Market Outlook May 2018 - Kotak Asset Management
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Market Outlook May 2018
Equity Markets
Key Events – April 2018 • RBI left the policy rates unchanged in the April policy. RBI lowered their projections for CPI inflation: CPI is now estimated to range between 4.7-5.1% in H1FY19 and 4.4% in H2FY19 • The India Meteorological Department(IMD) forecast says that there will be 97% normal monsoon for the year 2018-19 • Mar trade deficit widened to $13.7bn from $12bn last month as exports slipped into YoY contraction led by decline in gems & jewellery and textiles. Imports growth slowed but stayed positive at 7.1%. With this, FY18 trade deficit rose to $156.8bn (~6.4% of GDP) from $108.5bn last year (~4.9% of GDP). • India’s Industrial Production data for the month of Feb stayed buoyant at 7.1% which was higher than consensus estimates of 6.8%. While base effect post demonetization has been supportive, the double-digit expansion in 10 out of 23 manufacturing sector suggest broad-based strength. Growth in capital goods rose to 20% YoY, highest in 28 months • India added around 34.6 lakh people to the formal workforce between September 2017 and February 2018, according to payroll data released by Employees' Provident Fund Organisation (EPFO) and National Pension System (NPS) for the first time. • Domestic mutual fund holdings in Indian Equities increased further to 6.6% (+24bps Q/Q) and at life time highs, continuing the strong momentum up 200bps since Sep-16 (pre-demon quarter). • Indian equities (Nifty 50 +6.2%) saw some recovery post the YTD correction as early earnings trends across sectors were broadly supportive. Outcome of Karnataka state elections and MSCI rebalancing will be keenly monitored by investors this month. 3
TCS At 100bn$– Only 63 Companies Globally In This League 4
Normal Monsoon Forecast For 2018
> 40% chance of a normal monsoon in 2018
April Forecast for Monsoon rains as % average vs Actual rains
5 Source : IMD
GST Trend
The March jump . . .
Monthly GST Collection GST Collection (based on initial release for the month)
6 Source : CLSA, Ministry of Finance
Crude Breaches $75!
Fiscal threat of 40-50bp if crude remains above $70
Excise tax collections to Central government from petro products (Petrol and Diesel)
7 Source : CLSA, PPAC, Budget Documents
India’s CAD Vs Average Oil Price Trend
India’s CAD vs Average Oil price trend
8 Source : CLSA, RBI
Rise Of Twin Deficit Fears Could Trigger INR Depreciation
USD:INR Exchange Rate
9 Source : CLSA, Bloomberg
Can The BJP Regain Momentum
Make or break elections for the Congress..
Political Map of India
10 Source : Election Commission of India, CLSAOpinion Polls Indicate A Hung Assembly In Karnataka
Recent opinion polls forecast, 2013 State election and 2014 General election results
Source : Election Commission of India, Times Now, India Today, ABP, 2013 figures for the BJP includes those of two other parties- KJP
11 and BSRCP - which had a combined vote share of 12.5%Corporate Earnings Result Trends So Far
• Still early into this result season, as bulk of results will be declared in May-June
• IT Sector – Hope of a marginal improvement in revenue trajectory, the weakening rupee and under-ownership of
sector seems to have propelled the sector into limelight, for now
• Cement – Positive demand commentary, still awaiting price improvement, especially in light of increasing cost
due to higher energy costs
• FMCG – indicating recovery in volumes, especially due to poor base quarter
• Auto – Demand momentum sustains, though higher commodity costs takes some sheen off operating margins
• Retail banks – improving credit growth, especially taking share from PSU banks
• Corporate focused banks – as expected, weak earnings with likely large losses this quarter
• Telecom – weakness continues as pricing remains challenging
12High Frequency Indicators Showing Improvement…
Bank credit growth has picked up vs. total system credit
Bank and Total Credit
13 Source : RBI, SEBI, CLSAYoY Percentage Change In Total Sales Of Tractors
Tractor sales increased 52% YoY in March, taking 3mma growth to 43%
14 Source : CLSA, CMIEMarket Performance
Performance of Sensex and Nifty Indices 15 Source : Bloomberg, Kotak institutional Equities
Strong Performance By Majority Sectors In FY18
Pharma & PSU lagging in returns
BSE Sectoral Indices
50 (%)
41.1
40
30.2
30 26.3 26.3
20.1
20
12.1 13.4 13.1
9.0 9.0 9.9 9.4
10 7.2 7.4 7.6
5.3 5.8 5.3
0
(1.3) (0.2) (0.0)
(3.9)
(10) (5.8)
(12.9)
(20)
IT Services Tech Realty Metals FMCG Auto Bankex Capital Oil & Gas Power Healthcare PSU
Goods
1m return % 1 yr return %
19 *As on 30 April 2018, Source: Axis Capital, BloombergPerformance Across Market Cap -
Strong Performance Down the Capitalisation Curve
25
22.9
21.0
19.7
20 18.9
16.9
15.4
15
In percent
12.6 12.2
11.2
9.5
10 8.3 8.8
7.6 8.2
6.2
5
0
Nifty Nifty Midcap S&P BSE Smallcap
1m returns 1y returns 3 yr CAGR 5 yr CAGR 10 yr CAGR
18 *As on 30 April 2018, Source: Bloomberg, Past Performance may or may not sustain in the futureSensex Returns (%) 6 month before & 6 month Latter during Union elections
(1 of 2)
6m 6m 6m
6m before Elec Date 6m before Elec Date 6m latter Elec Date 6m latter Elec Date 6m latter 6m before Elec Date 6m latter
latter before before
Dates July-79 Jan-80 July-80 June-84 Dec-84 June-85 May-89 Nov-89 May-90 Nov-90 May-91 Nov-91 Oct-95 Apr-96 Oct-96
Sensex 125 118 123 246 272 459 706 712 778 1265 1284 1911 3409 3765 3251
Sensex
-5.25 3.81 10.31 68.96 0.84 9.31 1.51 48.77 10.46 -13.66
Retn(%)
Govt Formed Janta Party Congress National Front Cong + left United Front
UF formed govt, No big party
formed
govt. 3 PM in 2 yrs BJP failed to
form govt Devi Gowda and then
Gujral became PM
Total Return
-1.44 79.26 10.15 50.28 -3.21
in 1 yr
6m 6m 6m
6m before Elec Date 6m latter Elec Date 6m latter Elec Date 6m latter Elec Date 6m latter 6m before Elec Date 6m latter
before before before
Mar-
Dates Aug-97 Feb-98 Aug-98 Sept-99 Mar-2000 Oct-03 Apr-04 Oct-04 Oct-08 Apr-09 Oct-09 Nov-13 May-14 Nov-14
99
Sensex 4321 3450 2969 3649 4710 5521 4852 5805 5673 10581 10947 17323 20399 23905 28177
Sensex
-20.16 -13.94 29.07 17.21 19.65 -2.27 3.46 58.24 17.19 17.87
Retn(%)
Govt Formed NDA NDA UPA UPA NDA
BJP form govt ,AIDMK
withdrew support latter
Total Return
-34.11 46.29 17.38 61.69 35.06
in 1 yr
Source : Phillip CapitalThe Findings Are Noteworthy (2 of 2)
Over return in 1 yr : 70% of time markets have given an +ve return (ranging from 10%~79%). Twice Mkts gave negative return was
when 96 & 98 when United Front (UF) Govt came and BJP formed govt post AIDMK support and they withdrew few months latter
Return Pre election : 80% of time markets has given +ve return (ranging from 1% to 29%)
Return Post election : 70% of time markets has given +ve return (ranging from 4% to 69%)
18 Source: Phillip CapitalMost Global Markets Had Strong Showing In The Last Year
Brazil (IBOV) 1.3 32.2
HK (HSI) 2.4
25.2
China (HSCEI) 2.8
20.7
Japan (Nikkei 225) 4.7
17.0
US (Dow Jones) 0.9
16.1
India (Nifty) 6.2 15.4
Korea (Kospi) 2.8 14.1
Russia (IMOEX) 1.2 13.9
Singapore (Straits) 5.4 13.8
Taiwan (TSWE) (2.4)
8.0
Malaysia (KLCI - FTSE) 0.4
5.8
Indonesia (JCI) (3.1)
5.4
UK (FTSE 100) 6.3
4.1
France (CACS 40) 6.1
4.1
Germany (DAX) 4.0
1.1
Swiss (SMI) 1.2
0.3 1M 1Yr
EURO (Euro Stoxx 50) 4.7
(1.1)
(20) 0 20 40
21 * As on 30 April 2018, Source: Bloomberg. Performance data in local currencyValuations
Stock Picking Will Be Critical
Sensex sectoral long-term valuation snapshot: Forward PE*
160
-1 SD +1 S
140 60
120
50 Max
100
40 Top Quartile
80
60 30 Current
40
20 Lower Quartile
20
0 10 Min
Auto BFSI Engg FMCG IT Metals Oil Pharma Power Telecom Sensex
0
Power & IT at lower end of valuations, other sectors moving towards upper end Auto
of valuation
BFSI
zone
Engg FMCG IT S
23 *As on 30 April 2018, Source: Axis Capital, Bloomberg, Note: * Since April-2005Indian Markets Higher Than Most Peers On Valuation
P/E Multiple CY18/FY19 of Indices
India (Sensex) 20.9
US (Nasdaq) 18.6
Malaysia (KLCI - FTSE) 15.5
Japan (Nikkei 225) 14.3
Thailand (SET) 14.8
US (Dow Jones) 14.8
Singapore (Straits) 13.3
UK (FTSE 100) 13.3
Brazil (IBOV) 11.6
HK (HSI) 10.8
Korea (Kospi) 9.1
China (HSCEI) 7.3 (x)
6 10 14 18 22
24 Source: Internal Estimates , Bloomberg
* For India & Japan Fiscal year is FY19 while others it is CY18With Greater Power Comes Greater Responsibility
MF Equity collections in CY17 were ~80% of collections in last decade
25 Source: CEIC, AMFI, IIFL Research. Note: Based on sum of ‘ELSS’, ‘Other ETF’, ‘Growth’ and 65% Of ‘Balanced’ category collections. * CY17 flows based
on period of Jan to Nov-17Trend In Equity And Derivatives Flows
Net Investments by FPIs, DIIs and MFs in the cash market (US$ mn) Net foreign flows in the derivatives market (US$ mn)
Notes: (a) DII -Domestic Institutional Investors (Includes Bank, DFIs, Insurance, New Pension Scheme and MF).
26 (b) FII data is till Apr 26, MF data is till Apr 25 and DII data is till Apr 27.Domestic Flows May Sustain Into Equity Funds In CY 18
• Mature investor
base understanding
the benefits of
• Low FD Return compounding of
equities as asset Flows to equities
• Uncertain real class
estate environment
• SIP as a tool to
counter volatility
27Markets Consolidating As It Awaits Economy To Take Off
Sensex ‘EPS’
Sensex P/E
FY93-97 FY98-03 FY05-09 FY10-17 FY18-19e
28 Past performance is not a reliable indicator of expected future performanceKey Variables & Their Impact On Equities
Key Variables Short - Medium – Remarks
term term
Economy GST to impact near-term activity especially informal segment
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
FII Flow long term growth.
DII Flow Focus on improving financial savings of households
Higher disinvestment target and repair of leveraged balance sheet to
Supply of paper create supply in markets.
Election heavy year can dampen near term outlook for meaningful
Policy/Reform Initiative reform
2930
1.00
2.00
3.00
4.00
5.00
6.00
7.00
Apr-91
Apr-92
Apr-93
Apr-94
Apr-95
Apr-96
Apr-97
Apr-98
Apr-99
Apr-00
Apr-01
Apr-02
12000
18000
21000
24000
30000
33000
36000
15000
27000
39000
Apr-03
Apr-15 Apr-04
May-15 Apr-05
Jun-15 Apr-06
Apr-07
Sensex P/B (x) - LHS
Jul-15 Apr-08
Aug-15 Apr-09
Sep-15 Apr-10
Apr-11
12-month forward Sensex P/B (x)
Oct-15 Apr-12
Markets Above Fair Range
Nov-15 Apr-13
Dec-15 Apr-14
Apr-15
Jan-16 Apr-16
Feb-16 Apr-17
Mar-16
Apr-18
Apr-16
Fair 13x - 17x
May-16
Jun-16
Jul-16
Aug-16
Sep-16
Cheap 8x - 10x
Oct-16
Attractive 10x - 13x
Nov-16
Fair Value Plus 17x - 20x
Dec-16
Stretched 20x - 24x
Jan-17
12-month forward Sensex P/E (x)
83
Feb-17 2007
Mar-17
2008
103
Apr-17
May-17
55
2009
Jun-17
Jul-17
95
2010
Aug-17
Sep-17
88
2011
Oct-17
Nov-17
71
2012
Dec-17
64
Jan-18 2013
Feb-18
66
Mar-18 2014
Apr-18
2015
81
the period
69
2016
Average of 78% for
India’s Market Cap to GDP (%)
2017E
80
84
2018EWhile Valuations Not Cheap, Patience To Be Key As We Await Earnings To Pick Up
While equities may still be
out-performing other
alternate asset classes,
moderate return
expectations
Corporate earnings,
especially of domestic
oriented companies
showing improving trend
Use intermittent
volatility to increase
equity exposure
31Apr-18
Jan-18
Nov-17
Aug-17
Jun-17
Apr-17
Jan-17
Source: Bloomberg, Data as of 31st March 2018
Nov-16
Aug-16
Jun-16
Mar-16
Jan-16
Oct-15
Aug-15
May-15
Mar-15
Dec-14
Prices Normalised to 100
Oct-14
Aug-14
May-14
Mar-14
Dec-13
Oct-13
Jul-13
May-13
Feb-13
Crude Prices
Nifty & Crude Show an Inverse Relationship
Dec-12
Sep-12
Jul-12
Apr-12
Feb-12
Dec-11
Nifty Prices
Sep-11
Jul-11
Risk 1 – Higher Oil Prices
Apr-11
Feb-11
Nov-10
Sep-10
Jun-10
Apr-10
Jan-10
Nov-09
Aug-09
Jun-09
Mar-09
50
350
200
0
400
300
250
150
100
32Risk 2 – Rise in equity issuance impacting market liquidity
A Potential Rise In Equity Issuance Might Impact Market Liquidity
But low returns in traditional avenues and increasing awareness
continues to drive money to capital markets
33 Source: Bloomberg, CLSARisk 3 – Delay in NPL resolution
NPL Ratios Yet To Come Down And Resolution May Get Delayed
Source: RBI, CLSA
Bank recap details & roadmap would give further clarity
34Strategy For Investments In The Current Scenario
1- Kumbhkaran
(Invest & forget)
Or
2- Asset Allocation
35Key Recommendations
Key theme Remarks
Large Cap – play on buying sectoral leaders that benefit from improving
Kotak 50
investment climate
Balance of IQ and EQ Kotak Classic Equity
Diversified/Multicap – focus on sectors that are likely to benefit the most
Kotak Select Focus / Kotak Opportunities Fund
across market cap
Infrastructure revival – “True-to-label” fund – recent thrust of government to
Kotak Infrastructure & Economic Reforms Fund
revive 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
Balanced – benefit from debt and equity allocation Kotak Balanced Fund
We recommend investors to invest through SIP with a 5 years horizon.
36DEBT MARKETS
How April 2018 Unfolded
• Inflation :
– The CPI inflation moderated to a five-month low 4.3% in Mar 2018 (+3.9% in Mar 2017) from 4.4% in Feb 2018 (+3.7% in Feb
2017, as vegetable prices eased further on fresh supplies. However core inflation, that strips out the impact of food and fuel prices,
continued to rise hitting a 43-month high at 5.4%
– Inflation based on wholesale prices eased marginally to 2.47% in March (2.48% in Feb 2018) on cheaper food articles, especially
pulses and vegetables. WPI was 5.11% in March last year.
• Trade Data :
– India's merchandise exports fell 0.7% to US$ 29.11 billion in March 2018 over a year ago,
– imports moved up 7.1% to US$ 42.80 billion.
– The trade deficit jumped 28.6% to US$ 13.69 billion in March 2018 from US$ 10.65 billion in March 2017
• Monsoon 2018: The India Meteorological Department (IMD) forecast says that there will be 97% normal monsoon for the year 2018-19,
which could be a good news for the rural economy that suffered due to the twin impact of drought years and demonetisation.
• GST Collection :First time since the rollout of the new tax regime in July 2017, the Goods and Services Tax (GST) collection crossed ₹1
trillion in the month of April this year.
• Monetary Policy: The RBI left its key policy rate unchanged at 6% for the 4th meeting on Apr 5, 2018. Policymakers said the decision is
consistent with the neutral stance of monetary policy.
38How April 2018 Unfolded
• Manufacturing sector activity improved marginally in April, rose from 51.0 in March to 51.6 in April, indicating faster
improvement in the health of the country’s manufacturing economy than in the prior month.
• India’s industrial output grew 7.1 percent in February from a year earlier, government data showed.
• Rating agency Fitch kept India’s sovereign rating unchanged at BBB-, the lowest investment grade for the 12th year with
stable outlook even as it praised the implementation of the Goods and Services Tax (GST).
• The World Bank noted that the Indian economy has recovered from the effects of demonetisation and the GST and predicted a
growth rate of 7.3% for the country in 2018.
• India will again emerge as the world’s fastest-growing major economy at least for the next two years, the IMF said. India’s
growth will rise steadily to 7.4 % for 2018-19 and 7.8 % for 2019-20, against 6.7 % in 2017-18.
• North Korean leader Kim Jong Un and South Korean President Moon Jae-in agreed to finally end a seven-decade war this year,
and pursue the “complete denuclearization” of the Korean Peninsula.
• RBI provided roadmap wherein the FPI limits would increase by 0.5% each year to 5.5% of outstanding stock of securities in
2018-19 and 6% of outstanding stock of securities in 2019-20.
39India’s Potential to Absorb Foreign Ownership in Gilt is High 41 Source: Nomura, RBI, CSL, Bloomberg, and CEIC.
RBI OMO Purchase Is Contingent To Increase In Currency in Circulation (CIC) 42 Source: Nomura, RBI.
Positive Real Interest Rates to Stimulate Financial Savings
6
5
4 3.22
3
2
1
0
-1
-2
-3
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
Feb-13
Apr-13
Jun-13
Aug-13
Oct-13
Dec-13
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
Dec-14
Feb-15
Apr-15
Jun-15
Aug-15
Oct-15
Dec-15
Feb-16
Apr-16
Jun-16
Aug-16
Oct-16
Dec-16
Feb-17
Apr-17
Jun-17
Aug-17
Oct-17
Dec-17
Feb-18
Apr-18
• 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 is moving from physical to financial assets.
Note: Monthly 10 year Gilt Yield taken as average of their respective month. April 2018 CPI is assumed to be same as March-18 and Real
43 Interest rate is calculated . Source: BloombergCPI Inflation:
We expect the Inflation to remain within the RBI Band
12%
10%
CPI Core CPI
8%
6% 5.4%
4%
4.28%
2%
0%
Mar-17
Jan-13
May-13
Jul-13
Sep-13
Jan-14
May-14
Jul-14
Sep-14
Jan-15
May-15
Jul-15
Sep-15
Jan-16
May-16
Jul-16
Sep-16
Jan-17
May-17
Jul-17
Sep-17
Jan-18
Mar-13
Mar-14
Mar-15
Mar-16
Mar-18
Nov-12
Nov-13
Nov-14
Nov-15
Nov-16
Nov-17
• The CPI inflation moderated to a five-month low 4.3% in Mar 2018 (+3.9% in Mar 2017) from 4.4% in Feb 2018 (+3.7% in Feb 2017.
• The inflation for food and beverages moderated to a five-month low 3.0% in Mar 2018 (+2.5% in Mar 2017) from 3.5% in Feb 2018
(+2.4% in Feb 2017); primarily reflecting the decline in inflation for vegetables.
• The core-CPI inflation rose to a 43-month high 5.4% in Mar 2018 from 5.2% in Feb 2018 led by pan, tobacco and intoxicants, and a
broad-based uptick in miscellaneous items.
• Notably, the wedge between headline and core-CPI inflation widened to six-month high 109 bps in March 2018.
43 Source: MOSPICrude Oil Prices Spiked
80 Brent Crude (USD)
75.17
75
70
65
60
55
50
45
40
Jun-17
Jul-17
Oct-17
Sep-17
Aug-17
Jan-18
Feb-18
Mar-18
May-17
Apr-18
Nov-17
Dec-17
• Brent Crude Oil price rose to $75.17 from $70.27 in the previous month. Inventories of crude that had built up during the glut of 2014-16
have largely been worked off because of strong demand driven by a booming global economy and supply cuts by Opec and Russia.
• Oil prices also got a boost due to Geo political risk factors such as crisis in Venezuela and Syria. Though rapprochement between North &
South Korea will ease some pressure
Data as on 30th April 2018, Source : Bloomberg
4410 year Gilt Yield For the Month of April
India 10 year Gilt (%)
7.9
RBI allows banks to spread 7.767
7.8
provisions made for mark-
to-market losses on their
7.7
bond portfolios & US 10-year yield crossing 3%
Skymet’s prediction of
7.6 normal monsoon rainfall;
perceived dovish policy Hawkish RBI Minutes
7.5
7.4
Hike in limits for foreign investment
7.3 in government debt was lower than
what market participants had
expected, spike in crude, weak
7.2 Profit booking
currency; lack of buying interest;
rising global bonds
7.1
7
3-Apr
4-Apr
5-Apr
6-Apr
7-Apr
8-Apr
9-Apr
15-Apr
10-Apr
11-Apr
12-Apr
13-Apr
14-Apr
16-Apr
17-Apr
18-Apr
19-Apr
20-Apr
21-Apr
22-Apr
23-Apr
24-Apr
25-Apr
26-Apr
27-Apr
45 Source: Bloomberg, Data as of 27th April 2018Inflation to Drop Back Below RBI’s 4% Medium-Term Target
46
Inflation could drop to 4% to March 2019 on base effect wearing out , stable food prices
and assuming normal monsoon and crude prices to remain range bound
47 *CPI projections include impact of higher housing rent allowance for central government employees
Source : Ministry of Statistics and Programme Implementation, Bloomberg EconomicsCredit Growth Slowly Picking Up
Credit Growth (Weekly Data)
9100000 80
78
8600000
Current Credit/ Deposit Ratio is ~74.52% (RHS)
76
74
8100000
72
70
7600000
68
7100000 66
Commercial Credit by Banks = Rs 84.78 lakh Crore (LHS)
64
6600000 62
Jun-16
Oct-16
Jun-17
Jul-16
Jul-17
Oct-17
Sep-16
Feb-17
Feb-18
Apr-16
Mar-17
Sep-17
Mar-18
May-16
Apr-17
Apr-18
Aug-16
Nov-16
Jan-17
May-17
Dec-16
Aug-17
Nov-17
Jan-18
Dec-17
Credit growth has picked up by 10-12% as compared to last year.
48 Source: Bloomberg, Data as on 30th April 2018India Foreign Exchange Reserves – Stability Is Key
India Foreign Exchange Reserves (USD)
430000
420000
423.58 Billion USD
410000
400000
390000
380000
370000
Jun-17
Jul-17
Oct-17
Sep-17
May-17
Jan-18
Mar-18
Aug-17
Nov-17
Feb-18
Apr-18
Dec-17
Indian foreign exchange reserves have seen some decline as rising oil prices and FII selling led to rise in dollar
demand
48 Source: Bloomberg, Data as on 30th April 2018Active Liquidity Management
9.5 Repo Rate In the Last 1 year
9
8.5
8
Repo Rate (%) Overnight Rate (MIBOR %)
7.5
7
6.5
6
5.5
Jun-17
Oct-17
Jul-17
Aug-17
Sep-17
May-17
Nov-17
Jan-18
Mar-18
Feb-18
Apr-18
Dec-17
Amount in Rs. billion.
Date Repo Reverse Repo MSF SLF Total Systemic Liquidity Government Balances
27th April 2018 -480.01 722.15 -31.15 -23.52 187.47 216.31
RBI has managed to keep overnight rate close to the repo rate. As the liquidity in the system reduces due to the
increase in the Currency in Circulation, RBI may start conducting Open market operations, possibly in Q2, as
against Q3 & Q4 expected earlier
Source : Bloomberg, As of 30th April 2018
49Spreads Between 10 Year & Repo Widening
10 year bond yield spread over repo similar to the 2013 rate hike cycle
51 Source: Bloomberg, Citi ResearchYield Curve (M-o-M Analysis) Update chart
8.5
8
7.5
7
6.5 INR India Sovereign Curve Last Mid YTM INR India Sovereign Curve 1/04/18 Mid YTM
6
3M 6M 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 16Y 17Y 35Y 40Y
50
YTM (M-o-M Change)
30
10
-10 3M 6M 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 16Y 17Y 35Y 40Y
• Due to the profit booking and hawkish MPC minutes, the yields hardened across the curve. However, the yield movement
in the ‘greater than 20yr segment’ was relatively lower than in the ‘less than 20 year segment’.
52 Source: BloombergRelaxation of FPI Limits
Particulars Old provision New provision Potential Implication
>= 1 Year
Revision of minimum We expect increase in
residual maturity demand for short term
>= 3 years If residual maturity < 1 year in either category (G-Sec/SDLs),
requirement -Government Government papers, which
investment shall not exceed, at any point of time, 20% of the total
Bonds & Treasury Bills may soften the yields.
investment of that FPI in that category.
As on 27 April, 2018, the FPI
Revision of minimum >=1 year quota utlisation is 79.15%,
residual maturity hence we expect the
>= 3 years
requirement -Government If residual maturity < 1 year, investment shall not exceed, at any point demand for corporate
Bonds -Corporate Bonds in time, 20% of the total investment of that FPI in corporate bonds. bonds to increase, which
may soften the yields.
Likely to help FPIs build up
Revision of security-wise
20% of the outstanding stock of on the portfolio by
limit in any Central 30% of the outstanding stock of that security
that security concentration on securities
Government security
already bought.
Likely to increase the
Investment in Treasury
Not Allowed Allowed demand for the Treasury
Bills
Bills
Monitoring of G-Sec Auction mechanism after limit Online monitoring of utilisation of G-sec limits by CCIL with effect from June 1, Actions will go away and all
utlisation limits utlisation reaches 90% 2018. limits will be available on tap.
53 Source: RBIRelaxation of FPI Limits
Particulars Old provision New provision Potential Implication
Long-term FPIs: 15% of prevailing investment limit for that category.
Other FPIs: 10% of prevailing investment limit for that category.
In case an FPI has investments (INV0) in excess of the concentration limit on the effective date, it will be
allowed to undertake additional investments such that its portfolio size at any point in time (INVt) does not
exceed INV0 plus 2.5% of investment limit for the category on the effective date. Once INVt falls below the
prevailing concentration limit for the category, the FPI shall be free to make investments up to the applicable
Concentration Concentration cap may
Not Applicable concentration limit.
limits affect larger players.
In case an FPI has investments (INV0) within the concentration limit, but in excess of 7.5% (12.5% in case of
FPIs in the ‘Long-term’ sub-category) of the investment limit for the category on the effective date, that FPI
shall be allowed to undertake additional investments such that its portfolio size at any point in time (INVt)
does not exceed (INV0) plus 2.5% of the investment limit for the category on the effective date. Once INVt falls
below the prevailing concentration limit for the category, the FPI shall be free to make investments up to the
applicable concentration limit.
(i) Investment by any FPI, including investments by related FPIs, shall not exceed 50% of any issue of a
corporate bond. In case an FPI, including related FPIs, has invested in more than 50% of any single issue, it
Parental FPI likely to be
shall not make further investments in that issue until this stipulation is met.
difficult.(Global parent's
Single/Group
subscription of NCD issued
investor-wise (ii) No FPI shall have an exposure of more than 20% of its corporate bond portfolio to a single corporate
Not Applicable by domestic subsidiary has
limit in corporate (including exposure to entities related to the corporate). In case an FPI has exposure in excess of 20% to any
been made restrictive,
bonds corporate (including exposure to entities related to the corporate), it shall not make further investments in
limited to 50% of total
that corporate until this stipulation is met. A newly registered FPI shall be required to adhere to this stipulation
issuance size)
starting no later than 6 months from the commencement of its investments.
54 Source: RBIRelaxation of FPI Limits :
Boost to Overall Demand May Lower Yields
Source: RBIIndia-Us 10 Year Gilt- Spreads Provide Adequate Safety
The spreads have widened over last 1 month. However we expect the spreads would compress in
medium term due to narrowing inflation differentials
55 Source: BloombergInflation Adjusted Yields In India Is Attractive
12
10 India-US CPI Spread India-US Gilt Spread
8
6
4
2
0
Aug-12
Oct-12
Dec-12
Feb-13
Apr-13
Jun-13
Aug-13
Oct-13
Dec-13
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
Dec-14
Feb-15
Apr-15
Jun-15
Aug-15
Oct-15
Dec-15
Feb-16
Apr-16
Jun-16
Aug-16
Oct-16
Dec-16
Feb-17
Apr-17
Jun-17
Aug-17
Oct-17
Dec-17
Feb-18
Apr-18
-2
Narrowing CPI spreads and widening bond spreads make Indian fixed income attractive
Note: 10 year Gilt Yield taken as average of their respective month . Data as of April 2018 (April 2018 CPI is assumed to be same as March 2018 .
56 Source: BloombergGlobal Bond Yields Remain Volatile
3.5 10 Year Gilt of Selected Countries
3
US 10 Year
2.5
2
1.5
UK 10 Year
1
0.5 Germany 10 Year
Japan 10 Year
0
Jun-17
Oct-17
Jul-17
Sep-17
May-17
Jan-18
Feb-18
Mar-18
Apr-18
Aug-17
Nov-17
Dec-17
-0.5
Global bond yields rose during last month and continued to remain volatile on account of growth and inflation uncertainity
57 Data as of 30th April 2018. Source: BloombergKey Variables & their Impact On Interest Rates in 2018
Key Variables Short - term Medium – term
(3-6 month) (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
58Widening Of Spread Between LIBOR And UST
This can hurt companies borrowing in USD market more than what is priced by the market
59Debt Outlook
The 10 year gilt has risen up by around 64 bps to 7.76% since the April bottom of 7.12%.
The spreads vis-a-vis the repo rate is now at 175 bps. These levels are similar to those witnessed in the 2013 cycle in
wake of the currency crisis.
Vis-à-vis the CPI inflation, the current yield level provides a spread of around 340 bps. While the inflation is below the RBI
projection of 4.4% for Mar-19, even at 5-5.5% levels, the present gilt levels provide a real interest rate spread of more
than 200 bps. Thus at these levels, the yields may be already discounting 1 to 2 rate hikes.
Having said that if the crude prices remain range bound and the monsoon season passes off normally, then we may be in
for a long pause. From that stand point, the present levels may seem higher than required.
In the near term, the gilt is likely to remain volatile due to rising pressure from crude prices and rising yield level globally.
In this scenario, the 10 year is likely to trade in the 7.6-7.9% range.
The yield levels at the shorter end are also discounting 1-2 rate hikes. Going forward, we expect the rates to stabilize in
the ±20 bps range from current levels
60Key Recommendations
Segment Scheme Rationale
Accrual Kotak Income Opportunities Fund / Kotak Medium Term Investment for
Play Fund higher accrual
Investment for
Asset Allocation Kotak Monthly Income Plan
asset allocation
Kotak Treasury Advantage Fund / Kotak Low Duration
Fund / Kotak Corporate Debt Fund
Short Term
Parking of Funds Higher post tax
Kotak Equity Arbitrage Fund
return
Investment for
Kotak Mahindra Bond Scheme
longer maturities
Duration Play
Investment for
Kotak Bond Short Term
shorter maturities
61Categorization and Rationalization of Mutual Fund Schemes
Categorization and Rationalization of Mutual Fund Schemes
We believe - “ Funds are like kids. Don’t have more than you can manage.” -
Because of this philosophy none of our schemes were required to be merged.
There are a few change in names, which we have highlighted in Bold.
Equity, Hybrid & FOFs would change with effect from May 25th 2018 (Exit Window of April 25th – May 24th 2018*) except
Kotak Opportunities & Kotak Classic Equity
Debt schemes along with Kotak Opportunities & Kotak Classic Equity would change with effect from June 1st 2018 (Exit
Window of May 2nd – May 31st 2018)
Please be mindful when considering past performance of schemes, since some schemes in the Industry will have
change in characteristics/positioning post the standardization of scheme categories.
62 *ETFs do not have an exit windowEquity Funds
Equity Funds
Existing Existing Scheme Name New SEBI New Scheme Name Benchmark
Category Scheme Category
Kotak Standard Multicap
Multi Cap Fund Kotak Select Focus Fund Multi Cap Fund Nifty 200
Fund
Large Cap Fund Kotak 50 Large Cap Fund Kotak Bluechip Fund Nifty 50
Large & Mid Cap Kotak Equity Opportunities
Multi Cap Fund Kotak Opportunities Nifty 200
Fund Fund
Mid and Small Cap Kotak Emerging Equity Scheme Mid Cap Fund Kotak Emerging Equity Scheme S&P BSE Mid small cap
Mid Cap Fund Kotak Midcap Small cap Fund Kotak Smallcap Fund Nifty Small cap 50
Contra Fund Kotak Classic Equity Contra Fund Kotak India EQ Contra Fund Nifty 100
Kotak Infrastructure & Economic Kotak Infrastructure & Economic India Infrastructure Index
Sectoral/Thematic Sectoral/Thematic
Reform Fund Reform Fund ( Customized index by IISL)
ELSS Kotak Tax Saver ELSS Kotak Tax Saver Nifty 500
63Debt Funds
Existing Category Existing Scheme Name New SEBI Scheme New Scheme Name Benchmark
Debt Funds Category
Liquid-Conservative Kotak Mahindra Liquid Scheme Liquid Fund Kotak Mahindra Liquid Scheme Nifty Liquid Fund Index
Liquid-Aggressive Kotak Floater Short Term Money Market Fund Kotak Money Market Scheme Nifty Money Market Index
UST-Conservative Kotak Treasury Advantage Fund Ultra Short Duration Fund Kotak Savings Fund Nifty Ultra-short term Index
UST-Aggressive Kotak Low Duration Fund Low Duration Fund Kotak Low Duration Fund Nifty Low Duration Index
Short Duration Conservative Kotak Bond Short Term Short Duration Fund Kotak Bond Short Term Fund Nifty Short Duration Index
Credit Risk Fund Kotak Medium Term Fund Medium Duration Fund Kotak Medium Term Fund Nifty Medium Duration Index
Kotak Income Opportunities
Credit Risk Fund Credit Risk Fund Kotak Credit Risk Fund CRISIL AA Short Term Bond Index.
Fund
Kotak Mahindra Bond Unit Nifty Medium to Long Duration Index
Income-Aggressive Medium to Long Duration Fund Kotak Bond
Scheme 99
Short Duration Aggressive Kotak Flexi Debt Fund Dynamic Bond Kotak Dynamic Bond Fund CRISIL Corporate Bond Index
UST-Aggressive (Corporate
Kotak Corporate Bond Fund Corporate Bond Fund Kotak Corporate Bond Fund CRISIL Corporate Bond Index
Bond)
Banking and PSU Fund Kotak Banking & PSU Debt Fund Banking and PSU Fund Kotak Banking & PSU Debt Fund CRISIL Banking and PSU Debt Index
Kotak Mahindra Gilt Unit Scheme Kotak Mahindra Gilt Unit Scheme
Gilt Fund Gilt Fund Nifty All Duration G-Sec Index
98-Investment Plan 98-Investment Plan
64Hybrid Funds
Hybrid Funds Existing Scheme
Existing New SEBI New Scheme Benchmark
Category Name Scheme Name
Category
NIFTY 50 Hybrid
Balance Kotak Balance Aggressive Hybrid Fund Kotak Equity Hybrid Composite Debt 70:30
Index
Kotak Equity Savings 75% of Nifty 50 Arbitrage
Equity Savings Kotak Equity Savings Equity Savings
Fund index and 25% in Nifty 50
Conservative Hybrid CRISIL Hybrid 85+15 -
MIP Kotak MIP Kotak Debt Hybrid
Fund Conservative Index
Kotak Equity Arbitrage Kotak Equity Arbitrage
Arbitrage Fund Arbitrage Fund Nifty 50 Arbitrage
Fund Fund
There is no change in ETF and Fund of Fund(FOF) Category
65Why Accrual Funds ?
Default Risk - Very Low
- CRISIL’s average 1 year transition rates for long term ratings between 1988 and 2016
Ratings AAA AA A BBB BB B C D
AAA 97.37% 2.63% 0% 0% 0% 0% 0% 0%
AA 1.45% 93.22% 4.49% 0.49% 0.16% 0.03% 0.02% 0.04%
A 0 3.04% 88.91% 5.72% 1.48% 0.11% 0.23% 0.51%
CRISIL FY16 Round Up Our Comments
• Kotak AMC does not invest below A* category rating. Our robust
monitoring ensures that we do not take exposure even in AA & A ratings
from sensitive sectors
• AAA rate firms have never ever defaulted. • Moreover, to protect our interests , we ensure guarantee / mortgage /
• The risk of default of AA is only 0.04% and collateral etc. where required
• Risk of A is only 0.51%
• We look to invest in assets that have wide market acceptance
• AAA continue to hold its rating 97% of times, • This ensures that:
• AA around 93% of times, 1. Our credit risk is lower than perceived
• A holds the rating around 88% of times
2. That we capture value with limited risk
66 *Unrated papers that we invest in is generally very low and has implied credit risk which is moderate to lowStory in Accruals • The Fund Manager focuses on generating income from credit allocation rather than duration calls. • Accruals funds generate performance by purchasing high yielding assets with relatively short duration. • This provides investor with a relatively high yield with low NAV volatility • Investors with 18-36 months horizon can look at investing in Accrual Funds • Accrual funds like Kotak Income Opportunities / Kotak Medium term provide retail investors the potential to obtain high yields in the present condition. 67
Need to Watch Out for Opportunities in Hybrid
Space
68Why Kotak Monthly Income Plan
- Growing Through Asset Allocation
Particulars Nifty Level Net Assets in Rs Debt Equity
Start in Kotak MIP with ~ 20% equity exposure 10000 10 8.5 1.5
Equity markets drop by 15% (represented by Nifty 50) 8500 9.78 8.50 1.28
Shift to Kotak Equity Savings Fund which has ~ 25% unhedged
equity 8500 9.78 8.31 1.47
Equity markets drop by 15% (represented by Nifty 50) 7225 9.56 8.31 1.25
Shift to Kotak Balance with ~65% equity 7225 9.56 3.34 6.21
Equity markets drop by 15% (represented by Nifty 50) 6141 8.62 3.34 5.28
Shift to Equity fund with ~100% equity such as Kotak Select
Focus 6141 8.62 0 8.62
Equity markets go up by 20% (represented by Nifty 50) 7370 10.35
Shift Back to Kotak MIP with ~20% equity exposure 7370 10 7.93 2.07
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.
For use of the Intermediaries of Kotak Mutual Fund. (For Internal Circulation Only)
69Tactical Asset Allocation Through MIP
Kotak Monthly Income Plan can be used as a de-risking strategy
o The scheme invests upto 20% in equity & equity related instruments & rest in debt instruments
o Thus, an investor could consider Kotak MIP as a starting point for a moderate exposure to equity and use it as de-
risking strategy by shifting into funds with higher equity allocations as valuations become attractive
o The same has been explained below with an illustration
Whom is the Fund Ideal for?
Investors seeking regular income over short term
Investors seeking income through fixed income securities and marginal gains from equities
Investors with 1-3 year investment horizon
Those who are unwilling to assume the full equity risk
Those who have low appetite for credit risk
For use of the Intermediaries of Kotak Mutual Fund. (For Internal Circulation Only)
70Kotak Equity Saving Fund Performance
Kotak Equity Savings Fund Performance(%)
9 8.31 8.35
8 7.47
7.00
7
6.26 6.26
6
5
4
3
2
1
0
1 Year 3 Years Since Inception
Kotak Equity Savings Fund - Reg - Growth 75% NIFTY 50 ARBITRAGE + 25% Nifty 50 TRI#
* Less than 1 year Simple Annualized returns, Greater than or Equal to 1 year Compound Annualized returns. Scheme in inception
since 13th Oct 2014 Performance as of 28th March 2018
Past performance may or may not sustain in the future
71 Source: ICRAHave You Noticed The Regular Dividends In Kotak Balance ?
Record Date Rupees Per Unit Dividend Yield
25-Apr-18 0.138 0.83%
26-Mar-18 0.138 0.84%
26-Feb-18 0.14 0.83%
26-Jan-18 0.145 0.83%
26-Dec-17 0.14 0.82%
27-Nov-17 0.14 0.82%
25-Oct-17 0.11 0.66%
28-Sept-17 0.11 0.65%
28-Aug-17 0.11 0.67%
25-July-17 0.12 0.70%
27-June-17 0.11 0.65%
* After payment of the
25-May-17 0.11 0.65% dividend, the per Unit
25-Apr- 17 0.11 0.66% NAV falls to the extent of
the payout and statutory
27-Mar- 17 0.11 0.67% levy (if applicable)
27-Feb-17 0.11 0.69% ^Past performance may
or may not be sustained
25-Jan-17 0.11 0.69% in the future. Dividends
26-Dec-16 0.11 0.69% are subject to
distributable surplus
01-Dec-16 0.11 0.69% Inception Date:
26-Oct-16 0.08 0.49% November 25, 1999
All dividends are on face
27-Sep-16 0.08 0.49% value of Rs.10 per unit
25- Aug-16 0.08 0.50%
72 Source: ICRAOur Initiatives 68
Leading the Way
First AMC in India to Sign the United Nations supported principles for Responsible Investment
Please click
https://economictimes.indi
atimes.com/mf/mf-
news/kotak-mutual-fund-
signs-un-supported-
principles-for-responsible-
investment/articleshow/63
881663.cms
for the Newspaper article
Source: MINTDistributor Initiated Transaction – Support to get your Business on the go
Type of Transactions:
Step 1
Enter Your Mobile
Step 2 1. Existing Investors
Verify Via OTP • Lumpsum
• SIP
Step 3 • STP
• SWP
Select Type of Transaction
• Redemption
Step 4 • Switch
Trigger Transaction for your
Investor 2. First Time Investors
• Lumpsum
• SIP
• Zero Balance Folio
73Go Digital – Make your Digital Footprint 74
Why Kotak Mutual Fund Is Different From Others
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
77Disclaimers & Disclosures 68
Performance (%) as on 28th March, 2018
Scheme Inception date is 13/10/2014. Mr. Deepak Gupta has been managing the fund since 17/09/2014. Mr. Abhishek Bisen has been managing the
fund since 17/09/2014.
Different plans have different expense structure. The performance details provided herein are of regular plan. ^Past performance
may or may not be sustained in future.*All payouts during the period have been reinvested in the units of the scheme at the then
prevailing NAV. Returns > = 1 year: CAGR (Compounded Annualised Growth Rate). N.A stands for data not available. Note:
Point to Point (PTP) Returns in INR shows the value of 10,000/- investment made at inception. Source: ICRA MFI Explorer. #
Name of Scheme Benchmark. ## Name of Additional Benchmark.Please refer slide 76 for top 3 and bottom 3 schemes
managed by & Mr. Abhishek Bisen.
79Other Funds Managed by Mr. Deepak Gupta
Top 3 Funds Managed by Mr. Deepak Gupta
Bottom 3 Funds Managed by Mr. Deepak
Gupta
80 Performance (%) as on 28th March, 2018 Source: ICRADisclaimers & Risk Factors
• The information contained in this (document) is extracted from different public sources. All reasonable care has been taken to ensure that the
information contained herein is not misleading or untrue at the time of publication. This is for the information of the person to whom it is provided
without any liability whatsoever on the part of Kotak Mahindra Asset Management Co Ltd or any associated companies or any employee
thereof.We are not soliciting any action based on this material and is for general information only.
• Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
About the scheme:
78Product Labeling
Name of the Scheme This product is suitable for investors who are seeking* Riskometer
• long term capital growth
Kotak Mahindra 50 Unit Scheme • Investment in portfolio of predominantly equity & equity related
securities
• long term capital growth
Kotak Select Focus Fund • Investment in portfolio of predominantly equity & equity related
securities generally focused on a few selected sectors
• long term capital growth
Kotak Emerging Equity Scheme • Investment in equity & equity related securities predominantly in
mid & small cap companies.
• Long term capital growth
• Investment in equity & equity related securities balanced with
Kotak Balance Fund
income generation by investing in debt & money market
instruments
• long term capital growth
Kotak Opportunities • Investment in portfolio of predominantly equity & equity related
securities
• income over a long investment horizon
Kotak Gilt Investment • Investments in sovereign securities issued by the Central and/or
State Government(s) and / or reverse repos in such securities.
• income over a long investment horizon
Kotak Bond
investment in debt & money market securities
• Income over a medium term investment horizon
• Investment in debt, government securities & money market
Kotak Medium Term Fund
instruments with a portfolio weighted average maturity
between 3-7 years
Kotak Low Duration Fund • Regular Income over short term
(Formerly known as PineBridge
India Short Term Fund) • Income by focusing on low duration securities
79 * Investors should consult their financial advisers if in doubt about whether the product is suitable for themProduct Labeling
Name of the Scheme This product is suitable for investors who are seeking* Riskometer
• income from arbitrage opportunities in the equity market
Kotak Equity Arbitrage Scheme
• investment in arbitrage opportunities in the cash & derivatives
segment of the equity market.
Kotak Income Opportunities • Income over a medium term investment horizon
Fund • Investment in debt & money market securities
Kotak Treasury Advantage • Income over a short term investment horizon
Scheme • investment in debt & money market securities
Kotak Infrastructure & Economic • long term capital growth
Reform Fund • long term capital appreciation by investing in equity and equity
(formerly known as related instruments of companies contributing to infrastructure
“PineBridge Infrastructure & and economic development of India
Economic Reform Fund”)
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
80Product Labeling
Name of the Scheme This product is suitable for investors who are seeking* Riskometer
• Income from arbitrage opportunities in the equity market & long
term capital growth
Kotak Equity Savings Fund • Investment predominantly in arbitrage opportunities in the cash
& derivatives segment of the equity market and equity & equity
related securities
• income over a short to medium term investment horizon
Kotak Banking and
• •Investment in debt & money market securities of PSUs, Banks &
PSU Debt Fund
government securities
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