Equity & Debt Strategy

Transcription

1 Equity & Debt Strategy Mid June - July 2016

2 Equity Market Update & Equity MF Strategy

3 Summary: Global indices earnings growth & valuations Source: Bloomberg, Current Index is as on 10 th Jun 16 Confidential 3

4 Global Overview: 2016 looks to be a challenging year Global GDP growth projected to be above 3%, downside risks given weak US GDP in first quarter (0.5%), and shocking jobs data for the last month. Global earnings growth shows deceleration (CY14: 4.9% & CY15: -0.6%) Dollar Index has retreated from the highs, but is range bound without much downward bias China is stabilizing, fears of Yuan depreciation have diminished, capital outflows have shown signs of reversal but commodities are pulling back on massive speculation. Key points of debate: Britain s exit from EU, and if it happens what is the potential impact on the global financial markets? The probability of US Fed Action amid weak jobs data and slower economic growth and options for the fed. The resolve of the world powers in the G7 to work together on improving economic prospects through Fiscal, structural and monetary measures given domestic compulsions Source: Bloomberg, KIE, Internal Confidential 4

5 Global Growth: U.S. & U.K. to drive global growth in CY16 Global GDP growth is projected to be above 3% for the next two years. Hopes are Eurozone will continue to grow in CY16. U.K. is expected to maintain growth momentum in CY16. China & India are likely to grow at 6-8% in CY S. Korea could grow at ~2.5-3% & Japan at %. US kept up the growth momentum in CY15. CY16 and CY17 are likely to see growth of 2% or above. Source: Bloomberg Confidential 5

6 Global: Indices, commodities & INR performance (as on 31 May 16) Confidential 6

7 India: Sector Performance (as on 31 May 16) Sector-wise Performance (May 16) May 16 saw a rally in the market with Nifty (+4.0%) & Sensex (+4.1%) posting good returns. For May 16, Capital Goods (+9.6%) & Banking (+5.2%) were the biggest gainers, while Healthcare (-2.2%) & Oil & Gas (-0.4%) posted lowest returns. Other sectors which performed better than Nifty/Sensex in May 16 were: Auto (+4.8%), Realty (+4.7%) & FMCG (+4.5%). Other sectors which performed worse than Nifty/Sensex in May 16 were: Consumer Durables (- 0.2%), Metals (-0.1%), Power (+1.4%), Teck (+1.7%) & Infotech (+2.2%). On YTD basis, Healthcare (-9.8%), Power (-4.4%) & Oil & Gas (-2.4%) have given the least returns, while Metals (+7.5%), Realty (+5.7%) & Infotech (+4.7%) & Auto (+4.6%) have given the best returns. On YTD basis, Nifty (+2.7%) and Sensex (+2.1%) have posted positive returns. Confidential 7

8 India: Indices Performance (as on 31 May 16) Good corporate results, forecast of above normal monsoon, strong US home sales data, government s approval on the National Capital Goods Policy & the passage of bankruptcy bill in Rajya Sabha drove the rally in the market. Though weak Chinese factory data, changes in the India-Mauritius tax treaty, disappointing CPI & IIP data weighed on the market at the start of the month. FY17 started positively with Sensex and Nifty Indices posting 2.1% and 2.7% returns on YTD basis, respectively. On the other hand, CNX Mid Cap index was down 0.8% and BSE Small Cap index was down 5.9%. Confidential 8

9 Apr-05 Nov-05 Jun-06 Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11 Apr-12 Nov-12 Jun-13 Jan-14 Aug-14 Mar-15 Oct-15 May-16 Dec-16 Valuations: India remains expensive vis-a-vis other emerging markets Source: Kotak Institutional Equities 80% 60% 40% 20% 0% -20% MSCI India Premium vs MSCI World (1-yr FW Basis) India earnings as expected has picked up from the lower base, with fourth quarter results being better than the consensus expectations Despite better growth,india looks slightly expensive vis-a-vis its peers in EMs. However, there is expectation of good monsoon and if govt. is able to push GST reform, then from FY17E perspective, India may look only moderately expensive. Source: Kotak Institutional Equities Confidential 9

10 Macros: GDP FY2016 real GDP growth at 7.6%; real GVA growth at 7.2% 4QFY16 real GDP growth at 7.9%; real GVA growth at 7.4% We expect FY2017 real GVA growth at 7.7% IMF sees India as the fastest growing amongst major economies with GDP growth of ~7.5%, compared to 7.2% in FY15. Monsoon is expected to be above normal, there is good possibility of wider distribution Confidential 10

11 Macros: IIP April IIP growth at (-) 0.8% much lower than ours and consensus expectation. Manufacturing sector growth at (-)3.1% Capital good growth at (-)24.9%; Consumer goods growth at (-)1.2% Consecutive six months of negative capital goods growth does not instill confidence in the private capex cycle recovery. Confidential 11

12 Macros: Inflation (CPI) May CPI inflation increased to 5.76% after 5.47% in April. The increase in the headline print was largely on account of food inflation, which increased to 7.6% after 6.4% in April, with broadbased increases. While there are upside risks emanating from higher crude prices and 7CPC implementation, KIE expects price pressures on volatile food items to ebb in the subsequent months. Core inflation, however, softened marginally to 4.48% from 4.69% in April. Kotak Economic Research continues to monitor the monsoon outturn and retain their call for a 25 bps rate cut in 2HFY17. Confidential 12

13 Macros: Inflation (WPI) WPI inflation registered second consecutive positive reading, after almost 1.5 years of contraction. May WPI inflation printed 0.79%, after 0.34% in April. Notably, food inflation mirrored the trends shown in CPI inflation, picking up sharply to 7.88% after 4.2% in April, helped by sequential pickup across the board, primarily vegetables (14.4% mom), pulses (7.0%) and egg, meat & fish (1.5%). Non-food primary goods articles eased to 4.5%. As the base effect wanes, Kotak Economic Research expects FY2017 WPI inflation to average 3% against (-)2.5% in FY2016. Core inflation, on the other hand, has remained in the negative territory, printing (-)0.43% in May from (-)0.75% in April. Core inflation is expected to turn positive from 2QFY17 and average1.4 % in FY2017 against (-)1.5% in FY2016. Confidential 13

14 Macros: Monsoon IMD maintains monsoon rainfall at 106% of LPA July and August likely to receive rainfall of 107% and 104% of LPA North-west, central and south peninsula to receive rainfall 813% above LPA; north-east at 6% below LPA IMD forecasts above normal monsoon in FY17 Confidential 14

15 Flows: Foreign & Domestic net investments After huge inflow in March for the Emerging Markets, April,may witnessed moderation in FII Flows,In June so far we have witnessed some positive momentum. The capital outflows from China have stabilized, lower volatility in currencies have led to some stability in the EMs. Moderation in Dollar index, and weak economic data from US suggest fed to hold on June rate hike which will be positive for the flows. Source: Kotak Institutional Equities Confidential 15

16 India Sectors: Earnings growth & valuations FY17E to FY18E earnings growth is expected to be in a range of 12-20%; Q4 results were better than expectations and suggest very low probability of downgrade. Focus on sectors which are likely to report earnings growth above that of Nifty on a CAGR basis between FY16 & FY18E. These are: - Automobiles, Banking, Industrials, Metals & Mining, Pharmaceuticals and utilities Confidential 16

17 India Valuations: Trading close to 10 yr averages (i.e. on P/E, PBV & EV/EBITDA) On one year forward earnings, Sensex (26396) trades at~ 17x (i.e. on June 17E EPS of Rs.1520) KIE EPS estimates: FY16: Rs.1290 (1289) FY17E: Rs.1484 (1502) Consensus EPS : FY17E: Rs.1646 (1725) We continue to maintain our our PE range to 15xto-17.5x. This is mainly on the back of positive leading indicators. However if the GST reform materialize the range is expected to move to 15-18x Confidential 17

18 India Earnings: Q4 preview The earnings of the Sensex companies have grown at 7.5% ahead of our expectation of 6.7%. the growth ex-energy was higher at 10.1% Net profits of the BSE- 30 Index excluding banking companies were 8% ahead of expectations. Banks reported very high loan-loss provisions in 4QFY16 pertaining to fresh impaired assets. Adjusted EBITDA of the BSE-30 Index increased 14.5% yoy versus our expectations of 12.3% Confidential 18

19 India Equities: Outlook G7 meeting was successful with concluding statement : we commit to strengthening our economic policy responses in a cooperative manner and to employing a more forceful and balanced policy mix, in order to swiftly achieve a strong, sustainable and balanced growth pattern. Thus guidance is amply clear for more international cooperation including fiscal cooperation hence lowering of risk in terms of the market volatility With the disappointing GDP and Jobs data,the US Fed is likely to go slow on the rate hikes; this move is likely to provide stability to the emerging market currencies in the medium term. ECB reiterated commitment to continue QE for an extended period of time, if required. The Bank of Japan has suggested that policy makers will not hesitate to expand monetary stimulus in order to achieve their 2% inflation target. Thus, the accommodative monetary policy adopted by most of the influential central banks is likely to continue. The extraordinary expansion in the balance sheet of the central banks could be a structural risk, however we do not see it materializing in the short term. The domestic monsoon is expected to be above normal; this along with Government capex, 7 th CPC, and focus on the rural sector is likely to contribute to the recovery process in India. The initial quarterly numbers suggest low probability of downgrades in FY17. Sensex at levels is trading at a valuation of approximately 17x on a one year forward basis. Confidential 19

20 Key risks: Mainly stems from global factors The risk of Brexit has gone up with more surveys indicating lead of leave campaign. Confidence in policy traction is slipping amid concerns about the ability of overburdened monetary policies to offset the impact of higher economic and political risks. The US has been witnessing fragile recovery which is reflected by volatile data points. A sharper correction in the Chinese or any other major economy could have negative spill over effect on the US growth. Emerging markets run the risk of broad-based selling if the US Fed moves contrary to expectations and decides to consistently raise rates in CY16 & thereafter faster depreciation of the yuan or increase in the geopolitical tensions could lead to higher volatility. Fall in the global trade has been a major risk for the trans-border flow of liquidity and global growth. Earnings downgrades is a global phenomenon due to currency movements and fall in global trade. China is in the midst of shifting from investment to consumption driven economy. This is leading to medium term slowdown in their economy, this coupled with excessive leverage could be potential source of global commodity and currency volatility. The crude and other commodity prices have stabilized to some extent, any return of the volatility could derail the stability in the markets. On the domestic front we might witness some currency volatility on FCNR related expectations of tightening of liquidity, the risk of monsoon being lower than expectation also remains a major risk. Confidential 20

21 Strategy: Continue to remain Neutral On the global front we are witnessing signs of risk to expected growth of ~3.5%. On the domestic economic front, Monsoon is expected to drive the rural economy, further leading indicators like diesel sales, MHCV and LCV sales, air traffic, direct and indirect taxes, electricity, cement and construction equipment production etc. are pointing to economic recovery. The recent Rajya Sabha elections points to increased probability of GST reform. The government capex spending is likely to positively affect industrial sector. But private capex continue to lag. With signs of economic revival, expectation of better monsoon, and the Q4 result numbers being better than expectation suggest the risks of downgrades have reduced considerably. However at this point we are not changing our conservative stance and expect Sensex EPS for FY17E at Rs.1484 & that of FY18E at Rs Assigning the forward PE of 17x (slightly below last 10 years average) our Sensex target would work out to an upside of approx. 15% from current levels of On the immediate downside, we expect the market to take support at 15x, which works out to Sensex levels of ~22,800, which is approx. 14% downside from current levels. Thus on risk reward basis, we continue to maintain Neutral stance. Confidential 21

22 Equity MF Strategy Recommended allocation within equity mutual funds is as under: - 100% Large Cap allocation - This allocation to Large caps can also be taken through Opportunistic Funds which currently have a bias towards Large cap Confidential 22

23 Debt Market Update & Debt MF Strategy

24 RBI policy: Pause on rates and focus on liquidity easing RBI expectedly kept the policy rates unchanged but emphasized on its aim to reach neutral banking system liquidity over a period of time. With the recent inflation resurgence, RBI reckoned considerable uncertainty around the inflation outlook, but maintained the forecast unchanged from April policy. RBI highlighted upside risks to inflation such as (1) pickup in food inflation beyond the seasonal effects (especially in items such as pulses and sugar), (2) sticky services inflation and (3) reversal in commodity prices On growth, RBI retained the real GVA growth projections for FY2017 at 7.6%, premised on improving consumption demand and some private capex crowding in of public investment. The immediate policy focus will continue to be on better transmission of past rate cuts and assessment of domestic liquidity backed by RBI s new liquidity management framework. On the policy strategy with regards to managing volatility around the period of upcoming FCNR (B) maturities during September-December, RBI reassured of its readiness to offset any INR liquidity shortfall, or do FX intervention, if needed Source: RBI website Confidential 24

25 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Liquidity As of June 09, 2016 banking liquidity deficit was Rs Cr compared to Rs 1 lakh crore for month of May The pace of OMO purchases ( Rs 70,014 crore FYTD of net OMO purchases compared to Rs 52,324 crore in FY16) in July- August is likely to fade given the expected easing in system liquidity on the back of seasonal payback in CIC, RBI s dividend declaration to the government and likely Rupee liquidity through FX intervention. 3,500 3,000 2,500 2,000 1,500 1, (500) (1,000) (1,500) Govt surplus cash balance (Rs. bn) Total systen liquidity deficit (Rs. bn) Source: Kotak Institutional Equities Confidential 25

26 Macros: CPI CPI inflation continued to move higher in May led by increase in food prices. May CPI inflation increased to 5.76% after 5.47% in April (Kotak Estimate: 5.7%, consensus estimate: 5.6%). The increase in the headline print was largely on account of food inflation. A favorable monsoon can keep a lid on the speculative pricing and help in keeping inflationary pressures at bay. Core inflation, however, softened marginally to 4.48% from 4.69% in April Our inflation trajectory mostly mirrors that of RBI, with the 4QFY17 inflation expected to average 4.8%, and end-fy2017 inflation around 5% mark Confidential 26

27 Ten Year G-sec & Repo Spread above historical average 10 Year G-sec spread over Repo is currently trading at 98 bps against average of 79 bps over last 10 year. Source - Bloomberg Confidential 27

28 10 Year AAA PSU Spread over G-sec 10 Year AAA PSU Bond spread over G-sec is marginally below historical levels. Current spread at 86 bps against average spread of 88 bps in last 5 years. Corporate Bond spreads could widen on account of supply and possibility of FII selling Source : Bloomberg Confidential 28

29 Global Rates Spread between Indian ten year G-sec and US 10 Year Treasury currently at 5.81% substantially above historical average spread of 4.96% in last 10 years; thus giving Indian Bonds enough cushion even if US rates were to go up. Source - Bloomberg Confidential 29

30 SDL Yield Attractive Spread G-Sec SDL Spread Source: CCIL, Bloomberg SDL s trading at spread of 60 bps over G-sec Spread over 60 bps existed only 27% of the times in last 5 years Median spread between SDL & G-sec is 46 bps Confidential 30

31 CP s at attractive spread over CD CP s are getting traded at 1.15% over CD s against five year average of 44 bps Source - Bloomberg Confidential 31

32 Themes to invest in Bond Market in Current Environment Possible volatility due to FCNR outflow during the September-November period We would recommend not to invest in long duration as there could be some volatility on account of FCNR outflows. Post the event we would review the strategy on long bonds The risk of maturity mismatches will cause swings in FX reserves and hence INR liquidity Limited scope for rollovers as ~85% of FCNR deposits were from leveraged funds Long bonds yield movement would be dependent on pace of RBI OMO during that period Attractive Absolute Yield & Spread Invest through State Development Loan s (SDL s) for Held to Maturity Attractive Yield Play thru High Yielding Funds/ FMP s (allocation based on investor risk profile) In last 1 months high yield funds have underperformed duration strategy. Rate cut by RBI has not impacted the yields in the credit segment significantly thus the segment could do well going ahead. Held To Maturity Invest through FMP s and roll down open ended debt products having 5 year maturities. Confidential 32

33 Risks CPI overshooting RBI s projection Unwinding of positions by FIIs in Indian Debt / Equities Any major geopolitical risks and disruption in crude supplies could hurt India. Sharp reversal in direction of global commodity prices leading to widening of fiscal deficit Sudden changes in global monetary policies Volatility due to FCNR outflow during the September-November period Confidential 33

34 Disclaimer The 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 inhouse. 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 may have 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. Kotak Mahindra Bank however does not warrant the accuracy, reasonableness and/or completeness of any information. For data reference to any third party in this material no such 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 offer for purchase, sale or any financial transaction/commodities/products of any financial instrument dealt in this material. All recipients of this material should before dealing and or transacting in any of the products referred to in this material make their own investigation, seek appropriate professional advice We have included statements/opinions/recommendations in this document which contain words or phrases such as "will", "expect" "should" and similar expressions or variations of such expressions, that are "forward looking statements". Actual results may differ materially from those suggested by the forward looking statements due to risks or uncertainties associated with our expectations with respect to, but not limited to, exposure to market risks, general economic and political conditions in India and other countries globally, which have an impact on our services and / or investments, the monetary and interest policies of India, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices, the performance of the financial markets in India and globally, changes in domestic and foreign laws, regulations and taxes and changes in competition in the industry. By their nature, certain market risk disclosures are only estimates and could be materially different from what actually occurs in the future. As a result, actual future gains or losses could materially differ from those that have been estimated Kotak Mahindra Bank (including its affiliates) and any of its officers directors, personnel and employees, shall not liable for any loss, damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss of profit in any way arising from the use of this material in any manner. The recipient alone shall be fully responsible/ are liable for any decision taken on the basis of this material. The investments discussed in this material may not be suitable for all investors. Any person subscribing to or investing in any product/financial instruments should do so on the basis of and after verifying the terms attached to such product/financial instrument. Financial products and instruments are subject to market risks and yields may fluctuate depending on various factors affecting capital/debt markets. Please note that past performance of the financial products and instruments does not necessarily indicate the future prospects and performance thereof. Such past performance mayor may not be sustained in future. Kotak Mahindra Bank (including its affiliates) or its officers, directors, personnel and employees, including persons involved in the preparation or issuance of this material may; (a) from time to time, have long or short positions in, and buy or sell the securities mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation in the financial instruments/products/commodities discussed herein or act as advisor or lender / borrower in respect of such securities/financial instruments/products/commodities or have other potential conflict of interest with respect to any recommendation and related information and opinions. The said persons may have acted upon and/or in a manner contradictory with the information contained here. No part of this material may be duplicated in whole or in part in any form and or redistributed without the prior written consent of Kotak Mahindra Bank. This material is strictly confidential to the recipient and should not be reproduced or disseminated to anyone else This material is not a research report as per the SEBI (Research Analyst) Regulations, Mutual Fund investments are subject to market risks, read all scheme related documents carefully. Confidential 34