Market Outlook June-2019 - Kotak MF
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Market Outlook
June-2019
1
Equity Market Outlook
June- 2019
2
The NDA Swept The Polls Across West, Central And North India And Made Substantial Gains In The East The NDA had swept the polls in Western, Central and North India in It defended strongly in the heartland states in 2019 and also made 2014 with its gains presence relatively limited in the South and East impressive strides in the East and North East Note: Saffron for BJP, Blue for UPA. Source: Jefferies , Axis 3
BJP Scores Triple-ton – Stable Government For A 2nd Term
Narendra Modi takes oath as the Prime Minister of India for a second term 4
The NDA Has Swept Back To Power With A Much Larger Majority Than Most Had Anticipated This is the most solid mandate that any party has Indeed, the BJP/NDA swept as many as 19 states and UTs with managed in India in about three decades the BJP winning ~70% of its contested seats Source: Jefferies estimates, Company data 5
Key changes to cabinet - Amit Shah Home Minister, Rajnath Singh Defense
Minister, Finance goes to Nirmala Sitharaman
Cabinet Minister Portfolio Cabinet Minister Portfolio
Shri Arjun Munda Minister of Tribal Affairs
Shri Raj Nath Singh Minister of Defence
Minister of Women and Child Development; and Minister of
Shri Amit Shah Minister of Home Affairs Smt Smriti Zubin Irani
Textiles
Minister of Road Transport and Highways; and Minister of Micro,
Shri Nitin Jairam Gadkari Minister of Health and Family Welfare; Minister of Science and
Small and Medium Enterprises Dr Harsh Vardhan
Technology; and Minister of Earth Sciences
Shri DV Sadananda Gowda Minister of Chemicals and Fertilizers
Minister of Environment, Forest and Climate Change; and
Shri Prakash Javadekar
Minister of Information and Broadcasting
Smt. Nirmala Sitharaman Minister of Finance; and Minister of Corporate Affairs
Shri Piyush Goyal Minister of Railways; and Minister of Commerce and Industry
Shri Ramvilas Paswan Minister of Consumer Affairs, Food and Public Distribution
Shri Dharmendra Pradhan Minister of Petroleum and Natural Gas; and Minister of Steel
Minister of Agriculture and Farmers Welfare; Minister of Rural
Shri Narendra Singh Tomar
Development; and Minister of Panchayat Raj
Shri Mukhtar Abbas Naqvi Minister of Minority Affairs
Minister of Law and Justice; Minister of Communications; and
Shri Ravi Shankar Prasad Minister of Parliamentary Affairs; Minister of Coal; and
Minister of Electronics and Information Technology Shri Pralhad Joshi
Minister of Mines
Smt. Harsimrat Kaur Badal Minister of Food Processing Industries
Dr Mahendra Nath Pandey Minister of Skill Development and Entrepreneurship
Shri Thaawar Chand Gehlot Minister of Social Justice and Empowerment
Shri Arvind Ganpat Sawant Minister of Heavy Industries and Public Enterprise
Dr Subrahmanyam Jaishankar Minister of External Affairs
Shri Giriraj Singh Minister of Animal Husbandry, Dairying, and Fisheries
Shri Ramesh Pokhriyal ‘Nishank’ Minister of Human Resource Development
Shri Gajendra Singh Shekhawat Minister of Jal Shakti
6
Several Reforms Have Achieved Critical Mass But Others Are Still Work-in- progress Source: Kotak Institutional Equities estimates 7
Elections Can impact Sentiment Only so Much – Lot needs to be done on
economic front now
Tight Liquidity
Tight Credit
High Interest Rates
Lack of Transmission
IMPACTING
CORPORATE INDIA
8
4th Quarter GDP (Mar’19) At 5.8% Source: CEIC, Axis Capital 9
Rural Distress, Liquidity Crunch And Weak Consumer Sentiment Lead To Slowdown In Consumption 4W and 2W volume growth turned negative in Q4FY19 Rural distress and liquidity crunch impacted FMCG volume growth growth Source: ICICI Securities 10
Muted Capex Intentions, Sluggish Consumption & Weak Exports Domestic consumption indicators are also softer – for autos Capex intentions are muted, too, although, encouragingly, utilisation levels appear to (as before) but also for staples, durables of late have ticked up Source: Jefferies estimates, company data 11
At What Point Removal Of Excess Credit Becomes Removal Of Essential
Credit ?
Rs in Billion
Incremental
Incrementa Incremental Total Credit
Incremental Incremental l Non NA Credit / /
Non Agriculture Incremental Agriculture Agriculture Incremental Incremental Incremental
Year GDP Total GDP Credit Credit Bank Credit NA GDP Total GDP
2014 4421 5106 761 6600 7361 1.49 1.44
2015 5756 6008 999 4734 5733 0.82 0.95
2016 7117 7119 1171 5440 6610 0.76 0.93
2017 7884 8632 1094 5476 6570 0.69 0.76
2018 6506 7378 378 5939 6318 0.91 0.86
12Inflation Also Well Under Control – Room For RBI To Cut Rates!
Inflation has ticked up from the lows of 2018 as food prices rise, although core inflation is now softening
Source: Jefferies estimates, company data
13RBI – Tightening the Liquidity Arbitrage for NBFC to get at par
with banks
RBI’s draft norms on liquidity management for NBFC focuses on the short term to avoid future shocks post the ILFS default.
LCR = stock of HQLA/total net cash outflow over the next 30 days
Potential Impact of LCR Guidelines on ROA and ROE of HFCs and NBFCs (Illustration)
14NBFC – Can Asset Sales Ease Pressure Off At Key Lenders?
15Q4FY19 Sectoral NIFTY50 Earnings Snapshot Source: Capital – line, I-Sec research 16
Corporate Earnings Downgrades Continues
India’s corporate EPS growth disappointed for eight years with continuous EPS cuts, FY19 was no different
Source: Jefferies estimates, company data
17It is Not Gloom & Doom Everywhere Though!!
18US-China trade tussle might benefit India Timeline of events Source: USTR, UBS 19
Can India capture the space ceded by China? After 20 years of rising, China's share in global Share of India's manufactured exports has gone up manufacture exports started to fall in 2016 Source: UNCOMTRADE, UBS estimates Source: WTO, UBS 20
200 Companies Moving From China To India Source: Economic Times 21
India – Seen the biggest improvement in Ease of Doing Business Rankings in Last 5 Years India still lagging its majority of peers in 'ease of- …however, improvement in the past five years doing business' ranking… has been meaningful for India Source: World Bank, UBS 22
India's possible market-share gains in US imports under the three scenarios Note: Base case = India’s market-share gains proportional to the share of ex-China exports to the US; upside scenario = India’s market share in US imports improves similar to the levels seen in 2018; blue-sky scenario = India’s market share in US imports improves more than proportionately versus ROW. Source: US Census , CEIC, UBS Estimates 23
Already Seeing Evidence Of Some Trade Moving To India US imports from India overlap with those from US imports from India overlap with those of China on which tariffs have been imposed (all tariff lists) China on which tariffs have been imposed Source: US Census Bureau, USTR, UBS Estimates 24
India Seems Favorably Placed in Surveys of Companies Evaluating De-Risking From China Top destinations of moving production to (those who have already Interest in India for moving production facilities is reasonably good moved or plan to move production out of China) Source: UBS Evidence Lab 25
NEAR TERM DRIVERS
26`
IMD sticks to normal monsoon prediction amid weak El Niño
27As EM Allocations Have Gone Up, India Has Seen Greater Deployment By FII
Year-to-date, FII Have Net Bought US$11bn In Indian Equities, The Largest Among The EM Asian Markets
12 11
10
8
6
4 4
4
2
2
1
0
(0)
(2) (1)
India South Korea Indonesia Taiwan Philippines Thailand Malaysia
28
Source: BloombergNIFTY earnings outlook – Corp Banks the Heavy Hitters
29Early Signs of Cement Growth Cycle Robust cement volumes continues in Q4FY19 Source: ICICI Securities 30
MARKET PERFORMANCE
31Performance Across Market Cap -
Midcaps and Smallcaps Still Down for last 12 months
15 13.5
12.1 12.9
11.1 10.5 10.4 10.5
10 9.2
7.9
6.3
5
1.5 2.2
1.2
In percent
0
(5)
(5.0)
(10)
(15)
(16.4)
(20)
Nifty Nifty Midcap NSE Small Cap
1m returns 1y returns 3 yr CAGR 5 yr CAGR 10 yr CAGR
*As on 31 May 2019, Source: Axis Capital, Bloomberg, Past Performance may or may not sustain in the future 32Sectoral Indices Performance (%) Source: Bloomberg, As on 31 May 2019 33
Small And Mid Cap Still Down From Peaks Despite Recent Pullback
% of Top Median Correction from 52 Week High by Market Cap
No. of
Drawdown from 52 Week High 1000 Top 10 -4%
Stocks
stocks 10 to 100 -16%
100 to 500 -22%
Less than 10%
198 20% 500 to 1000 -31%
Overall : Top 1000 -12%
Between 10% and 20%
205 21%
Drawdown from 52 Week High
Between 20% and 30%
206 21%
Nifty 50 -1.0%
Between 30% and 50%
300 30% Nifty Midcap 100 -10.6%
More than 50% Nifty Smallcap 100 -16.6%
91 9%
34
Source: Axis Capital, Bloomberg, As on 31 May 2019Market Snapshot
Dec-07 May-13 May-19 Dec-07 May-13 May-19
Macro Indicators 10-Yrear Govt Bond Yield
Capacity Utilisation (Dec18) 91.7% 71.6% (Jun-13) 75.9% India 7.8% 7.2% 7.0%
Credit Growth (as on Apr19) 22.0% 14.4% 13.1% USA 4.0% 2.1% 2.1%
ROE Nifty 50 (May19) 25.5% 17.1% (Mar-13) 12.4% Japan 1.5% 0.9% -0.1%
Net FII Flows (12M - Rs. Cr - May) 71,952 125,110 45,150 Europe 4.3% 1.5% -0.2%
IIP - May19 13.5% 1.0% -0.1% China 4.5% 3.4% 3.3%
GDP Growth (Jan - Mar 19) 9.6% 6.4% 5.8%
Dec-07 May-13 May-19 Dec-07 May-13 May-19
Valuations Returns of Nifty 50 (CAGR)
Trailing P/E Nifty 50 27.6 18.0 29.5 Last 1 Yr Return 54.8% 21.6% 11.1%
Trailing P/B Nifty 50 6.4 3.2 3.8 Last 2 Yr Return 47.1% 3.8% 11.3%
Last 3 Yr Return 43.4% 5.6% 13.5%
35
Source: Axis Capital , Bloomberg,VALUATIONS
36Midcap Valuations Largely at par to Large Cap Valuations
12 Month Forward PE
N IFTY Midcap 1 00 N ifty 50
30
(x)
25
20 19
15
19
10
5
May-1 2
May-1 4
May-1 5
May-1 7
May-1 9
May-1 3
May-1 6
May-1 8
N ov-12
N ov-14
N ov-17
N ov-13
N ov-15
N ov-16
N ov-18
Source: Axis Capital, As on 31st May 2019 37Sensex Above ‘Fair Value Plus’ Range
12-month Forward Sensex P/B (X)
3.6
2.9
10 Year Avg: 2.6x
2.84
2.2
1.5
May-09
May-10
May-11
May-12
May-13
May-14
May-15
May-16
May-17
May-18
May-19
38
Source: Axis Capital, BloombergIndia’s Market Cap to GDP (%)
103
95 Average of 78% f or the period
88
83 85
81 80 76
71
69
64 66
55
2014
2017
2007
2008
2009
2010
2011
2012
2013
2015
2016
2018
2019
39
Source: Axis Capital, BloombergSensex in ‘Fair Value Plus’ Range
12-month Forward Sensex P/E (X)
40
Source: Axis CapitalKotak Equity Opportunities Fund
Why You Need Exposure Across Market Caps
Since 2004, Midcap Index and Smallcap Index have outperformed Midcap Smallcap
Nifty on an annual basis Index Index
Outperformance ~4% ~3%
against Nifty
Most investors are concerned about high volatility despite the outperformance against Nifty
A portfolio with large, mid and small cap mix has the potential to offer better returns than Nifty with
reasonably lower volatility than mid and small cap basket
42Why Kotak Equity Opportunities Fund
INVESTMENT OBJECTIVE
To generate capital appreciation from a diversified portfolio of equity and equity related securities. The Scheme will invest predominantly in a mix of
large and mid cap stocks from various sectors, which look promising, based on the growth pattern in the economy. There is no assurance that the
investment objective of the Scheme will be achieved
KOTAK EQUITY OPPORTUNITIES FUND
Offers exposure across market cap Reasonably lower volatility due to Long-term performance track
segments prudent portfolio construction record
43Investment Approach
Philosophy is to remain fully
Style: Growth at reasonable Investment Style & invested as per mandate and
price (GARP) not to take active cash calls
Philosophy
Aggressively look for Large and Midcap selection
investment opportunities decision based on valuations,
Investment bottom-up research and
without any market cap or
sectoral bias Strategy market outlook
• Minimum exposure of 35%
• Portfolio Composition: 40-60 each in large and mid cap
stocks Portfolio segments
• Top 10 holdings: Around Construction • Flexibility to move across
45% of portfolio market capitalization ranges
within above band
44Product Performance Potential
Summary of the Fund Return For Every Day Since Inception
• In its Long history, the Fund tends to improve performance as the investment horizon increases
• The Possibility of a loss declines as the time of investment horizon increases
• Fund’s average 3-5 year performance likelihood remains largely in the 14-16% range
• The Fund has higher alpha potential as the investment horizon increase
Past performance may or may not be sustained in future. Returns 1 year: CAGR (Compounded Annualised Growth Rate). Source: ICRA 45
MFI Explorer , data as of 31st May 2019, Kotak Opportunities fund has been renamed to Kotak Equity Opportunities Fund with effect from 25th May 2018Key Recommendations
Key theme Remarks
Dynamic Equity Allocation – Freedom from managing equity debt allocation manually Kotak Balance Advantage Fund (KBAF)
Large Cap – play on buying sectoral leaders that benefit from improving investment Kotak Bluechip Fund
climate (Erstwhile Kotak 50)
Kotak India EQ Contra Fund
Balance of IQ and EQ
(Erstwhile Kotak Classic Equity)
Kotak Standard Multicap Fund
Multicap
Diversified/Multicap – focus on sectors that are likely to (Erstwhile Kotak Select Focus)
benefit the most across market cap Kotak Equity Opportunities Fund
Large and Midcap
(Erstwhile Kotak Opportunities Fund)
Infrastructure revival – “True-to-label” fund – recent thrust of government to revive
Kotak Infrastructure & Economic Reforms Fund
the infrastructure theme
Through SIP in Midcap oriented scheme Kotak Emerging Equities Fund
ELSS – Equity allocation with ability to reduce tax outgo Kotak Tax Saver Fund
Opportunities in smallcap segment Kotak Smallcap Fund
Kotak Equity Hybrid Fund
Balanced – benefit from equity & debt allocation
(Erstwhile Kotak Balanced Fund)
We recommend investors to invest through SIP with a 5 years horizon. 46Kotak Balanced Advantage Fund – Asset Allocation
Nifty Index KBAF – It’s Automatic
12500 55
12000 50
KBAF Net Equity
11500 45
11000 40
10500 35
Nifty 50
10000 30
9500 25
Nifty 50 Net Equity
9000 20
31-Aug-18 30-Sep-18 31-Oct-18 30-Nov-18 31-Dec-18 31-Jan-19 28-Feb-19 31-Mar-19 30-Apr-19 31-May-19
47
Source: Internal CalculationsDebt Market Outlook
June – 2019
48Bond yield slides below 7%
10 Year Gilt (%)
CPI jumps to 6-month
high of 2.92% in April
7.4 2019
7.39
Exit poll results
7.3 favored NDA Election Results – NDA
sweeps India with 300+
seats
7.2
7.1 Political uncertainty has been lifted
IMD expects monsoon to be near normal
The immediate concern lies in the tussle for RBI’s surplus reserves and 6.98
7
managing the fiscal deficit
6.9
22-May-19
06-May-19
07-May-19
08-May-19
09-May-19
10-May-19
11-May-19
12-May-19
13-May-19
14-May-19
15-May-19
16-May-19
17-May-19
18-May-19
19-May-19
20-May-19
21-May-19
23-May-19
24-May-19
25-May-19
26-May-19
27-May-19
28-May-19
29-May-19
30-May-19
31-May-19
01-Jun-19
02-Jun-19
03-Jun-19
Source: Bloomberg,Yield Curve Flattens
• The curve has started to flatten, indicating bullish trend given all the major uncertainty is over. We expect this trend to c ontinue in the gilt
curve
%
8
7.5
7
INR India Sovereign Curve 31/05/19 YTM (Current)
6.5
INR India Sovereign Curve 30/4/19 YTM
6
3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 16Y 30Y 40Y
YTM M-o-M Change
3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 16Y 30Y 40Y
0
-10
-20
-30
-40
-50
50
Source: BloombergInflation Adjusted Yields In India Is Attractive
%
10.50
India-US CPI and Yield Spread
Narrowing CPI spreads and widening bond spreads make Indian fixed income attractive therefore risk
8.50 of sharp outflow due to rates differential is unlikely
6.50
4.91
4.50
2.50
0.92
India-US CPI Spread India-US Gilt Spread
0.50
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16
May-16
Jul-16
Sep-16
Nov-16
Jan-17
Mar-17
May-17
Jul-17
Sep-17
Nov-17
Jan-18
Mar-18
May-18
Jul-18
Sep-18
Nov-18
Jan-19
Mar-19
May-19
-1.50
51
Note: 10 year Gilt Yield taken as average of their respective month . Data as of May 2019 (May 2019 CPI is assumed to be same as April 2019 . Source: BloombergFII Debt Flows: FIIs Turned Buyers In May 2019
Trend In Monthly FII Flows (Debt) – USD mn
5,000
3,977
4,000
3,138
2,893 2,757
3,000
2,350
2,213
2,000
1,470
889 828
1,000 559 665
357 262
164
0
(191)
(421) (367)
(1,000)
(1,123) (846)
(1,285) (1,158)
(1,546) (1,461)
(2,000) (1,785)
(3,000) (2,629)
Jan-19
May-17
Jan-18
Jun-17
Jul-17
Dec-17
Feb-18
May-18
Jun-18
Jul-18
Feb-19
May-19
Aug-17
Apr-18
Aug-18
Apr-19
Nov-17
Mar-18
Nov-18
Mar-19
Sep-17
Oct-17
Sep-18
Oct-18
Dec-18
Source: Axis Capital, SEBISubdued Global Crude Oil Prices
$ per barrel Crude Prices
75
70
65
62.93
60
55
Mar-19 Apr-19 May-19
Source: BloombergLow Volatility In Currency
Indian Rupee Movement Against US Dollar
72
71
69.81
70
69
68
Jan-19 Feb-19 Mar-19 Apr-19 May-19
Source: BloombergCPI Inflation Slowly Inching Up As Food Prices Starts To Rise
12.0%
10.0% CPI Core CPI
8.0%
6.0%
4.55%
4.0% 2.92
2.0%
0.0%
Oct-13
Oct-14
Oct-15
Oct-16
Oct-17
Oct-18
Feb-13
Feb-14
Feb-15
Feb-16
Feb-17
Feb-18
Feb-19
Dec-12
Apr-13
Jun-13
Aug-13
Dec-13
Apr-14
Jun-14
Dec-14
Apr-15
Jun-15
Aug-15
Dec-15
Jun-16
Aug-16
Dec-16
Apr-17
Jun-17
Aug-17
Apr-18
Jun-18
Aug-18
Dec-18
Apr-19
Aug-14
Apr-16
Dec-17
• The CPI inflation rose to 2.92% in April 2019, compared with 2.86% in March 2019
• The core CPI inflation eased to 4.55% in April 2019 compared with 5.02% in March 2019
• CPI food inflation rose to 1.3 percent in April 2019 compared to 0.66 percent in March 2019
• The urban inflation stood at 4.23% in April 2019 against 4.10% in March 2019
• The rural inflation stood at 1.87% in April 2019 against 1.80% in March 2019
55
Source:
Source: MOSPI, ICRA
BloombergPolicy Rates Likely To Get Cut By 50bps in FY20
Trend in CPI & Repo Rate
Source: CLSA, MOSPI, RBIFiscal Deficit A Concern
Fiscal Deficit As % Of BE In The Eleven Months Ended Feb’19
160
140 134.2
117.5 120.3
120 114.3 113.5
107.1
100 94.6 97.4
92
80
68.6
60
40
20
0
Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 Feb-19
Source: MOFSL; BE – Budgeted EstimatesTrend In Transferring Surplus Generated By The RBI On A Yearly Basis
Surplus Transferable To The Govt. Of India (US$ Bn) Transfer To Contingency Fund (US$ Bn)
Source: RBI, Budget, Morgan Stanley Research *Includes Interim dividend of INR100bn in F2018.** Includes interim dividend of Source: RBI, Morgan Stanley Research * Note years are as per RBI's financial accounts which
INR 280bn in F2019.Note the years are as per GoI's fiscal year accounting (Apr-Mar) run from Jun-July.RBI Balance Sheet Source: RBI, Morgan Stanley Research
Govt. Borrowings May Fall Due To Tax Reforms Source: RBI, CEIC, Morgan Stanley Research
0.8
0.9
1
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
-0.10
-0.05
0.00
0.05
0.10
0.15
May-18
May-18
Jun-18
Source: Bloomberg.
Jun-18
Jul-18 Jul-18
Aug-18 Aug-18
Global Bond Yields
Sep-18 Sep-18
Oct-18 Oct-18
Nov-18 Nov-18
Dec-18 Dec-18
UK 10 Year Gilt (%)
Jan-19 Japan 10 Year Gilt (%) Jan-19
Feb-19 Feb-19
Mar-19 Mar-19
Apr-19 Apr-19
0.90
May-19
May-19
-0.09
2.00
2.20
2.40
2.60
2.80
3.00
3.20
-0.20
-0.10
0.00
0.10
0.20
0.30
0.40
0.50
0.60
May-18 May-18
Jun-18
Jun-18
Jul-18
Jul-18 Aug-18
Aug-18
Aug-18
Sep-18
Sep-18 Oct-18
Oct-18
Oct-18
Nov-18
Nov-18 Dec-18
Dec-18
Dec-18
US 10 Year Gilt (%)
Jan-19
Germany 10 Year Gilt (%)
Jan-19 Feb-19
Feb-19 Feb-19
Mar-19
Mar-19
61
Apr-19
Apr-19 May-19
-0.18
May-19
May-19
2.12LIQUIDITY
62Liquidity Around Neutral Zone
Total Liquidity in INR bn
System Borrowing
(600.00)
(100.00) 20.38
400.00
900.00
1,400.00
Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19
• The RBI is committed towards maintaining the liquidity around the neutral zone.
• RBI announced that it will conduct an OMO purchase of INR 150bn on 13th June. This implies a liquidity injection of INR 600bn in the current
fiscal year through the FX swap tools (INR 350bn) and two OMO purchases in May (INR 250bn total).
• All liquidity tools remain on the table including FX Swaps. Thus OMOs are likely to continue going forward
Source: RBI 63Currency in Circulation (CIC) - Cause of Concern
USD Mn
Currency in Circulation (USD Mn)
32000 31770.6
Sharp Increase in CIC has negative impact on
liquidity. Thus OMO is needed
31000
30000
29000
28000
27000
26000
May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19
Source: Bloomberg; Data till 24 May 2019Liquidity Management by RBI Through OMO And FX Swaps
RBI’s Durable Liquidity Injection & Benchmark 10-year G-sec Rates
Source: CLSA, RBI
6510%
12%
14%
16%
18%
0%
2%
4%
6%
8%
(% YOY)
Nov-16
Dec-16
Jan-17
Feb-17
Mar-17
Source: Bloomberg, Data till 10th May 2019
Apr-17
May-17
Jun-17
Jul-17
Bank credit growth
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Deposit growth
Feb-18
Mar-18
Apr-18
Deposit Growth Slowly Inching Up, Still Trails Credit Growth
May-18
Jun-18
Jul-18
Aug-18
Sep-18
Oct-18
Nov-18
Dec-18
Jan-19
Feb-19
Mar-19
Apr-19
10%
13%YIELD & ITS METRICS
67%
0.00
1.00
1.50
2.00
2.50
0.50
-0.50
May-12
Jul-12
Source: Bloomberg,
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
10 Year Bond Yield Spread Over Repo
Nov-14
Jan-15
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16
May-16
Jul-16
Sep-16
Nov-16
Spread Between 10 Year And Repo
Jan-17
Mar-17
May-17
Jul-17
Sep-17
Nov-17
Jan-18
Mar-18
May-18
Jul-18
Sep-18
Nov-18
Jan-19
68
Mar-19
May-19
1.03Positive Real Interest Rates to Stimulate Financial Savings
%
6
5
4
4.38
3
2
1
0
-1
-2
-3
-4
May-12
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Nov-14
Feb-15
May-15
Aug-15
Nov-15
Feb-16
May-16
Aug-16
Nov-16
Feb-17
May-17
Aug-17
Nov-17
Feb-18
May-18
Aug-18
Nov-18
Feb-19
May-19
• Earlier, negative real rates fueled inflation in physical assets as people chased assets such as real estate and gold till 2014.
• This can lead to healthy banks deposits and therefore lending to the formal sector
69
Note: Monthly 10 year Gilt Yield taken as average of their respective month. May-19 CPI is assumed to be same as Apr-19 and Real Interest rate is calculated . Source: BloombergDebt Outlook
• The head line and core inflation are converging and core is moving towards 4%. This may bring much desired comfort to the RBI.
• Correction in Brent crude oil to ~US$62 per barrel may further provide comfort to RBI .
• Q4 GDP came much below expectation at 5.8% YoY. This may make RBI focus on growth, in addition to inflation targeting.
• General election is over and the NDA Government returned to power with a stronger mandate. This takes away the uncertainty of fractured coalition
Government
• It is likely that RBI will continue to infuse liquidity in the market through OMO and FX Swaps
• We expect at least 25 bps cut in the policy rates in June’19 monetary policy with high probability of change in stance to accommodative - giving signal
of possibility of further rate cuts in near future.
• The corporate bond spreads have normalized in PSU AAA assets upto 5yrs. However the curve remains steep and spreads on long dated PSU are wide,
which provide investment opportunity.
• On longer end (5-15 years category), the yield curve can move down with a flattening bias. In 1-5 year category the same can remain steep and move
with a steepening bias if the RBI gives higher than expected rate cuts
• We believe that the investment opportunity in short duration bond funds, banking and PSU funds, credit funds and dynamically managed duration
funds is still present. Investors may look to invest in the funds depending on the scale of risk appetite and the investment horizon.
70Key Recommendations
Segment Scheme Rationale
Accrual Kotak Credit Risk Fund (Erstwhile Kotak Income Opportunities Fund) / Investment for higher
Play Kotak Medium Term Fund accrual
Investment for asset
Asset Allocation Kotak Debt Hybrid
allocation
Kotak Savings Fund (Erstwhile Kotak Treasury Advantage Fund) / Kotak Low
Parking of surplus
Duration Fund /
cash
Short Term Parking of Kotak Corporate Bond Fund
Funds
Kotak Equity Arbitrage Fund Higher post tax return
Kotak Bond Investment for longer
(Erstwhile Kotak Mahindra Bond Unit Scheme 99) maturities
Duration Play
Investment for shorter
Kotak Bond Short Term
maturities
71Some Myths & Behavioral Anomalies That Hurt Accrual Fund Investors
Myths Truths
Credit Funds Are Risky Even Deposits are Risky. Credit Funds only better utilize the
credit spectrum for gains while taking steps to mitigate risk
LAS are Risky LAS reduces risk and infact provides an early liquidity window
before a credit event. Even in cases such as Satyam, LAS helped
reduce and recover the loss
Payment Delay is Default It means a cash-flow issue. Payment is still an obligation of the
borrower, which usually gets settled sooner or later
Reduce exposure to Credit Fund at times Loss from Exit load and STCG is usually higher than risk of default.
of market upheaval Increasing time horizon helps in recovering loss
• Credit Fund is investible due to the Portfolio and the Strategy they Build.
• Much Like using Sehwag for Test and Dravid for IPL. Both will play and perform but the style they add is different 72Story in Accruals
• The Fund Manager focuses on generating income from credit allocation rather than duration calls.
• Accruals funds generate performance by purchasing high yielding assets with relatively short duration.
• This provides investor with a relatively high yield with low NAV volatility
• The recent credit crisis has been a good learning for us. We have internally decided to reduce concentration risk across all our
schemes.
• With the widening of spreads, we recommend investors to take the potential benefit by investing in accrual funds
• Investors with 18-36 months horizon can look at investing in Accrual Funds
• Accrual funds like Kotak Credit Risk Fund / Kotak Medium Term provide retail investors the potential to obtain high yields in the
present condition.
7374
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77ANNEXURES
78Key Variables & Their Impact On Equities
Key Variables Short - term Medium – term Remarks
Economy GST to aid formalization of economy and longer term growth
Improving operating leverage, falling interest costs and improvement in
working capital can accelerate earnings, but a bit back-ended. Key is
Corporate Earnings
improvement in capacity utilisation
India stands out among global asset classes with prospects of strong long
FII Flow term growth
DII Flow Long runaway of longer term growth in financial channelization of savings
Higher disinvestment target and repair of leveraged balance sheet to create
Supply of paper supply in markets
Policy/Reform Initiative Now that elections are over, expect improved reform momentum
Signify Growth 79Key Variables & Their Impact On Interest Rates
Short Term Medium Term
Key Variables Remarks
(3-6 months) (6months-2yrs)
Inflation expected to remain benign over near & medium term. Thus, positive impact on interest
Inflation rates.
Rupee expected to remain range bound in the near term. It may gradually tend towards a relatively
Rupee low depreciation that will affect the interest rates positively.
Near term tight liquidity and demand for money may lead to widening for spreads. However in long
Credit Demand term its likely to ease out.
Budget announced additional borrowings for FY19 and FY 20 Gross borrowing was also on higher
Government Borrowing side which will keep rates high.
RBI Policy RBI is expected to be dovish thus will remain positive for short term rates .
Fed may become dovish and start cutting rates vs earlier expectation of a hike. Trade war between
Global Event Risk US and China has resulted in price fall of Crude prices this is likely to benefit India.
Spreads are already wide. Gradually they are expected to narrow; having positive impact on interest
Corporate bond Spread rates Should there be a bigger cut in rates we may see Contraction of spreads sooner than later.
With favorable out of general election's the FII flows are trickling back and we expect the trend to
Debt FII flow continue given the overall environment.
Liquidity has turned almost neutral. Central Bank likely to add more liquidity in the near and
Liquidity medium term and the same may be taken in positive zone. Thus a positive impact on interest rates
80PERFORMANCE OF SENSEX AND NIFTY INDICES Source: Bloomberg, Kotak Institutional Equities 81
FII Equity Inflows
UPDATE
Net Investments by FIIs, DIIs and
MFs in the Cash Market (US$ mn)
Notes: (a) DII -Domestic Institutional Investors (Includes Bank, DFIs, Insurance, New
Pension Scheme and MF. Source: Bloomberg, Axis Capital
82Disclaimers & Disclosures
83Disclaimers & Risk Factors
The information contained in this (document) is extracted from different public sources. All reasonable care has been taken to ensure that the information contained herein is not
misleading or untrue at the time of publication. This is for the information of the person to whom it is provided without any liability whatsoever on the part of Kotak Mahindra Asset
Management Co Ltd or any associated companies or any employee thereof.We are not soliciting any action based on this material and is for general information only. Investors should
consult their financial advisors if in doubt about whether the product is suitable for them before investing
These materials are not intended for distribution to or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. The distribution of this
document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and
to observe, any such restrictions
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
84Product Labeling
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* Investors should consult
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their financial financial
advisers advisors
if in doubt about whether if
thein doubt
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