Equity & Debt Strategy - Kotak Mahindra Bank€¦ · For the month of December, Indian Equity markets continued its rally to make new life-time highs on the back of BJP’swin in

Equity & Debt Strategy

Mid Jan – Feb’ 2018

Equity Market Update &

Equity MF Strategy

Confidential | 3

Equity market ended 2017 on a high note, Nifty 50 up by 28% in CY17

18,000

18,500

19,000

19,500

20,000

20,500

21,000

21,500

22,000

9,800

9,900

10,000

10,100

10,200

10,300

10,400

10,500

10,600

06-Dec-17 12-Dec-17 18-Dec-17 24-Dec-17 30-Dec-17 05-Jan-18

NIFTY Index Nsemcap index

BJP won Gujarat

Election

Strong US GDP

leads global rally

-10,764

1,918

19,188

-6,663

1,664

-917 -2,841

1,586

21,450

13,046 12,090

6,182

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

20,000

25,000

Sep 17 Oct 17 Nov 17 Dec 17

FII DII excl MF MF

Nifty up 3% in Dec, MidCap Index up 6.2%FII flows reversed while MF investments slowed down in

Dec

In 2017, sectors which had been lagging like Realty,

Energy and Infra did well

Source: Bloomberg, Kotak Institutional Equities (KIE)As of 5th Jan 2018

cr

December saw higher contribution through Balanced

Funds

cr

18010

15218

19508

14921

81415897

76149756

0

5,000

10,000

15,000

20,000

25,000

Sep 17 Oct 17 Nov 17 Dec 17

Equity Balanced

109.8

40.538.7 34.1

31.4 29.412.2

-6.3-20

0

20

40

60

80

100

120

Realty Bank Energy Infra Auto FMCG IT Pharma

NSE sector indices

%

Confidential | 4

36.0

27.925.7 25.1

21.819.1

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

Hong Kong India US Dow Phillipines Korea Japan

World Economy has been expanding in 2017 Other than Equities, even Gold was up 13%

US Dollar has remained under pressure despite decent

US data

Weak dollar has helped fuel Emerging marker rally

globally

Source: Bloomberg

54

58

53

50.00

51.00

52.00

53.00

54.00

55.00

56.00

57.00

58.00

59.00

Jan 17 Feb17

Mar17

Apr 17 May17

Jun 17 Jul 17 Aug17

Sep17

Oct 17 Nov17

Dec17

US Comp PMI Europe Comp PMI China Comp PMI

Emerging Markets have benefited from rising global demand and weak USD

1306.21

1,050

1,100

1,150

1,200

1,250

1,300

1,350

1,400

Jan 17 Feb17

Mar17

Apr 17 May17

Jun 17 Jul 17 Aug17

Sep17

Oct 17 Nov17

Dec17

CY17Return%

Above 50 - Expanding

92

84.00

86.00

88.00

90.00

92.00

94.00

96.00

98.00

100.00

102.00

104.00

Jan17

Feb17

Mar17

Apr17

May17

Jun17

Jul 17 Aug17

Sep17

Oct 17 Nov17

Dec17

$/oz

Confidential | 5

Based on current run rate, Government is expected to have 1% of

GDP shortfall in indirect tax collection

Metal companies are likely to restart private capex, cement and Power

might follow

Intense pricing pressure in USA due to customer consolidation is

leading to consolidation in US generic space (eg. Teva)

Equity Markets Trends

Source: KIE, CLSA

Auto Sales have been rising at high pace reflecting strong

consumer sentiment and demand

4525

2400

875

78009269

1469

CGST Excise -Petrol

CustomDuties

Total IndirectTax

FY 18BE Shortfall

Rs. ‘000 cr

0

100

200

300

400

500

600

FY16 17CL 18CL 19CL 20CL

Rs. bn

13.8

23.2

25.3

6.4

50.4

15.1 13.811.3

-0.3

14.3

-10

0

10

20

30

40

50

60

Jul-17 Aug-17 Sep-17 Oct-17 Nov-17

Commercial Vehicle Sale Passenger Vehicle Sales-8.00

-4.00

0.00

4.00

8.00

12.00

16.00

Q3'11 Q2'12 Q1'13 Q4'13 Q3'14 Q2'15 Q1'16 Q4'16 Q3'17

Branded Generic

Drug Price YoY%

YoY%

Based on current run rate, Government is expected to have 1%

of GDP shortfall in indirect tax collection

Metal companies are likely to restart private capex, cement and

power might follow

Intense pricing pressure in USA due to customer consolidation

is leading to consolidation in US generic space (eg. Teva)

Confidential | 6

Opportunity in Infrastructure

6

Government has announced 6.92 lk crore spend on roads

under “Bharatmala” project by 2022

Government had planned higher spend for Affordable

Housing and has spent a large proportion already

After L&T , 2nd highest EPC player has a market cap of only

14k cr

Government’s “Power for All” initiative will pay out $250bn

in capex with $50bn opportunity in Transmission by FY22

Source: Blooomberg, CLSA, Ministry of Power

Rs bn

187,493

13,823 8,612 7,455 4,673 4,444 4,3810

30,000

60,000

90,000

120,000

150,000

180,000

210,000

L&

T

Dil

ipB

uid

co

n

NC

C

IRB

Ash

oka

bu

ild

co

n

KN

RC

on

str

uc

tio

ns

Hin

du

sta

nC

on

str

uc

tio

ns

120

50

25

50

5

0

20

40

60

80

100

120

140

Renewables Generation SubTransmission

andDistribution

Transmission EnergyEfficient

USD Bn

157

535

692

0

100

200

300

400

500

600

700

800

Existing NH Projects By 2019 Total

Rs ‘000 cr

1015

50

60

50

0

10

20

30

40

50

60

70

FY15 FY16 FY17RE FY18BE FY18 till Oct

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 above long term average of 35-40% despite broad rally in EMs

Bloomberg Consensus FY18 Nifty earnings cut have slowed down recently

Infra looks attractive in terms of valuation, Consumers most expensive

41.4%

0%

4%

8%

12%

16%

20%

24%

28%

32%

36%

40%

44%

48%

Jan2018

Dec2017

Nov2017

Oct2017

Sep2017

Aug2017

Jul2017

Jun2017

May2017

Apr2017

Mar2017

496

480

490

500

510

520

530

540

Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17

12M Forward PE

18.5 18.3

35.5

17.5

21.3

16.7 17.2

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Auto Banking Consumers Infra Pharma Tech Nifty 50

PE 2019E Average Earnings Growth FY19E and FY20E

18.0

24.0

15.4 16.3

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Large Cap Mid Cap

Current 12M Forward PE 5 Year Average

33% Premium

Bloomberg Estimate

Source: BloombergActual/Expected >1.05 – Better , Actual/Expected <0.95 - Worse

Confidential | 8

Key Triggers – Resolution of NPA & Earnings

• Global Demand: GDP growth strong in US and Europe, exports oriented sectors can benefit

• Commodity Prices: Sustained high prices is expected to lead to high earnings growth in Steel/Oil sector and thus indirectly benefit Banks on NPA issues

• Resolution of NPA: Effective addressal and high recovery rates of NCLT cases will be positive for Banks

• Weaker Rupee: Benefit IT and Pharma

• Lower Corporate Tax: Talks of lowering tax rate in next Budget

• Government Capex: Government might increase spending irrespective of fiscal concerns ahead of General Election

Positive Triggers

• Outflow from EMs: US tax reforms could again trigger capital flight back from EM to US

• Earnings: Consensus expected earnings growth for domestic equities is high at around 15-20%, any downgrade would make the valuations more expensive

• Geo-Political Risk: Uncertainty in Middle East, North Korea

• Monetary Policy: Faster than expected monetary tightening in Europe and US

• Economy Slowdown: Economy has been suffering for last 1 year and none of the economic indicators have shown signs of recovery yet

• Changes in Budget: Government could introduce LTCG tax on equity due to revenue shortfall post lower than expected GST collection

Risks

Confidential | 9

India Equities: Valuations & Strategy – Maintain Neutral Stance

For the month of December, Indian Equity markets continued its rally to make new life-time highs on the back of BJP’s win in keystates of Gujarat and Himachal Pradesh. With this gain, equity markets have locked in a gain of ~28% for calendar year 2017.Inflows by mutual funds also continued post a small dip seen last month.

At current levels of approx. 10,637 (10th January, 2018), Nifty is trading at a 1 year forward PE of 19X. 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 | 11

Indicators

Policy Action

• For now, the rate cut cycle seems over

• Tone of the policy seemed neutral but with caution on inflation

Inflation

• CPI inched up to 4.88% in Nov 2017, higher than RBI

forecast

• RBI increased CPI forecast by 10 bps to 4.3%-4.7% for

2HFY18

• We expect CPI to remain firm at around 5% by Mar

201810 Year G-Sec Benchmark Yield

• Near term upward pressure, can settle lower

Liquidity

• Liquidity surplus has reduced significantly

• Expected to drift towards neutrality

INR

• INR to remain stable relative to remaining EM

universe

• Expect mild depreciation towards 65.5 over 1 Year

• Broad range of 63-66 to hold

Key Risks

• Global monetary tightening

• Strengthening Crude Prices

• Impact of GST revenues and spending on Fiscal Deficit

• Higher inflation print

G-Sec Supply

• Additional borrowing of INR 50,000 cr announced

• Higher borrowing could lead to slippage in fiscal

deficit to the tune of upto 50 bps

• SDL supply for Jan - Mar quarter at INR 1.3 Lac Crs

Debt Market: Key Variables

Confidential | 12

Yields have spiked over concerns on Fiscal Deficit, rising core inflation and falling Liquidity

245

-1,000

0

1,000

2,000

01/12 06/12 11/12 16/12 21/12 26/12 31/12Am

ou

nt

in R

s. B

n

133

7.33

6.00

0

20

40

60

80

100

120

140

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 over

fiscal and inflation concerns

14

21

17

25

33

23

277.33

7.06

0

5

10

15

20

25

30

35

5.60

6.00

6.40

6.80

7.20

7.60

1Y 2Y 3Y 4Y 5Y 8Y 10Y

Sp

read

(b

ps

)

% Y

ield

Change Current G-Sec Yield 1M earlier G-Sec Yield

G Sec yields rose across the curve

Liquidity back to neutral level near quarter end

Core inflation is inching up

Note: As of 4th Jan 2018, Source Bloomberg

4.88%

4.59%

Jan 17 Feb 17 Mar 17 Apr 17 May17

Jun 17 Jul 17 Aug17

Sep 17 Oct 17 Nov 17

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

CPI Core Inflation

Confidential | 13

Indian Bonds are still attractive to Foreign Investors however limits are almost utilized

3,1032,840

4,057

3,112

2,380

164

2,757

-221

379

Apr 17 May 17 Jun 17 Jul 17 Aug 17 Sep 17 Oct 17 Nov 17 Dec 17-500

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

US

D M

illi

on

FIIs buying has slowed down despite Moody’s upgrade

since Utilization level is near 100%, CYTD $23bn inflow from

FIIs

63.37

Feb17

Mar17

Apr17

May17

Jun17

Jul17

Aug17

Sep17

Oct17

Nov17

Dec17

Jan18

63.00

64.00

65.00

66.00

67.00

68.00

69.00

Indian currency has gained on global Dollar weakness FII Debt Utilization in GSecs and Corporate near 100%

94.9%

95.0%

11.35%

Dec16

Jan17

Feb17

Mar17

Apr17

May17

Jun17

Jul 17 Aug17

Sep17

Oct17

Nov17

Dec17

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

Government Corporate SDL

68.07

May 17 Jun 17 Jul 17 Aug 17 Sep 17 Oct 17 Nov 17 Dec 17 Jan 18

40

45

50

55

60

65

70

Crude prices have increased over events in Iran

Note: As of 4th Jan 2018, Source Bloomberg

Confidential | 14

Debt Market Trends

0.00

50.00

100.00

150.00

200.00

250.00

Jun 17 Jul 17 Aug 17 Sep 17 Oct 17 Nov 17 Dec 17

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

3 Year AAA 5 Year AAA SDL Credit RHS

AAA Corporate Curve spreads over GSec have reduced

significantly in last few monthsIn 2017, Credit Funds were the best performers, Gilt

Funds were the worst performers with just 2% return

5.87

4.94

7.45

3.25

2.14

Short Term Income Funds Credit Funds Dynamic Funds Gilt Funds

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

Jun 17 Jul 17 Aug 17 Sep 17 Oct 17 Nov 17 Dec 17

6.40

6.60

6.80

7.00

7.20

7.40

1 Year CD

1 Year CP

CD and CP yields have spiked due to falling Liquidity

leading to underperformance in Ultra Short Term Funds

Spread over 10 Year GSec

Note: As of 31st Dec 2017, Source Bloomberg, MFI

8.13%

8.70%

8.12%

8.75%

Aug 17 Dec 17

7.80%

8.00%

8.20%

8.40%

8.60%

8.80%

SBI Perp HDFC Perp

Perpetual Bond yields have become attractive

%

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

Kotak Mahindra Bank (including its affiliates) and any of its officers directors, personnel and employees, shall not liable for any loss, damage of any nature, including but notlimited to direct, indirect, punitive, special, exemplary, consequential, as also any loss of profit in any way arising from the use of this material in any manner. The recipientalone shall be fully responsible/ are liable for any decision taken on the basis of this material. The investments discussed in this material may not be suitable for all investors.Any person subscribing to or investing in any product/financial instruments should do so on the basis of and after verifying the terms attached to such product/financialinstrument. Financial products and instruments are subject to market risks and yields may fluctuate depending on various factors affecting capital/debt markets. Please notethat past performance of the financial products and instruments does not necessarily indicate the future prospects and performance thereof. Such past performance mayormay not be sustained in future. Kotak Mahindra Bank (including its affiliates) or its officers, directors, personnel and employees, including persons involved in thepreparation or issuance of this material may; (a) from time to time, have long or short positions in, and buy or sell the securities mentioned herein or (b) be engaged in anyother transaction involving such securities and earn brokerage or other compensation in the financial instruments/products/commodities discussed herein or act as advisoror lender / borrower in respect of such securities/financial instruments/products/commodities or have other potential conflict of interest with respect to anyrecommendation and related information and opinions. The said persons may have acted upon and/or in a manner contradictory with the information contained here. Nopart of this material may be duplicated in whole or in part in any form and or redistributed without the prior written consent of Kotak Mahindra Bank. This material is strictlyconfidential to the recipient and should not be reproduced or disseminated to anyone else

This material is not a research report as per the SEBI (Research Analyst) Regulations, 2014.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.