Equity & Debt Strategy Mid Oct – Nov’ 2017
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Equity & Debt Strategy
Mid Oct – Nov’ 2017
Equity Market Update &
Equity MF Strategy
Confidential | 3
Nifty-50 corrected post FII outflows but later recovered
3,965
2,529
-11,258-11,837
-2,587-7,157
-1,736
5,174
9,165
11,980
18,187
15,886
-15,000
-10,000
-5,000
0
5,000
10,000
15,000
20,000
Jun 17 Jul 17 Aug 17 Sep 17
FII DII excl MF MF
Equity market were mostly driven by global cues in
September
Significant FII outflow for 2nd month in a row, Mutual Fund
inflows have not been affected by market volatility
Indian markets have been broadly following the Emerging
market returns even in 2017
Source: Bloomberg, Kotak Institutional Equities (KIE), CLSAAs of 10th Oct 2017
cr
Monthly SIP inflows are showing an increasing trajectory
0
1,000
2,000
3,000
4,000
5,000
6,000
Apr 16 Jun 16 Aug 16 Oct 16 Dec 16 Feb 17 Apr 17 Jun 17
-15%
-10%
-5%
0%
5%
10%
15%
01
/14
03
/14
05
/14
07
/14
09
/14
11
/14
01
/15
03
/15
05
/15
07
/15
09
/15
11
/15
01
/16
03
/16
05
/16
07
/16
09
/16
11
/16
01
/17
03
/17
05
/17
07
/17
09
/17
1m MSCI EM Return 1m Nifty Return
cr
17,000
17,500
18,000
18,500
19,000
19,500
9,600
9,700
9,800
9,900
10,000
10,100
10,200
10,300
15-Sep-17 21-Sep-17 27-Sep-17 03-Oct-17 09-Oct-17 15-Oct-17
NIFTY Index Nsemcap index
Trump’s tax cut
proposal
Fed signals shrinking Positive
Global cues
North Korea
threatens Nuclear Test
Confidential | 4
1,250
5,800
1,210
5,600
1,130
5,300
1,070
5,150
1,000
4,800
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Steel Coal
2,014 2,015 2,016 2017F 2018F
US Yields and Dollar rise on Trump’s tax reform
announcement
Supply side reforms in China have led to reduction in capacity and increase in commodity prices
Baltic Dry Index hit 3 Year high reflecting strong global
trade demandBoth US and Europe GDP growth has been healthy
Source: Bloomberg, CLSA
2.17
2.33
91.00
91.50
92.00
92.50
93.00
93.50
2.05
2.10
2.15
2.20
2.25
2.30
2.35
1 Month Back 2 Week Back 1 Week Back 30-Sep-17
US 10 Year Govvie Dollar Index RHS
0
200
400
600
800
1000
1200
1400
1600
Jan 16 Mar 16 May 16 Jul 16 Sep 16 Nov 16 Jan 17 Mar 17 May 17 Jul 17 Sep 17
Improvement in global data points
Mn Tonnes
1.0
1.5
2.0
2.5
3.0
Jun15
Aug15
Oct15
Dec15
Feb16
Apr16
Jun16
Aug16
Oct16
Dec16
Feb17
Apr17
Jun17
US GDP Euro Area GDP
Confidential | 5
4,9584,684
0
1,000
2,000
3,000
4,000
5,000
6,000
ETF Non ETF
14.0%
10.8%
12.5%
10.5%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
Asia ex Japan GEM
Jan-17 Aug-17
-2,500
-2,000
-1,500
-1,000
-500
0
500
India Indonesia Phillipines South Korea Taiwan Thailand
Aug Sep
EPFR indicates CY 2017 FII flows have been driven mostly
through ETFs
India allocation has reduced since beginning of the Year
till August
Outflows in Aug and Sep were a phenomenon across
Emerging Markets
FII holding in Indian Equity is significantly larger in size
compared to Domestic MFs
FII Flows to India have been driven by Emerging Market ETFs, India allocation has been falling
Promoters, 51%
FII, 21%
Domestic MFs, 5%
Domestic Insurance, 5%
Other DII, 2%
Retail, 9%
USD mn
BSE 500, As of Dec 2016
USD mn
Source: KIE
Confidential | 6
Domestic Economy showed greenshoots in Aug-Sep
IIP also recovered mainly due to manufacturing and
mining activity
PMI back to expansion as new orders came in
52.5 52.7
46.0
49.0
51.1
42
44
46
48
50
52
54
May 17 Jun 17 Jul 17 Aug 17 Sep 17
Auto Sales bounced back strongly
8.6
-11.2
15.1 13.8
-33.0
-6.5
6.7
28.4
-40
-30
-20
-10
0
10
20
30
40
May 17 Jun 17 Jul 17 Aug 17
Passenger Vehicle Sales MHCV Sales
2.9
-0.2
0.9
4.3
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
May 17 Jun 17 Jul 17 Aug 17
Exports also grew despite concerns over input tax credit
6.0
4.1 3.9
10.3
0.0
2.0
4.0
6.0
8.0
10.0
12.0
May 17 Jun 17 Jul 17 Aug 17
Source: Nomura, Bloomberg, KIE
Confidential | 7
Earnings and Valuation –Liquidity and Hope of strong Earnings growth has led to slightly expensive valuations
Mid Cap Index consensus earnings expectation has seen
recent downgrade leading to widening premium over
large cap
MSCI India P/E Premium over MSCI EM is close to average
level
Bloomberg Consensus FY18 Nifty EPS estimates have
fallen since beginning of the Year mostly due to GST and
Demon impact
Banking and Automobile sector to lead Earnings growth
37.2%
32%
36%
40%
44%
48%
Oct 2017Sep 2017Aug 2017Jul 2017Jun 2017May 2017Apr 2017Mar 2017
547
502
470
480
490
500
510
520
530
540
550
560
Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17
12M Forward PE17.9
21.5
15.1 15.3
0.0
5.0
10.0
15.0
20.0
25.0
Large Cap Mid Cap
Current 12M Forward PE 5 Year Average
19% Premium
Bloomberg Estimate
Source: Bloomberg. Large Cap is represented by Nifty 50 & Mid Cap is represented by CNX Mid Cap 100
-
10.0
20.0
30.0
40.0
50.0
Automobiles Banking Consumers Energy Pharma Technology
Earnings Growth FY18-19E P/2019E
Confidential | 8
Recapitalization of PSU Banks
The government on 24th October, 2017 announced an allocation of Rs 2.11 lakh crores over two fiscal years for therecapitalization of public sector banks.
• The recapitalization plan is intended to help banks make adequate provisions against bad loans and revive lending, which, in turn, may help support a recovery in the economy and private investment..
• The plan is split into two parts:• Bulk of the capital - Rs 1.35 lakh crore - may come via the issue of recapitalization bonds• The remaining Rs 76,000 crore, which includes Rs 18,000 crore already allocated under the Indradhanush
Recapitalization Scheme, may come through budgetary support over two fiscal years.
• By recapitalising banks through a mix of bonds and cash infusions, the government expects that it will maintain its fiscal deficit target.
Confidential | 9
Key Triggers – GST Implementation and Monsoon
• Global Economic data : World economy improving
• Lower Domestic Interest rates: Many Banks have cut their MCLR sharply which should help in reviving credit demand
• Resolution of NPA: Effective addressal by government of NPA issue in Indian Banks
• Fiscal Stimulus: Benefit infra related sectors
Positive Triggers
• Trump Trade Revival: US Tax reforms could again trigger capital flight back from EM to US
• Earnings: Consensus estimates of earnings growth for domestic equities is high at around 15-20%, any downgrade would make the valuations more expensive
• Geo-Political Risk: Political uncertainty in UK & Spain. Geo political risk between US & North Korea
• Monetary Policy: Faster than expected global monetary tightening
Risks
Confidential | 10
India Equities: Valuations & Strategy – Maintain Neutral Stance
Post rising to a lifetime high, markets corrected to end the month of September with a 1% fall. The fall was primarily on account ofgeo-political risks. Indian markets have primarily been following other emerging market trends for the year. On the positive front,inflows into monthly systematic investment plans (SIPs) have been increasing at a steady pace and thereby taking markets to newlife time highs.
At current levels of approx. 10,207 (24th October, 2017), Nifty is trading at a 1 year forward PE of 19.6X. In the current scenario, wecontinue to maintain a Neutral stance.
Mutual Funds: As domestic liquidity continues to drive markets, we advise new investments in Mutual Funds to be deployed 25%in lumpsum and subsequent in tranches via SIPs/STPs.
Recommended allocation within equity mutual funds is as under:
• 100% Large Cap allocation (Prefer Large Caps due to relatively Favorable Valuations)
• This allocation to Large caps can also be taken through Opportunistic Funds which currently have a bias towards Large cap
• For investors who want equity exposure but have low appetite for volatility, they can take equity exposure through
Balanced Funds. Balanced funds have around 25% to 30% of their portfolio into Debt instruments which provides cushion
to the portfolio return during market volatility.
Source: EPS Estimates by KIE
Debt Market Update &
Debt MF Strategy
Confidential | 12
Indicators
Policy Action
• We maintain our expectation that the RBI will pause on rate cut
• Tone of the policy seemed little hawkish, emphasis on inflation
• One member pushed for 25 bps cut
Inflation
• CPI increased to 3.28% in September 2017
• RBI increased CPI forecast to 4.2%-4.6% for 2HFY18
• We expect CPI 4.7% for Mar 2018 vs 4.5%estimate of
RBI
10 Year G-Sec Benchmark Yield
• 10 Yr yield likely to remain in range of 6.60-6.80%
Liquidity
• Liquidity surplus has reduced to Rs 1.7 trn plus
• Reduced due to Advance Tax and could reduce further due
to festive season
• OMO pace remains key
INR
• Weakened to 65 Level
• Will depend on crude price movement and
Equity flows
Key Risks
• US policies; Fed hikes; Global monetary tightening
• Impact of 7CPC allowance implementation on CPI
• Strengthening of US Dollar
• Farm loan waivers can impact FD by 1.0 to 1.3% of GDP
G-Sec Supply
• The gross G-Sec supply to be Rs. 5.8 trn
• SDL issuance of Rs. ~4 trn + expected; QFY18
issuance expected to be Rs. ~1.2 trn
Debt Market: Key Variables
Confidential | 13
Yields have spiked over the last one month over concerns on Fiscal Deficits
1,771
0
1,000
2,000
3,000
4,000
31/08 05/09 10/09 15/09 20/09 25/09 30/09
Am
ou
nt
in R
s. B
n
74
6.74
6.00
0
10
20
30
40
50
60
70
80
5.75
6.25
6.75
7.25
7.75
Spre
ad (
bp
s)
% Y
ield
Spread 10 Year G Sec Repo Rate
G Sec Spread over Repo near highest in last 1 Year
2
3
8
10
17
15
18
6.74
6.56
0
2
4
6
8
10
12
14
16
18
20
5.60
6.00
6.40
6.80
7.20
1Y 2Y 3Y 4Y 5Y 8Y 10Y
Sp
read
(b
ps
)
% Y
ield
Change Current G-Sec Yield 1M earlier G-Sec Yield
Longer Duration yields have increased by 15-20 bps
Liquidity has reduced close to quarter end
Inflation stabilizing below 4%
Note: As of 10th Oct 2017, Source Bloomberg
3.28%
4.12%
Nov16
Dec16
Jan 17 Feb17
Mar17
Apr 17 May17
Jun 17 Jul 17 Aug17
Sep17
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
CPI
Core Inflation
Confidential | 14
FII flows slowed down after consecutive 6 months of strong inflow
Jan 17 Feb 17 Mar 17 Apr 17 May 17 Jun 17 Jul 17 Aug 17 Sep 17
-1,000
0
1,000
2,000
3,000
4,000
5,000
US
D M
illi
on
FIIs buying streak continued, CYTD $20bn inflow from
FIIs
65.14
Nov16
Dec16
Jan17
Feb17
Mar17
Apr17
May17
Jun17
Jul 17 Aug17
Sep17
Oct17
63.00
64.00
65.00
66.00
67.00
68.00
69.00
Indian currency also weakened over macro worriesFII Debt Utilization in GSecs and Corporate near 100%,
interest in SDLs increasing
95.2%
99.5%
13.94%
Sep16
Oct16
Nov16
Dec16
Jan17
Feb17
Mar17
Apr17
May17
Jun17
Jul 17 Aug17
Sep17
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
100.00%
Government Corporate SDL
Jan 17 Feb 17 Mar 17 Apr 17 May 17 Jun 17 Jul 17 Aug 17 Sep 17
44
46
48
50
52
54
56
58
Higher crude prices remains a risk for Indian Bonds
Source Bloomberg
Confidential | 15
India Fixed Income: Strategy
Substantial part of the portfolio should be deployed through a mix of high rated and credit accrual strategies. Exit from duration funds only for investors who have completed 3 years and can deploy with another 3 years view.
Investment Focus:
Passive Accrual-Oriented Debt funds
High quality portfolios (~100% AAA / Sovereign) Portfolio is run on a passive accrual basis i.e buying a bond and holding it till maturity thereby earning from the accruing of
interest Higher predictability of return, lower volatility & lower interest rate risk
High Yield Credit-Oriented Funds
Low volatility on account of maturity of portfolio between 3 – 5 years, attractive and stable accrual yields Experienced teams to carefully evaluate and tightly monitor high yielding debt instruments
Short Term Bond Funds
Actively managed to run a low avg. maturity of 2-3 years, attractive risk-reward Lower volatility and interest rate risk than Dynamic Bond Funds, better suited from a risk-adjusted basis in volatile markets
Continue to recommend ultra short term relative to liquid funds (up to 3 Months)For short term parking of funds for a minimum of 6 months, Arbitrage funds preferred over ultra short term funds on back of better tax adjusted returns
Source : AMCs, other Financial websites
Confidential | 16
DisclaimerThe aforesaid is for information purposes only and should not be construed to be investment advice under SEBI (Investment Advisory) Regulations.
In the preparation of the material contained in this document, Kotak Mahindra Bank has used information that is publicly available, including information developed in-house. Some of the material used in the document may have been obtained from members/persons other than the Kotak Mahindra Bank and/or its affiliates and which mayhave been made available to Kotak Mahindra Bank and/or its affiliates. Information gathered & material used in this document is believed to be from reliable sources. KotakMahindra Bank however does not warrant the accuracy, reasonableness and/or completeness of any information. For data reference to any third party in this material nosuch party will assume any liability for the same. Kotak Mahindra Bank and/or any affiliate of Kotak Mahindra Bank does not in any way through this material solicit any offerfor purchase, sale or any financial transaction/commodities/products of any financial instrument dealt in this material. All recipients of this material should before dealingand or transacting in any of the products referred to in this material make their own investigation, seek appropriate professional advice
We have included statements/opinions/recommendations in this document which contain words or phrases such as "will", "expect" "should" and similar expressions orvariations of such expressions, that are "forward looking statements". Actual results may differ materially from those suggested by the forward looking statements due torisks or uncertainties associated with our expectations with respect to, but not limited to, exposure to market risks, general economic and political conditions in India andother countries globally, which have an impact on our services and / or investments, the monetary and interest policies of India, inflation, deflation, unanticipatedturbulence in interest rates, foreign exchange rates, equity prices or other rates or prices, the performance of the financial markets in India and globally, changes indomestic and foreign laws, regulations and taxes and changes in competition in the industry. By their nature, certain market risk disclosures are only estimates and could bematerially different from what actually occurs in the future. As a result, actual future gains or losses could materially differ from those that have been estimated
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