Equity & Debt Strategy

Mid May – Jun’ 2018

Equity Market Update &

Equity MF Strategy

Confidential | 3

Equity markets bounce back, MF flows still below peak level

18,000

18,500

19,000

19,500

20,000

20,500

21,000

21,500

22,000

9,800

9,900

10,000

10,100

10,200

10,300

10,400

10,500

10,600

10,700

10,800

06-Apr-18 12-Apr-18 18-Apr-18 24-Apr-18 30-Apr-18 06-May-18

NIFTY Index Nsemcap index

RBI keeps repo rate

unchanged

Axis and ICICI

report high slippage

IT rally over

depreciating INRTrump pulls

out of Iran deal

NSEMCAP Index

13,254

-12,552

13,117

-5,239-7,131

1,651

-2,574

-1,196

7,540

16,257

9,276 9,354

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

20,000

Jan 18 Feb 18 Mar 18 Apr 18

FII DII excl MF MF

Nifty 50 and Midcap 100 up by 6.2% and 8.2% in Apr

respectivelyFII selling was balanced by Mutual Fund buying

March net inflows were lower due to higher redemptions. In

April even gross inflows were low. Balanced Funds have

been most impacted

Source: Bloomberg, KIE, AMFIAs of 10th May , 2018

cr

Flows to Equity Mutual Funds still at lower levels compared

to peak of Dec-Jan

cr

20,372 19,535

11,047

13,446

0

5,000

10,000

15,000

20,000

25,000

Jan 18 Feb 18 Mar 18 Apr 18

Net investment in Cash market

Note: April excludes Arbitrage Funds

cr

Confidential | 4

50.4 52.6

39.7

31.1

24.6

0

10

20

30

40

50

60

Nov-17 Dec-17 Jan-18 Feb-18 Mar-18

17.3 18.9 20.0 20.4 17.8

23.5

41.5

33.4

23.8

18.3

0

10

20

30

40

50

Nov-17 Dec-17 Jan-18 Feb-18 Mar-18

Credit growth (personal loans)

2 Wheeler Sales

Auto/Industrials - Commercial Vehicles which are generally a lead indicator of industrial recovery have seen strong YoY growth in

sales

Consumption - Most Consumer linked indicators are growing at ~20% rate yoy

Capital Goods - Sectors related to infra and Auto have seen significant jump in new order inflows

Manufacturing – Capacity utilization is showing signs of bottoming out

Source: DB, KIE, RBIYoY% growth

Domestic Economy showing greenshoots in both Consumption and Capital Goods linked sectors

54.9

-20

0

20

40

60

Q3 2016-17 Q4 2016-17 Q1 2017-18 Q2 2017-18 Q3 2017-18

74.1

60

65

70

75

80

85

2011 2012 2013 2014 2015 2016 2017 2018

Confidential | 5

10%

9%

9%

10%

10%

11%

11%

12%

Feb

-17

Mar

-17

Ap

r-1

7

May

-17

Jun

-17

Jul-

17

Au

g-1

7

Sep

-17

Oct

-17

No

v-1

7

Dec

-17

Jan

-18

Feb

-18

Mar

-18

Emerging Markets under pressure as monetary tightening is in motion, India protected till now due to strong Domestic flows

Since 31st Jan, Emerging markets have corrected by 7.8% , Nifty 50 has sustained due to Domestic flows

India PE Premium over Emerging Markets has increased in last 1-2 Years

QE Unwind program is gaining pace , Fed Balance sheet leaner by $112 bn in last 1 Year

As of 10th May 2018Source: DB, Bloomberg, CLSA

43%

25%

30%

35%

40%

45%

50%

Sep 16 Nov 16 Feb 17 May 17 Aug 17 Oct 17 Jan 18 Apr 18

India allocation In Growth & Emerging Market (GEM) funds has been declining due to rich valuations

4,250,000

4,300,000

4,350,000

4,400,000

4,450,000

4,500,000

4,550,000

Jul 14

Oct 14

Jan

15

Ap

r 15

Jul 15

Oct 15

Jan

16

Ap

r 16

Jul 16

Oct 16

Jan

17

Ap

r 17

Jul 17

Oct 17

Jan

18

Ap

r 18

-2.8%

-6.5%

-7.8%

-8.8%

-4.0%

-6.3%

-4.4%-3.6%

-12%

-9%

-6%

-3%

0%Nifty 50

NiftyMidcap MSCI EM Shanghai

SouthKorea Hongkong Thailand US

$ Mn

Confidential | 6

Earnings and Valuation

Mid Cap Index premium over large cap still above median4QFY18 Nifty 50 results have been in line with expectation, ICICI and Axis

major disappointments, Yes bank surprised with better than estimates

Consensus Earnings expectation of FY 2019 has been relatively stable compared to previous Fiscals

Valuation of Consumption oriented and IT companies have become richer*

17.7

21.4

15.6 16.9

0.0

5.0

10.0

15.0

20.0

25.0

Large Cap Mid Cap

Current 12M Forward PE 5 Year Median

21% Premium vs 8% AverageBloomberg Estimate

400

450

500

550

600

650

700

Apr 15 Jul 15 Oct 15 Jan 16Apr 16 Jul 16 Oct 16 Jan 17Apr 17 Jul 17 Oct 17 Jan 18Apr 18

FY 2019 FY2018 FY2017

0

2

4

6

8

Auto Banks Others Tech Telecom Nifty 50

Better In Line Worse

Source: Bloomberg, KIE * Based on KIE Estimates on free float basisAs of 10th May 2018

18.9 21.8

40.0

11.7

22.818.6 18.3

0

10

20

30

40

50

60

Auto Banking Consumers Energy Pharma Tech Nifty 50

PE 2019E Average Earnings Growth FY19E and FY20E

Confidential | 7

Key Triggers

• Global Economic data : World GDP growth rate improving

• Commodity Prices: Sustained high prices are expected to lead to high earnings growth in Steel/Oil sector

• Resolution of NPA: Effective addressal of NCLT lists

• Weaker Rupee: To benefit IT and Pharma

• Normal Monsoon/Rural recovery: Government focus on ruraleconomy including increase of MSP could benefit ruralconsumption

Positive Triggers

• Outflow from EM: US tax reforms and rising global rates could trigger capital flight from Emerging Markets like India

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

• Earnings: Consensus expected earnings growth for domestic equities is high at around 22% for FY19, any downgrade would make the valuations more expensive

• Trade Wars: Further tariffs imposed by US/China

• Weaker Macro: Higher crude prices and low GST collection could lead to de-rating of Equity valuations

• Higher Provisioning : Due to recent RBI rule and continued slippages, Banks could show high provisioning this FY also thus impacting Nifty EPS

• Slowdown in Retail Flows: Redemption pressure post 10% LTCG. 10-15% correction in markets is possible.

• State Elections: Elections in some of the major states are expected to be closely contested

Risks

Confidential | 8

India Equities: Valuations & Strategy – Maintain Neutral Stance

Domestic equity markets bounced back in the month of April after two consecutive months of decline. The Nifty ended the monthup by ~6%. FII flows into equity markets turned negative in April, but was balanced by net buying from domestic mutual funds.

At current levels of approx. 10,682 (17th May 2018), Nifty is trading at a 1 year forward PE of 18.5X. In the current scenario, wecontinue to maintain a Neutral stance..

Mutual Funds: As domestic liquidity continues to drive markets, we advise new investments to be staggered in Mutual Funds viaSIPs/STPs.

Recommended allocation within equity mutual funds is as under:

• 50% Large Cap allocation (Prefer Large Caps due to relatively Favorable Valuations)

• 50% Multi Cap allocation (such funds currently have a bias toward large cap)

• For investors who want equity exposure but have low appetite for volatility, they can take equity exposure through

Balanced Funds. Balanced funds have around 25% to 30% of their portfolio into Debt instruments which provides cushion

to the portfolio return during market volatility.

Source: EPS Estimates by KIE

Confidential | 9

Recommended Large Cap, Multi Cap & Balanced Fund Performances

Source: MFI ExplorerReturns are CAGR as on May 15, 2018 and for Regular Plans with Growth option. Corpus size is as on Apr 30, 2018.

Scheme Name Corpus (In crs.) 1 Year 3 Years 5 Years Investor Suitability

Large Cap Fund

Axis Focused 25 Fund 3714 17.87 16.29 17.36 All Risk Profiles except Secure

Franklin India Prima Plus Fund 11848 8.22 10.12 18.29 All Risk Profiles except Secure

ICICI Prudential Focused Bluechip Equity Fund 17142 14.02 11.98 16.41 All Risk Profiles except Secure

Kotak Select Focus Fund 19228 8.62 13.91 20.14 All Risk Profiles except Secure

Mirae Asset India Equity Fund 7479 12.76 14.13 20.03 All Risk Profiles except Secure

Index

Nifty 50 -- 14.36 9.34 11.93

Multi Cap Fund

Aditya Birla Sun Life Advantage Fund 6184 7.92 13.09 21.85 All Risk Profiles except Secure

DSP BlackRock Equity Opportunities Fund 5560 10.16 14.97 19.45 All Risk Profiles except Secure

L&T India Value Fund 8073 7.56 16.45 24.93 All Risk Profiles except Secure

Motilal Oswal Multicap 35 Fund 13131 11.91 16.92 -- All Risk Profiles except Secure

Index

S&P BSE 200 -- 12.80 10.51 13.58

Balanced Fund

Aditya Birla Sun Life Balanced 95 Fund 14662 7.73 11.15 16.33 All Risk Profiles except Secure

HDFC Balanced Fund 21779 9.84 11.89 18.72 All Risk Profiles except Secure

ICICI Prudential Balanced Advantage Fund 27123 8.55 9.71 13.96 All Risk Profiles except Secure

L&T Hybrid Equity Fund (Erstwhile L&T India Prudence Fund) 10572 9.13 11.88 18.29 All Risk Profiles except Secure

SBI Equity Hybrid Fund (Erstwhile SBI Magnum Balanced Fund) 23581 12.58 9.90 16.82 All Risk Profiles except Secure

Index

CRISIL Hybrid 35+65 - Aggressive Index -- 10.19 10.65 12.62

Debt Market Update &

Debt MF Strategy

Confidential | 11

Indicators

Policy Action

• Short end rates pricing-in rate hikes• The latest minutes captures hawkish commentary

from MPS• We expect repo rate to be unchanged as a base case

in next policy

Inflation

• April headline CPI was higher than expectations at 4.58% YoY.

• We expect CPI averaging around 4.3% for FY2019

10 Year G-Sec Benchmark Yield• G-Sec segment expected to be volatile• 10 Year Yield should hold in 7.60 to 7.90 range

Liquidity• Liquidity is close to neutral• OMO Purchase for Rs.10000 Crs announced

INR• Concerns over CAD and FII outflow put pressure

on INR• Witnessed sharp depreciation towards 67.30• Expect range of 66-68 to hold in near term

Key Risks• Global monetary tightening• Crude Prices• Impact of GST revenues and spending on Fiscal Deficit• Growth Recovery

G-Sec Supply• Four consequent G-Sec auction got devolved.• SDL auction are also being cancelled. • Weak demand sentiment amid low volumes

Debt Market: Key Variables

Confidential | 12

Yields over Feb end levels due to concerns on rising crude prices

Liquidity back to surplus levels post March end

April Inflation rose due to rise in crude prices, Core CPI also inched

higher

Note: As of 10th May 2018, Source Bloomberg

211

-1,000

0

1,000

2,000

Am

ou

nt

in R

s. B

n

G Sec Spread over Repo has fallen from peak of 170 bps to 113

bps

171

7.71

6.00

020406080100120140160180200

5.75

6.25

6.75

7.25

7.75

Spre

ad (

bp

s)

% Y

ield

Spread 10 Year G Sec Repo Rate

10 Year papers rallied the most in April, but have inched

higher than the Feb-end levels.

39

6658

50 48

3934

-70

-50

-30

-10

10

30

50

70

90

6.00

6.40

6.80

7.20

7.60

8.00

8.40

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

Sp

read

(b

ps

)

% Y

ield

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

4.58%

5.90%

Jun 17 Jul 17 Aug 17 Sep 17 Oct 17 Nov 17 Dec 17 Jan 18 Feb 18 Mar 18 Apr 18

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

CPI Core Inflation

Confidential | 13

Despite announced increase in FII limit, FIIs have stayed away from Indian Bond market

Brent at $78/bbl is above Fiscal estimates based on $68/bbl

Note: As 10th May 2018, Source Bloomberg, Nomura

FIIs buying slowing down due to rising global rates and

weaker INR

Indian currency has depreciated by ~ 5% in 2018

GST collections improve but could be due to seasonality

effect

77.47

Sep 17 Oct 17 Nov 17 Dec 17 Jan 18 Feb 18 Mar 18 Apr 18 May 18

50

55

60

65

70

75

80

$/bbl

67.04

Jun 17 Jul 17 Aug17

Sep 17Oct 17 Nov17

Dec17

Jan 18 Feb 18 Mar18

Apr 18 May18

63.0

63.5

64.0

64.5

65.0

65.5

66.0

66.5

67.0

67.5

68.0

Aug 17 Sep 17 Oct 17 Nov 17 Dec 17 Jan 18 Feb 18 Mar 18 Apr 18

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

US

D M

illi

on

1035

Aug 17 Sep 17 Oct 17 Nov 17 Dec 17 Jan 18 Feb 18 Mar 18 Apr 18

0

200

400

600

800

1000

1200

‘000 cr

vs USD

Confidential | 14

Debt Market Trends

Demand for Gsecs has been low across all Public/Private Banks and

MFs especially PSU Banks

Note: As of 10th May 2018, Source Bloomberg, MFI

6 Month and 1 Yields have also increased to almost 8%RBI and Govt. have announced sleuth of measures to

control upward yields movement

Gsec Yield curve is steep till 3 Year and then almost flattish,

hence it better to stay at the short end

7.93

7.73

Sep 17 Oct 17 Nov 17 Dec 17 Jan 18 Feb 18 Mar 18 Apr 18

6.00

6.50

7.00

7.50

8.00

8.50

1 Year CD6M CD

3.0 5.5 3.381.0 6.0 10.0 2.88

Minimum ResidualMaturity for FII

FII Limit Gsecs RBI OMO Net CentreBorrowing

0

2

4

6

8

10

12

Earlier Now

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

6.2

6.4

6.6

6.8

7.0

7.2

7.4

7.6

7.8

8.0

8.2

Years

% of OS

‘000 cr

Lac cr

Jan 18 Feb 18 Mar 18 Apr 18

-25000

-20000

-15000

-10000

-5000

0

5000

10000

15000

Public Banks Private Banks Mutual Funds

Rs cr

CCIL Gsec Net buying

Confidential | 15

India Fixed Income: Strategy

Substantial part of the portfolio should be deployed through a mix of high rated and credit accrual strategies. Exit from duration funds only for investors who have completed 3 years and can deploy with another 3 years view.

Investment Focus:

Passive Accrual-Oriented Debt funds

High quality portfolios (~100% AAA / Sovereign) Portfolio is run on a passive accrual basis i.e buying a bond and holding it till maturity thereby earning from the accruing of

interest Higher predictability of return, lower volatility & lower interest rate risk

High Yield Credit-Oriented Funds

Low volatility on account of maturity of portfolio between 3 – 5 years, attractive and stable accrual yields Experienced teams to carefully evaluate and tightly monitor high yielding debt instruments

Short Term Bond Funds

Actively managed to run a low avg. maturity of 2-3 years, attractive risk-reward Lower volatility and interest rate risk than Dynamic Bond Funds, better suited from a risk-adjusted basis in volatile markets

For investments up to 3 months, prefer Ultra Short Term FundsFor investments for atleast 6 months, prefer a mix of Ultra Short Term Funds and Arbitrage Funds.

Source : AMCs, other Financial websites

Confidential | 16

Recommended Short Term Bond, High Yield & Debt Others Performances

Source: MFI ExplorerrScheme Returns are as on May 15, 2018 and for Regular Plans with Growth option. Crisil indices returns are as on May 14, 2018. Returns are CAGR. Corpus size is as on Apr 30, 2018.

Scheme Name Corpus (In crs.) 1 Year 3 Years 5 Years Investor Suitability

Short Term Bond Fund

Aditya Birla Sun Life Short Term Fund 17,330 5.61 7.95 8.39 All risk profiles except Secure

Edelweiss Corporate Bond Fund(Erstwhile Edelweiss Corporate Debt Opportunities Fund)

293 5.06 7.17 -- All risk profiles except Secure

HDFC Banking and PSU Debt Fund 3,631 4.62 7.76 -- All risk profiles except Secure

ICICI Prudential Banking & PSU Debt Fund 5,875 4.85 8.34 8.17 All risk profiles except Secure

Index

CRISIL Short Term Bond Fund Index -- 5.08 7.53 8.12

High Yield Fund

Aditya Birla Sun Life Corporate Bond Fund 6,588 6.51 8.72 -- All risk profiles except Secure

BOI AXA Credit Risk Fund(Erstwhile BOI AXA Corporate Credit Spectrum Fund)

1,495 8.29 9.79 --All risk profiles except Secure & Conservative

ICICI Prudential Regular Savings Fund 10,409 6.39 8.07 8.27 All risk profiles except Secure

Kotak Income Opportunities Fund 5,244 5.49 8.23 8.27 All risk profiles except Secure

L&T Credit Risk Fund(Erstwhile L&T Income Opportunities Fund)

3,773 5.67 8.23 8.43 All risk profiles except Secure

UTI Credit Risk Fund(Erstwhile UTI Income Opportunities Fund)

4,538 5.55 8.12 8.28 All risk profiles except Secure

Index

CRISIL Short Term Bond Fund Index -- 5.08 7.53 8.12

Other Debt

ICICI Prudential Income Opportunities Fund 3,625 3.39 7.24 7.05 All risk profiles

LIC MF Bond Fund 322 1.32 5.61 6.05 All risk profiles

Sundaram Corporate Bond Fund(Erstwhile Sundaram Flexible Fund - Flexible Income)

362 3.31 7.41 7.13 All risk profiles

Index

CRISIL Composite Bond Fund Index -- 2.58 7.52 7.29

Confidential | 17

DisclaimerThe aforesaid is for information purposes only and should not be construed to be investment advice under SEBI (Investment Advisory) Regulations.

In the preparation of the material contained in this document, Kotak Mahindra Bank has used information that is publicly available, including information developed in-house. Some of the material used in the document may have been obtained from members/persons other than the Kotak Mahindra Bank and/or its affiliates and which mayhave been made available to Kotak Mahindra Bank and/or its affiliates. Information gathered & material used in this document is believed to be from reliable sources. KotakMahindra Bank however does not warrant the accuracy, reasonableness and/or completeness of any information. For data reference to any third party in this material nosuch party will assume any liability for the same. Kotak Mahindra Bank and/or any affiliate of Kotak Mahindra Bank does not in any way through this material solicit any offerfor purchase, sale or any financial transaction/commodities/products of any financial instrument dealt in this material. All recipients of this material should before dealingand or transacting in any of the products referred to in this material make their own investigation, seek appropriate professional advice

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