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

April, 2022

Equity Outlook

➢ Despite multiple headwinds like geopolitical tensions between Russia and Ukraine, impending rate hike by Central Banks, rising crude prices, Indian markets (Nifty 50) delivered a return of 4% in the month of March 2022 and ~19% in FY 22

➢ The macro environment continues to remain challenging with persistent Inflation, rising bond yield (domestic and global), rising rate cycle and ongoing geopolitical crisis.

➢ Brent crude oil futures moved from US$64/bbl to a high of ~US$140/bbl in FY 22. Oil prices, currently hovering around $ 100-110 mark, has adverse impact on India's Current Account Deficit (CAD), GDP and inflation.

Indian Markets still trades at a valuation premium compared to its historical averages and other emerging markets

➢ Markets may continue to consolidate and remain volatile in the near term with news flows around Russia - Ukraine conflict, persistently higher inflation, central banks' action on policy tightening etc.

➢ Market may witness diverge sectoral impact with sectors having oil & derivate as raw material getting impacted adversely while BFSI, IT may have lower impact. BFSI is preferred sector.

Risks to downside has increased with the recent rebound and elevated valuation.

Return expectation over next 6-12 months need to be anchored. Investors need to have a long term investment horizon

Source: Bloomberg

Investment Strategy

➢ Risk to downside has increased with recent rebound.

Stay invested and maintain neutral stance

Large cap allocation at 80% with rebalancing towards strategic asset allocation.

➢ Preference to defensive strategies which have low volatility/ hedge built in e.g. Balanced Advantage MFs etc.

➢ Reduce exposure from high beta strategies towards market neutral strategies which offers lower volatility

Staggered investment over 3-6 months

Global MF allocation* at 25% of the equity allocation depending on risk profile

*Note:- SEBI has directed all asset management companies to stop accepting fresh inflows in mutual fund schemes which have a mandate to invest in overseas securities. The reason to stop allowing fund houses to collect fresh funds is in view of the impending breach of the industry-wide overseas investment limit of US $ 7 billion as currently permitted by RBI. Therefore, temporarily, all fresh purchases, switch-in, new SIP or STP registration will not be able to made in most of the international funds

Source: Bloomberg

Volatile March month for markets globally

Indian equities have been amongst the best performing markets since Jan 2020; 2022 CY YTD has been a volatile start for Indian and global indices

Key Highlights

➢ From pre pandemic levels of 1 Jan 20, Indian markets have outperformed most global markets. MSCI India is up ~48% as compared to MSCI Emerging Markets (~+8%; dragged down by Russia & China) and MSCI Europe (~+7%; due to the ongoing Russia-Ukraine war crisis)

➢ Globally, most of the major markets recovered from early March lows on the development of truce talks between Russia - Ukraine and resultant cool-off in crude oil prices after touching 14 year highs.

Source: Bloomberg
Performances are as of 31st Mar, 2022

MFs continue to get strong flows with SIP collection contributing most of the flows

Assets managed by the Indian mutual fund industry has increased from ₹ 32.4 trillion in April 2021 to ₹ 38.6 trillion in February 2022 with proportionate share of Equity schemes increasing from 42.4% to 48.2% with M.T.M movement contributing the most

SIP contribution in FY 2022 has crossed ₹ 1,00,000 cr with SIP transactions over ₹ 10,000cr for 6 consecutive months.

➢ A total of 18 new Equity schemes were launched by various AMCs and were able to garner over ₹3,310cr from them in the month of February

➢ In current FY till January, there have been over 130 schemes which have been launched garnering over ₹91,297cr of AUM

Source: AMFI

Rising Bond Yields driven by entrenched inflation

Vaccination rates have plateaued in the most of the geographies

Bond yields both in the domestic and global markets inched higher on account of persistently higher inflation, geo-political uncertainties and expectation of faster interest rate hike cycle implemented by Federal Reserve

Federal Reserve Monetary Policy
US Fed embarked on a monetary policy tightening cycle by hiking interest rates by 25 bps amid a strong economy, decadal-high inflation and a tight labor market. Fed will also begin reducing the size of the Fed's balance sheet from subsequent meetings

Bank of England Monetary Policy Meeting
Bank of England's Monetary Policy Committee (MPC) increase Bank Rate by 0.25 percentage points, to 0.75% and decided to begin to reduce the stock of UK government bond purchases, financed by the issuance of central bank reserves. This was the third instance when the policy rates have been increased

European Central Banks Monetary Policy Meeting
European Central Banks decided on keeping key interest rates unchanged despite record rise in inflation on concerns around the uncertainties arising from the Russia-Ukraine war

Bank of Japan Monetary Policy Meeting
Bank of Japan maintained status quo by keeping the key interest rates unchanged on concerns around the uncertainties arising from the Russia-Ukraine war

Source: Bloomberg

Domestic macro indicators

India's GDP grew 5.4% in Q3FY22 which was lower than expected estimates and is likely to grow at 8.9% in 2021-22.

Composite PMI came in at 53.5 in Feb 2022, and has remained above 50 in the last 6 months

GST collections in March was at record high at ₹ 1.42 lakh crs and it has been consistently been higher than ₹ 1.3 lakh crs for the past 6 months.

Selling pressure from FPIs in the secondary market in the last few months have resulted in net outflows

Source: Bloomberg, CDSL

Domestic macro indicators

Forex Reserves have seen a dip from 629 Bn USD to 617 Bn USD on account of surging oil prices

Feb CPI inflation was at an 8 month high level and has inched past RBIs target inflation level of 2% to 6%

Trade deficit jumped to $18.7 Bn in Feb 22 from $12.6 Bn a year ago primarily on account of rising crude oil prices

Lending and Term deposit rates have been in line but tad bit lower than FY 20 numbers

Source: Bloomberg, RBI, Ministry of Commerce

Global recovery might get impacted due to ongoing geo-political tensions

Global growth in FY 22 to be led by key geographies

Global economies have showed recovery however Covid surge along with rising inflation rates has impacted the recovery path

PMI numbers reflect global recovery post omicron led COVID wave

Global Negative-Yielding Debt has come down to USD 2.9 Trillion from USD 5.7 Trillion last month

Source: Bloomberg
*Feb 22 Composite PMI

Other global macro indicators:- Liquidity, Dollar Index & Oil prices

➢ Global liquidity has eventually began to normalize with tapering announcement by various Central Banks

➢ US Fed in the FOMC meeting had announced that it would ramp up the speed at which it pares its bond purchases, putting the nation's central bank on course to eliminate the emergency quantitative easing (QE) program a few months earlier than expected

➢ Federal Reserve and Bank of England had both resorted to interest rate hikes in the month of March.

Dollar Index has seen an increasing trend and has been at its strongest levels along with U S yields on investor concerns around Federal Reserve starting their withdrawal of policy support and hiking interest rates

Due to the geopolitical conflict, crude oil prices rallied with Brent crude touching 14 year high levels of $140 /bbl Crude oil prices have increased significantly over the past two months In FY 22 Brent crude oil futures moved from US$64 bbl to a high of ~US$140 /bbl

Source: Bloomberg

Indian markets bounced back from early March lows amid evolving geopolitical situation between Russia and Ukraine

Benchmark, Factor Indices & Sectoral Performance

Equity MF Category wise Performance (in %)

➢ Nifty Index rallied 4% despite multiple headwinds witnessed in the month of March

➢ Broader market outperformed Nifty with Mid and Small Cap Indices rallying 5.2%, & 6.0% respectively

➢ Most of the Sectoral indices were in green with IT and Energy leading the rally by being up by 7.3% and 6.6% respectively.

Performances are as of 31st Mar, 2022
Source: Bloomberg

Globally equity markets continued to remain volatile amid the Russia - Ukraine conflict

Developed Market Performance

Emerging Market Performance

➢ Possibility of truce talks between Russia and Ukraine led to bounce back in most of the major global markets.

➢ China corrected further on account of rising COVID cases and lockdowns in major cities like Shanghai

➢ Geo-political tension can keep the equity markets volatile in the near term

Performances are as of 31st Mar, 2022
Source: Bloomberg

Valuation at premium while yield gap, though increasing, is within historical range

(1) The market is trading well above its long-term 12-month forward. The composition of the index has also changed in favor of high quality, higher P/E stocks in the past few years
(2) The yield gap (difference between bond and earnings yield) has increased with rise in bond yield

Nifty 50 Index valuation after witnessing some correction post scaling new highs is still at the top end of historical range

Performances are as of 31st Mar, 2022
Source: Bloomberg

Markets, after recovering from recent lows, are still trading at premium in expectation of strong earnings growth

Majority of the benchmark and sectoral indices are currently trading at premium to their historical averages, while some sectors which have seen some correction are trading at a discount to their historical averages

A broader market recovery has led to recovery in Market Cap to GDP

Earnings recovery is expected to continue into FY23

Performances are as of 31st Mar, 2022
Source: Bloomberg

Global markets have seen some recovery but many of them trading still below their long term historical averages

US and MSCI Developed market Index are trading at relatively higher premium compared to the European counterparts

Indian markets are trading at relatively higher premium compared to their peers historical averages

Performances are as of 31st Mar, 2022
Source: Bloomberg

Key events to watch out for


➢ RBI Monetary Policy

➢ Q4FY22 results and management commentary

➢ Inflation impact due to spurt in Oil prices

➢ Macro economic indicators
  • ➢ GDP
  • ➢ CPI, WPI
  • ➢ PMI
  • ➢ Bond Yields


➢Evolving situation of geopolitical conflict between Russia and Ukraine

➢Federal Reserve minutes and action taken w.r.t interest rate hike

➢Inflation and Bond Yields

➢Rising Covid cases in China and actions taken by the government

➢ Macro economic Numbers

  • ➢ Services & Manufacturing PMI, CPI, WPI from various geographies

Source: Bloomberg

Key risks to the markets

➢ Escalation of geopolitical tensions between Russia & Ukraine

➢ Sustained high crude oil and commodity prices could impact economy and earnings in some sectors

➢ Any negative surprise in Q4 FY 22 results

➢ Faster than expected policy tightening & stimulus withdrawal along with faster than expected interest rate hike by Global Central Banks

➢ Potential slowdown in Domestic Institutional buying in Indian markets who have till now been maintaining a balance in the market on the back of sell off seen from FII's in the last few months

Source: Bloomberg

Recommended Equity Funds' Performances

Source: MFI Explorer Returns are CAGR as on April 18, 2022 and for Regular Plans with Growth option. Corpus size is as on March, 2022.

Recommended Equity Funds' Performances

Source: MFI Explorer Returns are CAGR as on April 18, 2022 and for Regular Plans with Growth option. Corpus size is as on March, 2022.

Recommended Hybrid Funds' Performances

Source: MFI Explorer Returns are CAGR as on April 18, 2022 and for Regular Plans with Growth option. Corpus size is as on March, 2022.

Fixed Income Market: The Month Gone By

  • "Volatility has no bounds" - An action packed month yet again with global events (Russia - Ukraine Crisis and its impact on global markets) dictating domestic bond yield movements.
  • Sanctions imposed on Russia after it invaded Ukraine had curtailed oil supply and sent the Brent crude oil contract to 14-year highs of near $140 per barrel in the month of March, a level last seen in July 2008.
  • However, with easing tensions between Russia and Ukraine and announcement (towards latter part of the month) by China's financial hub of Shanghai that it would lock down the city in two stages to carry out coronavirus testing over a nine-day period after it reported a new daily record for asymptomatic infections brought down oil prices to close below $110 per barrel towards month end.
  • 10-year US Treasury yields (hovering around 1.70% at start of the month) also joined the volatility race with crude oil prices. US treasury yields hit a three-year high of 2.56% before cooling down to close slightly above 2.30% as investors monitored progress of the Russia-Ukraine talks - Russia had agreed to scale down its military operations near Kyiv and surrounding cities, raising bets of a truce to end a five-week old conflict.
  • The FOMC meeting providing a more hawkish guidance on rates, with the US inflation forecasts being revised upwards while growth downwards. Fed officials are now expecting six rate hikes (of 25bps each) in CY2022 and four in CY2023. The Fed Chair has also left the room open for more aggressive actions, if needed, to tackle inflation.
  • While domestic bond yields were kept volatile throughout the month, short end of the curve up to 3 years ended the month range bound, and long end of the curve saw yields rise by 5 - 10 basis points. 1- Year securities remained an exception, with their yields falling by 10 - 15 basis points.
  • March CPI inflation rose to 6.95% vs 6.07% in February, led by a broad-based sequential increase. This is the third consecutive month that CPI data has breached the RBI's upper margin of 6%.
  • GST collection in March touched an all-time high of over ₹1.42 lakh crore (breaching an earlier record of nearly ₹1.41 lakh crore collected in January), an increase of 15% annually, on the back of rate rationalization and anti-evasion steps.
  • Release of G-sec borrowing for 1HFY23 - The government's plan to borrow 59% of the FY2023BE gross borrowings of ₹14.31 lakh crore in 1HFY23 is broadly in line with historical trends, but marginally higher than market expectation of 50-55%. The government will borrow ₹8.45 lakh crore through dated borrowing in 1HFY23, 20% higher than 1HFY22. The net issuance for 1HFY23 would be ~₹6.2 lakh crore as against ₹5.6 lakh crore in the past year (which was also aided by ₹2.11 lakh crore of OMO purchases by the RBI)
  • In the 8th April monetary policy, MPC voted unanimously to leave the policy repo rate unchanged at 4%. All six members voted for retaining stance at "accommodative" while focusing on withdrawal of accommodation to ensure inflation remains within the target going forward, while supporting growth (change in wording of accommodative stance).

Source: Bloomberg, RBI

Fixed Income Market: Outlook

  • Rates have only seen an upward trajectory since October 2021, after a long joy ride since 2020. FPI's have withdrawn ~US$22 billion since October 2021 compared to US$4.3 billion inflow in 1HFY22.
  • Even though some respite was witnessed recently with the rates stabilizing, given the unexpected dovish tilt of RBI signaling no hurry to normalize policy and cancellations of two G-Sec auctions in February, the future provides limited reasons for the bond markets to cheer.
  • This can be attributed to (i) faster global policy normalization amid persistently high inflation; (ii) elevated energy prices; (iii) heavy domestic bond supply; (iv) FPI outflow risks due to adverse global financial conditions, geopolitical risks, and narrowing interest rate differentials.
  • Elevated global price pressures in key food items due to global supply shortages impart high uncertainty to the food price outlook, warranting continuous monitoring. International crude oil prices remain volatile and elevated, with considerable uncertainties surrounding global supplies. Taking into account these factors and on the assumption of a normal monsoon in 2022 and average crude oil price (Indian basket) of US$ 100 per barrel, MPC inflation is now projected at 5.7% (vs 4.5% earlier) in 2022-23. Further, real GDP growth for 2022-23 is now projected at 7.2% (from 7.8% earlier).

Source: Bloomberg, RBI

Domestic Micros

Source: Bloomberg, PPAC, RBI, CEIC, SBIMF Research

Fixed Income Market: Strategy

  • Perhaps the worst will happen, perhaps not, but until then, look forward to better things.
  • Sometimes the expectations are so strong that something as mundane as yield curve moves away from its natural upward slope to an inverted one. This has happened in US where the 2 yr Sov bond has been trading higher than the 10 yr Sov Bond. Will it lead to slowdown, is it a sign of recession and similar remarks are filing pink newspaper across the globe. So what we know for sure is a dilemma in the minds of Central Bankers - which macro variable will best guide the trajectory of monetary policy change.
  • Amidst these epic battle of nerves, lesser mortals have to also focus on the next un-deployed cent staring through its twinkling eyes a world with credit spreads or a world where duration will help it remain comfortable and still steadily compound. We have witnessed improvements in financial leverage in the economy, the best downgrade to upgrade ratio in credit rating during last 3-4 yrs, Banking sector rolling provisions back and recoveries happening in stressed accounts. This indicates requirement for a select focus on credits. And this brings us to options available in fixed income. The duration battle is long won with results indicating that a blended duration of 3 years is half the battle won. The next half has following products: As started with, there is not a single product which will solve for the entire portfolio, it has to be curated and avoid cost of waiting. We know opportunities are highest in the time of dilemmas in the economic theory. Hence, deploy and not wait..
    • Shorter end appetite can be satisfied through Arbitrage MFs/ Passive Roll down MFs.
    • Longer end options has to be traded cautiously through SDL oriented index funds/ with roll down etc.
    • Medium term is the most critical part of the strategy. Roll down MFs will immune this portion from Mark to Market hit and in the process will create alpha over the benchmark. Arbitrage funds with an investment horizon of 6 -12 months are still looking good (though with interim volatility).

Source: Bloomberg, RBI

Indicative Prevailing Yields Across Investment Options

Arbitrage funds can be looked at from a 6 months to 1 year perspective
Each categories should be looked at as per the above matrix in their respective mentioned tenures. All rates are tentative pre-tax estimates based on yields as of 31st March 2022.
These are only indicative results and the actual returns may differ depending on underlying schemes, tenure of holding, change in interest rates etc.

Source: Kotak bank website for Bank FDs, Others from NSE/BSE traded data

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 April 18th, 2022 and for Regular Plans with Growth option. Corpus size is as on March, 2022.


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

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Kotak Mahindra Bank Limited, AMFI Registered Mutual Fund Distributor. AMFI Registration Number (ARN) 1390.