Kotak Mahindra Bank Limited, AMFI Registered Mutual Fund Distributor , ARN 1390


November, 2023



Monthly Market Review

Indian equities came under pressure along with global markets in October

• After the sharp outperformance in September, the Indian equity market saw some profit booking in October and slid 2.8%, marginally outperforming the global markets. FPI selling continued with INR 245.5 bn outflows in Indian equities in October; however, this was partly offset by the DII flows, which were favorable to the tune of INR 270 bn.

• We continue to maintain our neutral stance on Indian equities from a portfolio context and believe any further sell-off in Indian equities could offer a good buying opportunity. Relative risk-reward is favorable in large-caps versus mid and small-caps in the near term, in our view.

• Export-oriented and commodity-linked sectors such as chemicals, IT, textiles, and metals could underperform. In contrast, domestic-focused sectors such as cement, banks (including PSUs), real estate, and defense could attract buying interest on corrections. We maintain our positive view on the pharma sector.

• The festive season and the cricket World Cup could have a positive impact on economic activities and tax collections. The yields could remain largely range-bound while the INR may track global developments. We expect the ongoing geopolitical developments to have a limited impact on India's macroeconomic fundamentals unless they deteriorate materially in the next few weeks.



Source: Bloomberg; Data as on 31st October 2023




Indian Macro

Macro stability parameters in solid shape, consumption may need some support ahead of the elections

• The net financial savings of Indian households have fallen to a multi-decade low of just 5.1%, while their net financial liabilities have risen to 5.8% of GDP in FY 2023, up from 3.8% in FY 2022. This could be attributed to higher inflation eroding savings, as well as the financially weaker section of society borrowing more to make ends meet, in our view.

• This could lead to sluggish overall consumption demand in the medium term unless the government steps up spending to revive consumption before the elections.

• On the other hand, a surge in government spending, higher tax collections, a solid revival in the housing market, a spike in premium consumption, and improving credit penetration could lead to slightly better-than-consensus GDP growth in FY 2024, in our view. Furthermore, the festive season sales, wedding-related spending, along with the Cricket World Cup may help to revive certain pockets of consumption.

• The ongoing geopolitical tensions are a significant concern for global economic growth; however, unless the oil prices spike much higher from here onward, the impact on the Indian economy is expected to be limited in our view.






Indian Equities

Earning momentum weakens, prefer large caps over mid and small caps

• The earnings season so far has been lackluster, with the export-oriented (IT, Chemicals, etc.) and the consumption-oriented names ex-autos seeing a deterioration in the operating performance.

• Nevertheless, despite the higher interest rate environment, the banking and financial sector, real estate, and autos have performed relatively better. Within the consumption-oriented names, earnings were supported mainly by margin expansion, while the top line, especially the volumes, remained sluggish. We shall keenly monitor global developments, especially weakening growth in China, which may have some rub-off impact on commodity prices.

• Our investment committee believes the Indian equities will consolidate in the near term. We prefer pharma and domestically focused companies such as Banks (including PSUs), Cement, select NBFCs, Real estate, and defense-related companies where we believe the corrections could provide buying opportunities.

• Even after the broader market correction and faltering advance-to-decline ratio, the risk-reward is still favorable for large caps in the near term. We believe the domestic flows could remain sufficiently large to offset FPI selling and heighten capital raise in the coming weeks and months.





.

Domestic Market Performance

Indian markets end the month in red

Benchmark, Factor Indices & Sectoral Performance

Equity MF Category wise Performance (in %)



Source: Bloomberg
Performances are as of 31st October 2023




Domestic Indicator is indicating that we are back to neutral zone after correction in October




Data is as on 31st October 2023




Mutual Funds

Mutual Funds flows gained momentum; Strong SIP collections continue

Assets managed by the Indian MF industry has increased from INR 39.9 Tn to INR. 47.8 Tn in last 12 months with proportionate share of Equity schemes increasing from 51.2% to 54.1%

SIP flows increased to INR 160 bn and, overall MF Flows decreased to INR 140 bn in Sep'23 from INR 202 bn a month ago.




Source: AMFI




Equity strategy- A Snapshot

Neutral on Equities with focus on large cap






Recommended Equity Funds' Performances



Source: MFI Explorer Returns are CAGR as on Nov 08, 2023 and for Regular Plans with Growth option. Corpus size is as on Sep, 2023.




Recommended Equity Funds' Performances



Source: MFI Explorer Returns are CAGR as on Nov 08, 2023 and for Regular Plans with Growth option. Corpus size is as on Sep, 2023.




Recommended Hybrid Funds' Performances



Source: MFI Explorer Returns are CAGR as on Nov 08, 2023 and for Regular Plans with Growth option. Corpus size is as on Sep, 2023.







Indian Fixed Income

Global central banks paused their rate hiking cycle despite higher than desired inflation

• In October, Indian bond yields rose (10-year yield up 14 bps) following the October MPC meeting, fearing OMO sale by the RBI. We expect the bond yields to remain largely well anchored around this level, with some minor volatility in the coming weeks depending on global yield movements.

• While the inflation could remain higher than the 4% target, it should stay in the comfortable zone, in our view. We are enthused by India's overall central government's revenue collections, which rose over 17% YoY in the first six months of the fiscal year (versus the annual target of 10.5%). Additionally, GST collections for October came in at INR 1.72 trn, the second highest since implementation after April 2023 of INR 1.87 trn.

• Major central banks like the Fed, ECB, and BOE have paused their rate hiking cycles despite high inflation. On the other hand, in China, the PBOC has loosened liquidity conditions to arrest further downfall in economic activities. Japanese central bank has recently tweaked its yield control policies; however, this was a little dovish compared to market expectations.

• Overall, interest rates are peaking, and real rates are attractive, in our view. We recommend that investors gradually add duration to their portfolios in the coming months.



Source: Bloomberg; Data as on 31st October 2023




Fixed Income strategy

Focus on carry + Prefer 2-5 year maturity

  • Amid the rising global uncertainty, domestic macros continued to remain resilient. Terminal Repo Rate now expected to peak at 6.5%.
  • Going forward, yields are expected to be stable in near term, short term investors can prefer products in line or slightly longer than investment horizon to lock in yields. Following is preferred strategy
    • For investment horizon upto 12 months: Prefer allocation to arbitrage funds, ultra short term/ money market funds
    • For investment horizon of 1-3 years: Active funds (Short Term Funds / Banking & PSU / Corporate Bond Funds), target maturity funds (roll down strategies)
    • Horizon of more than 3+ years -
      • Equity Savings Fund, a mutual fund scheme, which had a 3 year historical median rolling return between 7-8%* can be preferred as an alternative option as it has potential to provide better post tax risk reward for long term investments






Recommended Debt Funds' Performances



Source: MFI Explorer. Less than 1 year Simple Annualized returns, Greater than or Equal to 1 year Compound Annualized returns. Returns as on Oct 12, 2023 and for Regular Plans with Growth option. Corpus size is as on Sep, 2023.




Indian Forex

INR remained stable amid heightened geopolitical tensions

• As the economic and defense ties with the USA show progress, we note that India's bilateral trade with the USA has also started to improve materially. In the current financial year YTD, the USA replaced India's largest trading partner with bilateral trade of USD 59.7 bn, higher than USD 58 bn with China.

• The INR has been under pressure amid global risk-off sentiment, aiding the rise of the dollar. Despite lower crude oil prices in October, the DXY index rose most of the month. We expect the INR to remain broadly stable in the coming weeks. We believe inflows in the Debt market and RBI intervention should offset any significant pressure on the INR, especially from FPI selling in the Indian equity market and risk-off episodes.

• The merchandise trade deficit improved to USD 19.4 bn in September 2023, the lowest gap in five months and below market expectations of USD 23.3 bn. Exports fell 2.6% on a YoY basis, while reduced oil imports led to imports falling -15% on a YoY basis.

• The RBI's forex reserves fell for a third straight month and closed at USD 584 bn, possibly due to FPI equity outflows, and probably also to defend the INR against the stronger USD. We expect the RBI to continue to support the INR in case the currency sees increased selling pressures and volatility.






Global Markets

Fed expected to remain on pause mode; China sees fresh contraction in manufacturing activity

USA - resilient economic activity despite high rates

• US September quarter GDP came in at 4.9% versus consensus expectation of 4.7%. The ongoing strength of the US economy and the Fed's commitment in keeping interest rates higher for longer have led to a rise in US government bond yields, negatively impacting equities and risk assets.

• However, as the stimulus impact fades and saving rate dwindles in coming months, the market expects consumption to see weakening trends. The Feb in its recent policy meeting once again paused their rate hiking cycle and

• Overall the US earning season so far has seen mixed performance and we expect the equities to see some correction in coming months given stretched valuations, especially relative to the bonds.


China - stimulus fails to lift sentiment so far

• MSCI China Index underperformed the MSCI All Country World Index by ~18.1% YTD.

• Despite the introduction of various measures by the government to support the economy including cutting interest rates and relaxing home purchase restrictions in select cities, the Chinese equities underperformed global markets in October as the domestic growth parameters continues to falter.

• China's manufacturing activity unexpectedly contracted in October with PMI index falling to 49.5 compared to forecasted level of 50.2, underlining the daunting task facing policymakers as they try to revitalize economic growth heading into the end of the year and 2024 amid multiple challenges at home and abroad.

• Despite cheap equity valuations, we remain little cautious on Chinese equities until we see signs of stabilization in the housing market.



Source: Kotak Institutional Equities Report




Global Market Performance

Equity markets weaken with South Korea and Russia the biggest detractors

Developed Market Performance

Emerging Market Performance



Source: Bloomberg
Data as on 31st October 2023




Disclaimer

In the preparation of the material contained in this document, Kotak Mahindra Bank Ltd, 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 Ltd and / or its affiliates and which may have been made available to Kotak Mahindra Bank Ltd and / or its affiliates. Information gathered & material used in this document is believed to be from reliable sources.Kotak Mahindra Bank Ltd 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 Ltd and / or any affiliate of Kotak Mahindra Bank Ltd 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 Ltd(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 Ltd(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 Ltd.This material is strictly confidential to the recipient and should not be reproduced or disseminated to anyone else Non-resident clients are advised to observe the limitations with regards to dealing in securities under the provisions of the Reserve Bank of India Act, 1934(2 of 1934) for Non-Resident clients since the same have not been considered while arriving at the recommendations / advice made in this presentation.

Mutual Fund investments are subject to market risks. Please read the offer document carefully before investing


Kotak Mahindra Bank Limited, AMFI Registered Mutual Fund Distributor, ARN 1390