Market Outlook March 2018 1
Equity Markets 2
Key Events – February 2018 • India’s 3Q GDP rebounded to 7.2% as negative supply shocks on account of the demonetization and GST seem to be fading away. Investment growth surged to double digits from 8.9% last quarter to 13% in 3Q in line with what we have been seeing with some high frequency indicators. • RBI kept its policy rates unchanged in line with street expectations however inflation forecasts were pushed up and growth forecasts pared down – indicating likely difficult policy challenges going forward. • Jan trade deficit widened to $16.3bn which is well above the recent average of $13.4bn – this was driven by a strong acceleration in imports to $40.7bn (+26%) as well as a slowdown in exports to $24.4bn (+9%) which was particularly pronounced in textiles and gems & jewellery. • India’s cabinet approved a plan to allow private companies to bid for coal mines for commercial production, a move that would help the country cut imports and boost local production. • India replaced Germany to reclaim the third spot on the Hurun Global Rich List 2018 with 131 billionaires. India added 31 new billionaires over the last year while the combined wealth of the Indian billionaires increased by 49% to $454 billion. • Indian equities (-4.9%) gave up all the gains from the early part of the year in the month of Feb with the heightened global volatility weighing on sentiment and FIIs turning large net sellers. The introduction of LTCG in the budget and the unraveling of the massive ~$2bn scam involving PNB and heightened global volatility were also viewed as a dampener by market participants. 3
Performance of Sensex and Nifty Indices 4 Source: Bloomberg, Kotak Institutional Equities
States ruled by the BJP in 2018 BJP continues to spread its presence across the country 5
RBI maintains status quo Liquidity remains comfortable for now – But can tighten RBI keeps policy rates unchanged in March??? …and expects GVA growth to pick up from 6.6% in RBI sees upward trajectory in inflation in 1HFY19… FY18 to 7.2% next year 6 Source: RBI
Corporate Governance Issues – Not limited to PNB alone Needs systematic overhaul 7 Source: CIBIL, RBI
GST collections remain weak assumptions for FY19 are optimistic… Trends in GST collections CGST assumptions for FY19 are optimistic Monthly CGST collection run-rate 8 Source: CLSA, CGA, Ministry of Finance(budgeted documents)
GST miss implies likely Govt tax revenue shortfall… Government Tax Revenue Estimates 9 Source: CLSA, Ministry of Finance
… Can it likely to be met through higher disinvestment? The gov’t has ample potential to keep disinvesting through its existing listed companies. More companies may also be added to this list Source: CLSA, Capitaline, Bloomberg
GDP growth at five quarter high - helped by capex (GFCF) pick-up GDP and GFCF Growth 11 Source: MOSPI
MSCI Puts India on watch.. Our take on it 12 Source: Economic Times
Corporate Earnings Scorecard encouraging performance so far (Excluding SBI)… Comparison of 3QFY18 net income of BSE-30 stocks, actual versus expected Notes: (a) Kotak Mahindra Bank is not under KIE coverage. We have used consensus estimates 13 Source: Companies, Kotak Institutional Equities Estimates
Market Performance 14
Strong Performance By Majority Sectors Over The Last 1 Year Pharma & PSU lagging in returns BSE Sectoral Indices 70 65.1 60 50 40 27.6 30 24.4 20.6 20.5 19.4 16.9 14.6 20 15.6 10 1.2 0 (0.4) (1.3) (1.6) (1.5) (1.9) (3.1) (4.3) (5.3) (4.2) (10) (5.4) (8.3) (6.3) (8.6) (8.6) (%) (20) Realty Metals Capital Bankex IT Services FMCG Tech Auto Oil & Gas Power PSU Healthcare Goods 1m return % 1 yr return % 15 *As on 28 February 2018, Source: Axis Capital, Bloomberg
Performance Across Market Cap - Strong Performance Down the Capitalisation Curve 35 32.4 30 25 22.3 21.1 19.3 18.2 20 16.4 In percent 14.4 15 13.0 10.5 10 7.7 7.2 5.6 5 0 (5) (3.1) (4.9) (5.4) (10) Nifty Nifty Midcap S&P BSE Smallcap 1m returns 1y returns 3 yr CAGR 5 yr CAGR 10 yr CAGR *As on 28 February 2018, Source: Bloomberg 16 Past Performance may or may not sustain in the future
Most Global Markets Had Strong Showing In The Last Year (6.2) HK (HSI) 29.9 0.5 Brazil (IBOV) 28.0 (0.1) Indonesia (JCI) 22.5 (4.3) US (Dow Jones) 20.3 (8.7) China (HSCEI) 20.2 (4.9) India (Nifty) 18.2 (5.4) Korea (Kospi) 16.1 (4.5) Japan (Nikkei 225) 15.4 (0.5) 13.6 Singapore (Straits) 0.3 Russia (MICEX) 12.8 (2.6) Taiwan (TSWE) 10.9 (0.7) Malaysia (KLCI - FTSE) 9.6 (2.9) France (CACS 40) 9.5 (5.7) Germany (DAX) 5.1 (4.6) Swiss (SMI) 4.2 (4.7) EURO (Euro Stoxx 50) 3.6 1M 1Yr (4.0) UK (FTSE 100) (0.4) (15) 0 15 30 45 17 * As on 28 February 2018, Source: Bloomberg. Performance data in local currency
Nifty performance across cycles 18 Source: Phillip Capital
Valuations 19
Stock Picking Will Be Critical Sensex sectoral long-term valuation snapshot: Forward PE* 80 70 60 Max 50 Top Quartile 40 30 Current 20 L ower Quartile 10 Min 0 Auto BFSI Engg FMCG IT Metals Oil Pharma Power Telecom Sensex Source: Axis Capital, Bloomberg Note: * Since April-2005 Power & IT at lower end of valuations, other sectors moving towards upper end of valuation zone 20 *As on 28 February 2018
Indian higher than most peers on Valuation P/E Multiple CY18/FY19 of Indices India (Sensex) 20.5 US (Nasdaq) 19.1 US (Dow Jones) 15.5 Japan (Nikkei 225) 15.7 Thailand (SET) 15.1 Malaysia (KLCI - FTSE) 15.4 Singapore (Straits) 13.1 UK (FTSE 100) 12.9 Brazil (IBOV) 11.5 HK (HSI) 10.9 Korea (Kospi) 8.8 China (HSCEI) 7.1 (x) 6 10 14 18 22 Source: Internal Estimates , Bloomberg 21 * For India & Japan Fiscal year is FY19 while others it is CY18
With Greater Power Comes Greater Responsibility MF Equity collections in CY17 were ~80% of collections in last decade Source: CEIC, AMFI, IIFL Research. Note: Based on sum of ‘ELSS’, ‘Other ETF’, ‘Growth’ and 65% 22 Of ‘Balanced’ category collections. * CY17 flows based on period of Jan to Nov -17
Trend In Equity And Derivatives Flows Net Investments by FPIs, DIIs and MFs in the cash market (US$ mn) Net foreign flows in the derivatives market (US$ mn) Notes: A) DII- Domestic Institutional Investors (Includes Bank, DFIs, Insurance, New Pension Scheme and MF) 23 B) FII data is till Feb 26, MF data is till Feb 23 and DII data is till Feb 27. , Source: Kotak Institutional Equities Research
Domestic Flows May Sustain Into Equity Funds In CY 18 • Mature investor base understanding the benefits of • Low FD Return compounding of equities as Flows to equities • Uncertain real asset class estate environment • SIP as a tool to counter volatility 24
Markets Consolidating As It Awaits Economy To Take Off Sensex ‘EPS’ Sensex P/E FY93-97 FY05-09 FY98-03 FY10-17 FY18-19e Past performance is not a reliable indicator of expected future performance 25
Key Variables & Their Impact On Equities Key Variables Short - Medium - Remarks term term Economy GST to impact near-term activity especially informal segment Improving operating leverage, falling interest costs and improvement in working capital can accelerate Corporate Earnings earnings, but a bit back-ended. Key is improvement in capacity utilisation India stands out among global asset classes with prospects of strong long term growth. FII Flow DII Flow Focus on improving financial savings of households Higher disinvestment target and repair of leveraged balance sheet to create supply in markets. Supply of paper Policy/Reform Election heavy year can dampen near term outlook for meaningful reform Initiative 26
27 Markets Above Fair Range 1.0 2.0 3.0 4.0 5.0 6.0 7.0 Feb-91 Feb-92 12-month forward Sensex P/B (x) Feb-93 12000 15000 18000 21000 24000 27000 30000 33000 36000 39000 Feb-94 Feb-95 Feb-96 Feb-15 Feb-97 Mar-15 Feb-98 Apr-15 Feb-99 Feb-00 Sensex P/B (x) - LHS May-15 Feb-01 Jun-15 Feb-02 Feb-03 Jul-15 Feb-04 Aug-15 Feb-05 Feb-06 Sep-15 Feb-07 Oct-15 Feb-08 Nov-15 Feb-09 12-month forward Sensex P/E (x) Fair 13x - 17x Feb-10 Dec-15 Feb-11 Jan-16 Feb-12 Feb-13 Feb-16 Feb-14 Fair Value Plus 17x - 20x Mar-16 Feb-15 Attractive 10x - 13x Cheap 8x - 10x Feb-16 Apr-16 Feb-17 May-16 Feb-18 Stretched 20x - 24x Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 India’s Market Cap to GDP (%) Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18
While Valuations Not Cheap, Patience To Be Key As We Await Earnings To Pick Up While equities may still be out-performing other alternate asset classes, moderate return expectations Corporate earnings, especially of domestic oriented companies showing improving trend Use intermittent volatility to increase equity exposure 28
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