing Deposit Facility (SDF) mechanism to structurally absorb surplus liquidity

From liquidity deficit to liquidity Positive

-4000

-3000

-2000

-1000

0

1000

2000

3000

4000

5000

6000

Jan

-10

Mar

-10

May

-10

Jul-

10

Sep

-10

No

v-1

0

Jan

-11

Mar

-11

May

-11

Jul-

11

Sep

-11

No

v-1

1

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

Total Liquidity

Total Liquidity in INR bn

The liquidity remains ample in the banking system such that the overnight rates remain between

5.75%-6.00% much below the repo rate of 6.25%

Source:Bloomberg

Date RepoReverse

RepoMSF SLF

Total Systemic

Liquidity

Government

Balances

31st March 2017 -223.85 3383.78 -19.25 -14.83 3125.85 129.90

Amount in Rs. billion.

Active Liquidity Management-Liquidity Scenario

As of 31st Mar 2017

52

6

6.2

6.4

6.6

6.8

7

7.2

7.4

7.6

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

Repo Rate In the Last 1 year

Repo rate(%) Overnight Rate(MIBOR %)

Yield Curve (M-o-M Analysis)

• The curve became flatter with 11-18 being best performer (risk adjusted) and is likely to remain the same till clarity

emerges on monetary policy

• We expect belly of the curve to perform better vis-à-vis the 10yr benchmark. The 20-30yr segment will keep

underperforming as the Gilt/SDL supply hits April 2017

• High SDL supply will keep the 30 yr bonds yield high and the 10-30 spreads will remain high

Source: Bloomberg

53

5

5.5

6

6.5

7

7.5

8

3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 10Y 11Y 12Y 13Y 14Y 17Y 18Y 19Y 24Y 27Y 28Y 29Y 30Y 39Y

I180 INR India Sovereign Curve Last YTM

I180 INR India Sovereign Curve 01/03/2017 YTM

-60

-40

-20

0

3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 10Y 11Y 12Y 13Y 14Y 17Y 18Y 19Y 24Y 27Y 28Y 29Y 30Y 39YYTM (M-o-M Change)

India-US 10 Year GiltSpreads have widened creating space for reversion

54

The spreads have widened to above historical average. The market has

sold off in fear of unforeseen, which may not materialize

India-US 10 Year & CPI Spreads

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

Indian Gilt yields to fall.

Though, as the RBI waits for the H2 data, so the same may not happen in a hurry

55

Source: Bloomberg

0.00

2.00

4.00

6.00

8.00

10.00

12.00

Feb

-12

Ap

r-1

2

Jun

-12

Au

g-1

2

Oct

-12

De

c-1

2

Feb

-13

Ap

r-1

3

Jun

-13

Au

g-1

3

Oct

-13

De

c-1

3

Feb

-14

Ap

r-1

4

Jun

-14

Au

g-1

4

Oct

-14

De

c-1

4

Feb

-15

Ap

r-1

5

Jun

-15

Au

g-1

5

Oct

-15

De

c-1

5

Feb

-16

Ap

r-1

6

Jun

-16

Au

g-1

6

Oct

-16

De

c-1

6

Feb

-17

Spread 10 year yield India - US Spread CPI India - US

-0.5

0

0.5

1

1.5

2

2.5

3

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

US 10 Year

UK 10 Year

Germany 10 year

Japan 10 year

End of Easy Money Globally?

• Global bond yields rose in line with rising inflation in US & Europe however, yields have partly

corrected in March due to concerns on the ‘Trump Trade’

56

US Election results

Fed Rate Hike Probability

The Fed Fund Futures are indicating a status quo in May 2017 but will be data dependent

57

0

10

20

30

40

50

60

70

80

90

100

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

Historical Analysis of Meeting

0.5-0.75

0.75-1

Is India’s Country Rating Under-rated?

58

India with Better Debt Ratio and Growth Profile is evidently under-rated.

Apparently moody rating agencies have shown some poor standards in ratings.

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

59

Debt Outlook

The month of March was like a oasis in the desert. Extreme views were built and bonds sold off sharply

post policy in Feb-17. But the global bonds cooled post the FED rate hike of 25 bps. This led to short

squeeze in the benchmark gilt and triggered a smart recovery across the curve

The falling rates cycle has got extended. The RBI wants to see the headline inflation at 4% in H2 FY 2018

before they move ahead with the easing of the rate cycle

The 10yr benchmark yield fell to ~6.70% due to short covering. However since we are expecting a new

benchmark paper being announced any time during April or May, this may lead to a spike in current

benchmark towards 7% mark

The 10yr US treasury remains stable between 2.40-2.50 and is down 20-25 bps from the recent peak

Strong mandate in the UP election makes the way for the government for continuing with reforms. It also

gives strong message to the rating agencies about the stability and continuity of the current government

60

We await the methodology behind the SDF to be used. If the new facility makes the overnight rates

anchored at 5.75%-6% then it will bring the short term rates down to 5.75% and can give more

certainty regarding the durability of the easy liquidity to the market. This may lead to a rally across the

curve

The chase of carry has squeezed the credit spread and made sovereign cheap and therefore duration

should not be completely ignored despite being volatile

Short term rates have eased by about 15bps. Market awaits clarity on SDF before it starts pricing-in

the impact of easy liquidity on the yield curve

Low overnight rates will pull down liquid fund returns towards 6-6.25% by end of this quarter. Therefore

making the ultra and short term funds more attractive since they have a portfolio yield of 7.25-7.75%

The curve is likely to remain steep till we have clarity on monetary policy stance/SDF. Therefore long

term investors will be rewarded suitably on a risk adjusted basis.

61

Debt Outlook

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 PSU 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

62

Why Accrual Funds ?

• India is one of the fastest growing economy in the world and this will translate into revenue and profitabilityfor India Inc. Commodity & oil price decline has reduced input cost and increased margin support

• RBI has slashed repo by 175 bps since 2015 and more cuts are expected in the next 3-6 months. Thoughtransmission has been slow, however recent surge in deposits has lead to fall in cost and banks haveannounce sharp cuts in lending rates which will lead to fall in bond yield and spreads

• 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 takeexposure 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 around88% 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

63

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.

64

Need to Watch Out for Opportunities

in Hybrid Space

65

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

66

Record Date Rupees Per Unit Dividend Yield

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%

28-Sep-15 0.5 3.3%

25-Mar-15 3 16.3%

24-Sep-14 0.5 2.8%

25-Mar-14 4.85 24.7%

30-Sep-13 0.5 2.7%

25-Mar-13 4.7 20.5%

27-Sep-12 0.5 2.2%

26-Mar-12 0.5 2.3%

27-Sep-11 0.5 2.4%

28-Mar-11 0.5 2.2%

29-Sep-10 0.75 3.0%

25-Mar-10 2 8.4%

25-Sep-09 1 4.3%

25-Mar-08 4 15.6%

Particulars Nifty Level Net Assets in Rs Debt Equity

Start in Kotak MIP with ~ 20% equity exposure 8000 10 8.5 1.5

Equity markets drop by 15% (represented by Nifty 50) 6800 9.78 8.50 1.28

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

equity 6800 9.78 8.31 1.47


Shift to Kotak Balance with ~65% equity 5780 9.56 3.34 6.21


Shift to Equity fund with ~100% equity such as Kotak Select Focus 4913 8.62 0 8.62

Equity markets go up by 20% (represented by Nifty 50) 5896 10.35

Shift Back to Kotak MIP with ~20% equity exposure 5896 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.

67

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

68

Our Calls in 2016

Our Outlook Date Outcome

Overweight Gold 4th JanuaryGold Rallied by ~22% during Jan-

Aug 16

Overweight Duration 2nd FebruaryApprox 75bps rally since 25th

Feb

Equity- Buy on dips 22nd January10.27% absolute returns in the

next 5 month

Equity- Buy on dips 29th February26% absolute returns from 29th

Feb to 31st Aug 2016

Why Kotak Mutual Fund Is Different From Others

70

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:

71

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

72


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

73

74


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 April 2017 - Kotak Asset Managementassetmanagement.kotak.com/documents/19/4008011... · Indian Markets Among Top Performer In Terms Of 1yr Return Source: Bloomberg