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Market Outlook
March 2017
1
EQUITY
MARKETS
2
How February 2017 Unfolded -Key Events of Feb ‘17
• Govt. unveiled the FY18 Union Budget with focus on rural and social sector spending. Centre also stuck
to the fiscal consolidation path with FY18 fiscal deficit target at 3.2% of GDP vs 3.5% in FY17.
• The Reserve Bank of India kept the repo rate unchanged at 6.25% in its bi-monthly monetary policy
review. The reverse repo rate also remains unchanged at 5.75%. The RBI further said that the expected
growth is 6.9% for the 2016-17 fiscal.
• Trends from municipal body elections in 10 municipalities in Maharashtra indicate a strong outcome for
the BJP. It finished a close second to the incumbent Shiv Sena in the crucial Mumbai municipality,
winning 81 seats (out of 227) vs 31 in 2012.
• Jan trade deficit came in a 4 month low of $9.8bn vs $10.4bn in Dec, led by positive exports growth
(4.3% YoY). Engineering goods continued its strong show but Pharma, gems & jewellery dragged down
the overall export growth. Import growth remained elevated at 10.7% led by higher oil prices and the 7%
growth in cap goods imports
• IIP declined 0.4% in Dec vs 5.7% growth in Nov, partly led by contraction in manufacturing and
demonetisation hitting consumption demand. Consumer durables posted a decline of 10.3%.Mining
rose to 5.2% while electricity picked up to 6.3%
4
How February 2017 Unfolded -Key Events of Feb ‘17
• Deal activity picked up in Feb with 14 deals amounting to ~$1.8bn dominated the secondary
market.
• India's direct tax collection for the period April 2016 to January 2017 rose 10.79 % to Rs 5.82
lakh crore while indirect tax collections buoyed by 23.9 % to Rs 7.03 lakh crore.
• Equity markets rallied in February– as earnings of companies suggested lesser impact from
demonetisation
5
Strong Show By BJP … Can They Repeat The Magic In State Elections?
6
Overall GDP –
Rs150tn
Sales of Top 225 cos –
Rs40tn
Sales of Domestic focused
companies – Rs32tn
Why Demonetisation Is Not Reflected In Earnings Report Card?
• Unorganised to Organised – while
unorganised sectors have been
impacted very hard, organised
sectors have by and large benefited
• Listed India – only 25-30% of GDP
• Therefore, in many ways, Listed
India is seeing the benefits of
unorganised economy moving to
organised economy
7
India : On The Cusp Of Accelerated Shift To Organised Segment
The stock examples is only to illustrate the concept of shift from organized to unorganized sector and is not a recommendation to buy, sell or hold the stock. It is also not an indication that the performance of all the stocks in the any of our portfolio was similar to that of the stock disclosed herein
8
Operating Profit Rose 16% YoY
BSE100 Companies
9
WPI>CPI Augurs Well For Sales Momentum Of Corporate India
Source: CMIE
10
Strong Breadth Of Companies That Beats Or Meets Estimates
69-70% of BSE100
companies meeting or
beating estimates over
last 4 quarters
BSE100 Companies
11
Watch Out For Heightened M&A Activity In Corporate India
Free Cash Flow At Multi-year Highs
M&A Activity Starting from Lows
Corporate Payout Has Surged
Already seeing signs in Telecom , Banking and Infra assets
ICR = Interest Coverage Ratio
Distress Levels High Enough for Supply of Assets to Purchase
12
India Sentiment Indicator…Suggesting A Neutral Zone At This Point Of Time
ISI = India Sentiment Indicator; sd=Standard Deviation
13
FII Holding At 10 Quarter Low
Source: Capitaline, MINT
14
Domestic Mutual Funds - Reflecting Shift From Physical Savings To
Financial Savings
*As on 28 February 2017
Source: Axis Capital, Bloomberg
BSE Sectoral Indices
1.9 5.4
1.5 5.2
9.1
1.3
(1.5)
3.7 2.7
8.0 4.0
8.2
76.2
62.3
51.0 50.1
42.6 37.3
34.1 33.7
23.8
2.5 1.4
(0.7)
(10)
0
10
20
30
40
50
60
70
80
90
Metals Oil & Gas PSU Bankex Realty Power Auto CapitalGoods
FMCG Tech Healthcare IT Services
(%)
1m return % 1 yr return %
Strong Performance By Majority Sectors Over The Last 1 Year
15
*As on 28 February 2017 ,Source: Bloomberg
Performance Across Market Cap
3.7
6.9 5.8
26.3
43.1 43.3
12.3
28.3 26.6
10.6
16.7 15.0
9.0
12.9
8.3
0
5
10
15
20
25
30
35
40
45
50
Nifty Nifty Midcap S&P BSE Smallcap
1m returns 1y returns 3 yr CAGR 5 yr CAGR 10 yr CAGR
16
Indian Markets Among Top Performer In Terms Of 1yr Return
Source: Bloomberg. Performance data
1.8
8.2
8.9
12.3
13.0
13.2
13.8
15.9
16.9
18.1
19.0
22.6
24.3
25.2
26.3
28.2
60.3
1.3
2.8
1.2
2.0
2.4
(7.3)
1.7
3.2
1.6
0.4
2.2
1.6
2.5
4.9
3.7
5.0
3.1
(20) 0 20 40 60 80
Malaysia (KLCI - FTSE)
Swiss (SMI)
Korea (Kospi)
France (CACS 40)
EURO (Euro Stoxx 50)
Russia (MICEX)
Indonesia (JCI)
Taiwan (TSWE)
Singapore (Straits)
Japan (Nikkei 225)
UK (FTSE 100)
HK (HSI)
Germany (DAX)
US (Dow Jones)
India (Nifty)
China (HSCEI)
Brazil (IBOV)
1M 1Yr
17
*As on 28 February 2017
18
2017 And Beyond…
…Key Events With Large Range Of Outcomes
GST Rollout
• July 2017?
• Or Postponed indefinitely?
UP Election
• On development plank
• On populist measures (farm waivers/subsidy etc)
FOMC hikes in CY2017
• 2 hikes?
• 3 hikes?
• 4 hikes?
Global events
• Trump –protection barriers for trade?
• China – CNY stabilising?
• Eurozone election –more surprises in store
RBI Policy action in 2017
• Status quo?
• 1 cut?
• More than 1 cuts?
Negative outcomes like
more than expected hikes
by FOMC, greater
protection barriers by
Trump, China credit
bubble, Euro banking
crisis etc
19
In The Near Term Equities To Move Along A Pendulum
Positive outcomes like
continued focus on infra
spend, timely GST
implementation, below
expected rate hikes by
FOMC etc
Markets to gravitate
between both
extremes as
interplay of various
event outcomes
20
Key Trends In Consumption
Source: various national sources, CEIC, MoSL1=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
21
Key Trends In Investment
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.
Source: various national sources, CEIC, MoSL
22
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
23
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 , Power and oil are at lower end of valuations, other sectors have seen some moderation in
valuation
Source: Axis Capital, Bloomberg Note: * Since April-2005
Sensex sectoral long-term valuation snapshot: Forward PE*
Stock Picking Will Be Critical
*As on 28 February 2017
24
*As on 28 February 2017
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
Feb
-07
Feb
-08
Feb
-09
Feb
-10
Feb
-11
Feb
-12
Feb
-13
Feb
-14
Feb
-15
Feb
-16
Feb
-17
BSE Sensex ROE (%) BSE Midcap RO E (%)
Trailing PB (X)
0
10
20
30
Feb
-07
Feb
-08
Feb
-09
Feb
-10
Feb
-11
Feb
-12
Feb
-13
Feb
-14
Feb
-15
Feb
-16
Feb
-17
Sensex CNX Midcap 100
25
0.5
2.0
3.5
5.0
6.5
8.0
Feb
-07
Feb
-08
Feb
-09
Feb
-10
Feb
-11
Feb
-12
Feb
-13
Feb
-14
Feb
-15
Feb
-16
Feb
-17
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
26
7.7
9.2
10.9
11.1
13.4
13.6
13.7
15.0
15.7
16.7
17.2
19.1
6 8 10 12 14 16 18 20
China (HSCEI)
Korea (Kospi)
HK (HSI)
Brazil (IBOV)
Singapore (Straits)
Thailand (SET)
UK (FTSE 100)
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 27 February 2017
Strong purchase by FII in February
Net Cash Market Purchase
Category (Rs cr) Feb - Month CY17 CY-16 CY-15
DII 935 5,684 37,125 66,816
MF (54) 5,180 48,005 71,562
Insurance, Banks & Insurance 989 504 (10,880) (4,746)
FII 9,596 9,550 18,783 18,356
Clients (3,621) (4,297) (336) (9,795)
NRI (9) (111) (714) (317)
Proprietary 177 401 464 1,191
27
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
28
• 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
Rather Than Greed
Sensex – Earnings growth of 14.5 % in FY16-19E
Source: Motilal Oswal
29
1,356 1,324 1,317
1,634
1,989
FY15 FY16 FY17E FY18E FY19E
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
30
FY93-96 FY96-03 FY03-08 FY08-15 FY16-19e
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
34
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 1610
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
15000
18000
21000
24000
27000
30000
33000
Jan-
14
Mar
-14
Apr
-14
May
-14
Jun-
14
Jul-1
4
Aug
-14
Sep-
14
Oct
-14
Nov
-14
Dec
-14
Jan-
15
Feb-
15
Mar
-15
Apr
-15
May
-15
Jun-
15
Jul-1
5
Aug
-15
Sep-
15
Oct
-15
Nov
-15
Dec
-15
Jan-
16
Feb-
16
Mar
-16
Apr
-16
May
-16
Jun-
16
Jul-1
6
Aug
-16
Sep-
16
Oct
-16
Nov
-16
Dec
-16
Jan-
17
Feb-
17
Cheap 9x-10x
Attractive 10x-12x
Fair 12x-16x
Fair Value Plus 16-18x
Stretched 18x-20x
32
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
• UP Election Outcome
• European Banking Crisis
• China Slow down
• GST Roll Out
• In the absence of significant event risk, one can look at fresh issuance opportunities with
attractive valuations in
• IPO, OFS and FPO
• Any IPO in which NBFC are providing leveraged financing for applications might be
a good bet for retail application
33
34
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.
35
DEBT
MARKETS
36
Market Outlook
March 2017
37
How February 2017 Unfolded-Key Events Of The Month
• India GDP : India’s economic growth slowed marginally to 7% in October-December from 7.4% in the previous
quarter, government data showed, putting to rest the fear that India’s ongoing cash crunch following
demonetization would take a big bite out of the economy. Gross value added (GVA) was 6.6%, with the
difference explained by robust indirect taxes and reining in of subsidies.
• The CPI inflation eased to a series-low of 3.2% in January 2017 (+5.7% in January 2016 from 3.4% in
December 2016 (+5.6% in December 2015), , thanks to a slide in food and vegetable prices
• The WPI inflation rose to 5.2%(30-month high) in January 2017 from 3.4% in December 2016 , reflecting
rising commodity prices.
• Foreign direct investment (FDI) in India grew 18 % during 2016 to touch $46 billion, data released by the
Department of Industrial Policy and Promotion (DIPP) showed
• The RBI kept the repo rate unchanged at 6.25% in its bi-monthly monetary policy review. The reverse repo
rate also remains unchanged at 5.75%. The RBI further said that the expected GDP growth is 6.9% for the
2016-17 fiscal.
• The policy saw the central bank change its stance from accommodative to neutral, which is seen as a
hawkish move.
38
How February 2017 Unfolded-Key Events Of The Month
39
• Four out of six members of the monetary policy committee (MPC) were in favour of changing the monetary
policy stance to neutral from accommodative on 7 February, according to minutes of the meeting released .
• India's industrial production declined 0.4% in December 2016, after having registered a 5.7% growth in
the preceding month. Output dropped in December due to a 2% decline in manufacturing sector
production.
• In a significant step that can change the power scenario in the country and signal the success of the Ujwal
Discoms Assurance Yojana (UDAY) in Uttar Pradesh, India Ratings and Research (Ind-Ra) has assigned
UP Power Corporation (UPPCL)’s proposed R10,000-crore bond a provisional ‘IND AA(SO)’ rating with a
stable outlook
• India's merchandize exports expanded for a fifth straight month in January 2017, rising 4.32% to $22.1
billion thanks to increase in shipments of engineering and petroleum products, official data showed.
Imports also rose by 10.7%, leading to the trade deficit expanding to $9.84 billion
• Federal Reserve officials have said they may need to raise interest rates "fairly soon" if the economy
stays strong, minutes of their meeting show
40
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.
41
As of 28th Feb 2017, Source Bloomberg
6.87
6
6.5
7
7.5
8
8.5
9
9.5
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
NDA 2 (2014 to date)
Positive Real Interest rates to Stimulate Financial Savings
42
3.25
-3
-2
-1
0
1
2
3
4
5
6M
ar-1
2
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
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.
43
Why The 10 Year Yields Spiked in Feb?
• Post a fiscally prudent budget, the market was expecting a rate cut or a continuation of dovish stance.
• However, the monetary policy not only came as status-quo, but also changed the stance from ‘accommodative’
to ‘Neutral’, which was a big negative for the market and the yields spiked
• It is evident that RBI is targeting a 4% CPI and is expecting a mild rise in inflation due to rise in crude prices
• Likely volatility in US treasuries due to fiscally expansionary policy stance by Trump administration too seems
to be holding RBI back.
• However, if the crude oil prices were to remain in the current range, and US treasuries concerns were to
soften, RBI may find room for cuts in future. These possibilities may play out in the next 6-12 months
• We believe that rate cycle has been extended and has still not bottomed out
CPI moderated further to 3.17% in Jan-17
Source: MOSPI
• The CPI inflation eased to a series-low of 3.2% in January 2017 (+5.7% in January 2016 from 3.4% in
December 2016 (+5.6% in December 2015).
• The sequential decline in the CPI inflation in January 2017 benefitted from a moderation in the inflation for
food & beverages, clothing & footwear and fuel & light
• In contrast, the core-CPI inflation edged up to 5.1% in January 2017 from 4.9% in December 2016. This
primarily reflected the impact of the pass through of higher crude oil prices into those of petrol and diesel,
which are a part of the transport & communication sub-group
44
3.17%
5.1%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
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
CPI Core CPI
Crude Prices Remain Range Bound
-Brent Crude Oil Prices (USD)
Source:Bloombergas on 28th Feb 2017
• Crude Oil prices have remained range-bound during the month, post the sharp spike in Dec 2016
• If oil remains between 50-60$ a barrel, it may not have a meaningful adverse impact on the Fiscal.
45
55.59
30
35
40
45
50
55
60
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
Brent Crude (USD)
• Credit/Deposit Ratio has marginally increased in Jan MoM with increase in cash circulation in system
• 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 expansion continues at 5.1% yoy, down from 10.8% a year ago.
Credit Growth Moderates This Month
Source: Bloomberg, Data as on 28th Feb 2017
46
7.47M
70.81
64
66
68
70
72
74
76
78
80
6000000
6200000
6400000
6600000
6800000
7000000
7200000
7400000
7600000
7800000
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
Credit Growth (Weekly Data)
Current Credit/ Deposit Ratio is ~71% (RHS)
Commercial Credit by Banks = Rs 74 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)
47
India Foreign Exchange Reserves – Stability Is Key
India continues to attract capital flow resulting in healthy Foreign exchange reserves.
Source: Bloomberg
48
Source: Bloomberg, Data as on 28th Feb 2017,
$ 362.7 Billion
330
335
340
345
350
355
360
365
370
375
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
India Foreign Exchange Reserve ($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
Total Liquidity
Total Liquidity in INR bn
The Game Changer
49
Source: Internal Calculations
• The Cash withdrawal limit will expire from 13th March 2017. The likely cash withdrawals postthat date may significantly reduce surplus in the system.
From liquidity deficit to liquidity Positive
Other than this, around Rs1.5 lac cr has been withdrawn from the market through short term MSS.
As and when these deposit outflows happen from the system, RBI would unwind the MSS and the
huge balances in reverse-repo would come down.
Source:Bloomberg
Date RepoReverse
RepoMSF SLF
Total Systemic
Liquidity
Government
Balances
28th Feb 2017 -29.25 4670.1 -28.95 -9.30 4602.6 15.25
Amount in Rs. billion.
Active Liquidity Management-Liquidity Scenario
As of 28th Feb 2017
50
6
6.5
7
7.5
8
8.5
9
9.5
Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17
Repo Rate In the Last 1 year
Repo Rate (%)
Overnight Rate (MIBOR %)
Yield Curve (M-o-M Analysis)
• The curve became steep with 11-18 being worst hit 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 10 yr benchmark. The 20-30 yr segment will keep
underperforming as the 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
51
YTM (M-o-M Change)
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 23Y 26Y 27Y 28Y 29Y 30Y 35Y 39Y
I180 INR India Sovereign Curve Last YTM INR India Sovereign Curve 01/02/17 YTM
-20
0
20
40
60
80
3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 10Y 11Y 12Y 13Y 14Y 17Y 18Y 19Y 23Y 26Y 27Y 28Y 29Y 30Y 35Y 39Y
I180 Mid YTM (Last-01/02/17)
India-US 10 Yr GiltSpreads have widened creating space for reversion
52
The spreads have widened to above historical average. The market may
have oversold for any future global bond market volatility.
India-US 10 Year & CPI Spreads
Narrowing CPI spread makes Indian bonds attractive and therefore creates space for
Indian Gilt yields to fall.
53
Source: Bloomberg
0.00
2.00
4.00
6.00
8.00
10.00
12.00
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
Spread 10 year yield India - US Spread CPI India - US
-0.5
0
0.5
1
1.5
2
2.5
3
Mar
-16
Ap
r-1
6
May
-16
Jun
-16
Jul-
16
Au
g-1
6
Sep
-16
Oct
-16
No
v-1
6
De
c-1
6
Jan
-17
Feb
-17
Mar
-17
US 10 year
Germany 10 year
UK 10 year
Japan 10 year
End of Easy Money Globally?
• Global bond yields have moved up further in line with rising inflation in US & Europe
• Bond yields of major global economies have risen since November 2016.
54
US Election results
Fed Rate Hike Probability
The Fed Fund Futures are indicating 80% probability of rate hike in March 2017
55
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
0.25-0.5
0.5-0.75
0.75-1
Historical Analysis of Meeting
Is India’s Country Rating Under-rated?
56
India with Better Debt Ratio and Growth Profile is evidently under-rated.
Apparently moody rating agencies have shown some poor standards in ratings.
57
Understanding FII Strategy on Indian Debt
• India is not part of the JP Morgan Emerging Market Bond Index
• Yet, FII allocation in Indian Gilt and Bonds has been around US$ 40 bn
• Bond rally in India in 2016 provided significant gains through combination of high
Carry, MTM gains and a stable currency vis-à-vis other emerging market where their
currencies declined against dollar
• This effectively implies that ‘out of Index’ allocation to India generated a high Alpha
for the FIIs.
• FIIs therefore booked profits at these levels since their conviction call on India has
paid off effectively now
• Thus, FII selling does not reflect their long term view on India as an investment
destination
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
58
Debt Outlook
The month of February gave a big shock to the bond markets when RBI monetary policy changed stance to
neutral from accommodative
The falling rates cycle has got extended as the RBI wants to see the headline inflation at 4% in H2 FY 2018
before they move ahead in the easing cycle
Bond yields sold off sharply especially in the mid to long bonds curve. The 10 yr benchmark is likely to trade
in the band of 6.75% -7.00% in the near future
We have a US FED policy meet in mid March which will keep the market participants on the toes. Market is
predicting a 80% probability of a 25 bps hike and we believe that this event is already discounted in the
current market yields. The 10 yr US treasury remains stable between 2.40-2.50 and is down 12 bps from
the peak
We have UP election results in mid March. If the outcome is in favor of the NDA then it can add to the
sentiments of the equity bull markets and therefore INR and rates
Historically, the 10 yr gilt trades at ~100 bps over inflation. This is now at 250 bps (assuming average CPI
of about 4.5%). Thus, the real interest rates are higher than average which is much better for savers
59
We expect that investors may prefer MF investments over FD; and financial assets over real assets
since they will deliver better risk /liquidity/tax adjusted return
Easy liquidity and chase of carry has squeezed the credit spread and made sovereign cheap and
therefore duration should not be completely ignored despite being volatile.
Overnight rates have dropped below repo rates which will pull down liquid fund returns below 6.5%. This
will make 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. Therefore long term
investors will be rewarded suitably on a risk adjusted basis.
60
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
61
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
62
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.
63
Need to Watch Out for Opportunities
in Hybrid Space
64
Kotak Balance – Performance
Growth and Stability Together
65
Source: ICRA. Past Performance is no guarantee for future return. Scheme in inception since 29th Nov 1999. Performance as of 28th Feb 17
7.135.87
32.48
15.79
13.11
5.36 3.67
21.47
12.1910.36
0
5
10
15
20
25
30
35
3 Months 6 Months 1 Year 3 Years 5 Years
Kotak Balance - Dividend CRISIL Balanced Fund - Aggressive Index
Kotak Balance Fund Performance(%)
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-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%
25-Sep-07 2 7.1%
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
Equity markets drop by 15% (represented by Nifty 50) 5780 9.56 8.31 1.25
Shift to Kotak Balance with ~65% equity 5780 9.56 3.34 6.21
Equity markets drop by 15% (represented by Nifty 50) 4913 8.62 3.34 5.28
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
Kotak MIP Performance*
Consistency In Growth
As of 28th Feb 2017Source:ICRA
* Less than 1 year Simple Annualized returns, Greater than 1 year Compound Annualized returns
Past performance may or may not sustain in the future
69
1.32
6.66
19.14
12.8
10.66
-0.19
7.15
14.52
11.629.58
-5
0
5
10
15
20
25
3 Months 6 Months 1 Year 3 Years 5 Years
Kotak Monthly Income Plan Performance (%)
Kotak Monthly Income Plan - Reg - Growth Crisil MIP Blended Index
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
71
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
^Past performance may or may not be sustained in future. *All payouts during the period have been reinvested in the units of the scheme at the
then prevailing NAV. Returns <= 1 year: Absolute; Returns > 1 year: CAGR (Compounded Annualised Growth Rate). N.A stands for data not
available. Note: Point to Point (PTP) Returns in INR shows the value of 10,000/- investment made at inception. Source: ICRA MFI Explorer.
Classification of schemes in short term & long term is based on the average maturity of the scheme. # Name of Scheme Benchmark. ## Name of
Additional Benchmark. Please refer page no. 67 for top 3 and bottom 3 schemes managed by Mr. Abhishek Bisen & Mr. Devender Singhal.
Kotak Monthly Income Plan * Performance (%) As On 31st December, 2016
72
73
Kotak Balance Fund* Performance (%) As On 31st December, 2016
Scheme Inception date is 25/11/1999. Fund Managed by Mr. Pankaj Tibrewal & Mr. Abhishek Bisen
^Past performance may or may not be sustained in future.*All payouts during the period have been reinvested in the units of the scheme at the then prevailing NAV. Returns <= 1 year:
Absolute; Returns > 1 year: CAGR (Compounded Annualised Growth Rate). N.A stands for data not available. Note: Point to Point (PTP) Returns in INR shows the value of 10,000/-
investment made at inception. Source: ICRA MFI Explorer. # Name of Scheme Benchmark. ## Name of Additional Benchmark. Please refer page no. 69 for top 3 and bottom 3 schemes
managed by Pankaj Tibrewal & Mr. Abhishek Bisen.
Top 3 Funds Managed by Mr. Abhishek Bisen
Scheme Inception date is 25/11/1999. Fund Managed by Mr. Pankaj Tibrewal & Mr. Abhishek Bisen74
Bottom 3 Funds Managed by Mr. Abhishek Bisen
Scheme Inception date is 13/10/2014. Fund Managed by Mr Deepak Gupta & Mr Abhishek Bisen.
75
Other Funds Managed by Mr. Pankaj Tiberwal
76
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:
77
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
78
Name of the Scheme This product is suitable for investors who are seeking* Riskometer
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
79
80
Name of the Scheme This product is suitable for investors who are seeking* Riskometer
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
