Market Outlook June-2019 - Kotak MF

 
Market Outlook June-2019 - Kotak MF
Market Outlook
June-2019

                 1
Market Outlook June-2019 - Kotak MF
Equity Market Outlook
June- 2019

                        2
Market Outlook June-2019 - Kotak MF
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
Market Outlook June-2019 - Kotak MF
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
Market Outlook June-2019 - Kotak MF
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
Market Outlook June-2019 - Kotak MF
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
Market Outlook June-2019 - Kotak MF
Several Reforms Have Achieved Critical Mass But Others Are Still Work-in-
progress

Source: Kotak Institutional Equities estimates                              7
Market Outlook June-2019 - Kotak MF
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
Market Outlook June-2019 - Kotak MF
4th Quarter GDP (Mar’19) At 5.8%

Source: CEIC, Axis Capital           9
Market Outlook June-2019 - Kotak MF
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

                                                                                                12
Inflation 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
                                                                                                              13
RBI – 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)

                                                                                                                              14
NBFC – Can Asset Sales Ease Pressure Off At Key Lenders?

                                                           15
Q4FY19 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
                                                                                                            17
It is Not Gloom & Doom Everywhere Though!!

                                             18
US-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

                                                            27
As 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: Bloomberg
NIFTY earnings outlook – Corp Banks the Heavy Hitters

                                                        29
Early Signs of Cement Growth Cycle

  Robust cement volumes continues in Q4FY19

  Source: ICICI Securities                    30
MARKET PERFORMANCE

                     31
Performance 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                                                       32
Sectoral 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 2019
Market 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

             36
Midcap 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                                                                                                                        37
Sensex 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, Bloomberg
India’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, Bloomberg
Sensex in ‘Fair Value Plus’ Range

                                     12-month Forward Sensex P/E (X)

                                                                       40
Source: Axis Capital
Kotak 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

                                                                                                   42
Why 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

                                                                                                                                               43
Investment 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

                                                                                            44
Product 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 2018
Key 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.                                46
Kotak 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 Calculations
Debt Market Outlook
June – 2019

                      48
Bond 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: Bloomberg
Inflation 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: Bloomberg
FII 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, SEBI
Subdued Global Crude Oil Prices

  $ per barrel                               Crude Prices

       75

       70

       65

                                                                     62.93
       60

       55
        Mar-19                      Apr-19                  May-19

Source: Bloomberg
Low 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: Bloomberg
CPI 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
        Bloomberg
Policy Rates Likely To Get Cut By 50bps in FY20

                                           Trend in CPI & Repo Rate

Source: CLSA, MOSPI, RBI
Fiscal 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 Estimates
Trend 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
                                                                                                                 2.12
LIQUIDITY

            62
Liquidity 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                                                                                                                                    63
Currency 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 2019
Liquidity Management by RBI Through OMO And FX Swaps

                         RBI’s Durable Liquidity Injection & Benchmark 10-year G-sec Rates

Source: CLSA, RBI
                                                                                             65
10%
                                                                                        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
                                                     1.03
Positive 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: Bloomberg
Debt 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.

                                                                                                                                               70
Key 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
                                                                                                                  71
Some 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         72
Story 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.

                                                                                                                         73
74
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ANNEXURES

            78
Key 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                                                                                                  79
Key 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
                                                                                                                                               80
PERFORMANCE 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

                                                                                              82
Disclaimers & Disclosures

                            83
Disclaimers & 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.

                                                                                                                                                                                84
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*Investors should consult their financial advisors if in doubt about whether the product is suitable for them        85
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*Investors      should
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                      consult             their
                              their financial      financial
                                              advisers              advisors
                                                       if in doubt about whether if
                                                                                 thein  doubt
                                                                                     product       about
                                                                                             is suitable       whether the product is suitable for them
                                                                                                         for them                                         86
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