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

August, 2021

Equity Strategy

• Indian economy unlikely to have "V" shaped recovery from Covid 2nd wave, which was experienced after 1st wave.

• Demand may remain muted for a while and situation will evolve depending on occurrence and severity of potential 3rd wave.

• However corporate profits and Nifty earnings may continue to grow as

  • Large part of Nifty earning not linked to domestic recovery (e.g. export driven sectors like IT, Pharma and global commodity prices linked sectors like Metals, Oil & Gas etc.)
  • • Cost reduction measures, shift towards organised businesses and lower provisions by banks.
  • • Q1FY22 results and FY22 & FY23 projections stays on track so far with some minor misses.
Medium and long term growth outlook remain positive given lower interest rates, global growth recovery and Indian government initiatives. Interest rates and inflation not seen as immediate risk to markets currently.

• The probability of 5-10% pull down is more now compared to few months earlier as markets are at matured level, nevertheless likelihood of major correction is low. It is not advisable to try to time market swings given the risk of re-entry and consider using the SIP route.

• The pull down may be more pronounced in mediocre businesses in mid and small cap segment due to valuation froth or poor quality earning. Large cap valuations are relatively reasonable.

Source: Bloomberg; All data are as of 31st July 2021

Equity Strategy

• With confluence of corporate earning growth, global liquidity and elevated valuation, we maintain the "Neutral" stance, i.e. equity allocation as per strategic allocation.

• Market cap orientation to start rebalancing towards 70% large cap funds and up to 30% mid and small cap funds by making fresh deployment more towards large cap funds.

• SIPs as a route and Balanced Advantage funds should be used to take advantage of any volatility.

• Risk & Concerns

  • • Potential risk of Covid 3rd wave, which can impact economy and earnings
  • • Input cost inflation, slower growth than market expectations
  • • Central banks may halt easy monetary policy due to rising inflation
  • • Any sharp rise in bonds yields could result in de-rating of equities
• Benchmark indices may remain range bound due to optimism on post pandemic revival and earnings growth while concerns of Covid impact and inflation. Swift actions by Central Banks & Governments limits downside risk.

• Investors need to lower the returns expectations considering the sharp run-up already seen in recent past, but equities still is a preferred choice considering the opportunities.

Source: Bloomberg; All data are as of 31st July 2021

Chinese Equities Update

• The belief is that the current policy direction is not to dismantle the Corporate or tech sector in China. These measures are considered for specific purposes like discourage monopolistic behaviors, data security, address inequality, fair pricing, promote competitiveness and encourage investments in areas considered primary by government.

• Such measures are taken by other governments also like US Antitrust, UK on Uber and Europe Antitrust etc.

• Education sector in China has special sensitivities; the move to convert non-profit and ban on foreign capital is extreme, but it should be regarded as an exception rather than a precedent for more sectors.

• Earlier in 2018 there was an intensification of regulation in areas such as pharmaceutical pricing and computer game approval, however investor attention gradually returned to focusing on the compounding of earnings and other fundamentals

• The recent regulatory regime is expected to create an uncertain environment & short term headwinds, but it shouldn't destroy the corporate strengths.

• While there can be some impact on earnings & growth of select companies and demand for higher risk premium, but market is already factoring it with significant correction in valuations.

• Further, we continue to prefer allocation to global markets through MF, to complement Indian equities and believe investors should diversify by participating in complementing themes which otherwise are not available or have minimal presence in domestic public markets.

Source: Bloomberg; All data are as of 31st July 2021

Equity Market Update

In the domestic markets, the International Monetary Fund (IMF) has cut its economic growth forecast for India to 9.5% for FY22 (as against earlier estimate of 12.5%).

Nifty Index was flat despite some bouts of volatility, in July 2021. In the absence of any major economic prints, markets focused on corporate earnings and commentaries. Markets took note of strong results among construction materials, IT services and metal companies, even as automobile companies and banks posted disappointing results.

Among sectors, Nifty Realty gave highest return of 15.9%, followed by Nifty Metal (10.6%), Nifty IT (4.5%) and Nifty Pharma (1%) in July'21. On the other hand, Nifty Auto gave negative 5.2% return and Nifty Energy gave negative 4.5% return. Nifty small cap 100 index gave astonishing 8.1% return in July'21.

Infrastructure output (weight of 40.3% in IIP) rose 8.9% in June (May: 29.3%). Steel production increased by 25%, natural gas production by 21%, coal production by 7.4%, electricity production by 7.2%, cement production by 4.3%, refinery products production by 2.4%, and fertilizers production by 2%. On the other hand, crude oil production fell by 1.8%. Infrastructure output grew by 1.1% in June on a sequential basis.

On the positive side, normal monsoon, good progress in vaccination, upcoming festive period, reforms by the government and multi-year low-interest rates are supporting economic recovery.

On the revenue side, Gross tax collections for Q1FY22 increased by 97% over Q1FY21 with direct taxes and indirect taxes increasing by 112% and 85%, respectively. Fiscal deficit in Q1FY22 was at 18.2% of FY22BE.

Source: Bloomberg; All data are as of 31st July 2021

Covid Scenario

► A total of 47.2 Crore vaccine doses have been administered till July end.
► Covid Cases have receded to ~40,000 per day from peak of ~4,00,000 per day.

CDGR compounded daily growth rate
Source: covid19india.org

Economy recovering with relaxations in lockdowns

OEM Wholesale numbers improved Month on Month as States have relaxed lockdown and restrictions

GST collections at Rs. 1.16 Lakh crore is highest in last three months. This is expected to improve further as economy continue to re-open

Source: Kotak Institutional Equities; YoY% not applicable due to nation wide lockdown during April 2020.

Central banks willing to look past inflation risks

The Balance sheet (ECB+US Fed+BOJ) expansion since Feb'20 has been of the magnitude which took 6 years before Feb

10-yr Govt Bond Yields - the bond yield have further dropped to 1.15% amid delta variant concerns.

In the recent Federal Open Market Committee policy meeting the Fed Chairman Jerome Powell kept its benchmark policy rate unchanged at zero to 0.25 per cent, while indicating that they have begun talking about scaling back bond buying.

Rise in inflation was viewed as being influenced largely by transitory factors. The statements indicated that the Fed will be assessing its size of asset purchases in the coming meetings.

Fed Chair Powell reiterated that the accommodative stance would continue until substantial progress has been made towards achieving price stability and maximum employment and he would want to see some strong jobs numbers.

The Fed also introduced two separate standing repo facilities for domestic entities and international monetary authorities to ensure smooth functioning of money markets.

Similarly, the European Central Bank (ECB) kept its key interest rates unchanged. Additionally, the ECB's Asset purchase programme (APP) and Pandemic emergency purchase programme (PEPP) will continue until the effects of the pandemic are well under control.

Source: Bloomberg; All data are as of 31st July 2021

MFs net flows continue to be strong

After the positive flow in Jun'21, FIIs turned marginal net sellers in July. The most sold sectors are Banking & Financials, IT, Utilities and Auto

Equity Mutual Fund flow has witnessed significant increase in June with SIP flows continue to be robust.

Source: Bloomberg; AMFI, All data are as of 31st July 2021

Valuations are factoring in strong revival & growth

► Market is going through a consolidation phase; whereby time correction could lead to moderation in valuations.
► Markets are optically at premium given depressed earning due to Covid impact. The economic recovery and earning delivery is key for future returns

Source: Bloomberg; All data are as of 31st July 2021

Recommended Funds' Performances

Source: MFI Explorer Returns are CAGR as on August 9, 2021 and for Regular Plans with Growth option. Corpus size is as on July, 2021.

Recommended Funds' Performances

Source: MFI Explorer Returns are CAGR as on August 9, 2021 and for Regular Plans with Growth option. Corpus size is as on July, 2021.

Recommended Funds' Performances

Source: MFI Explorer Returns are CAGR as on August 9, 2021 and for Regular Plans with Growth option. Corpus size is as on July, 2021.

Fixed Income Market: The Month Gone By

  • Markets witnessed the much awaited issuance of the new 10 year G-sec benchmark, with RBI setting a higher than expected coupon of 6.10%, indicating central bank's comfort with slightly higher yields rather than keeping the benchmark anchored to around 6.00% levels.
  • Even though 10-year US treasury yields ended around 15 basis points lower at 1.23% on month end, back home, government bond yields ended the month higher by 5 - 10 basis points. Corporate bond yields throughout the curve also inched higher with only exception to short maturity assets of up to 3 months maturity.
  • Earlier this month, there were news reports which stated that RBI had eased the hold on bond yields to price in the increased supply of gilts to fund the GST compensation shortfall. This, along with frequent devolvement of dated securities at weekly auctions, higher than expected coupon setting of new 10-year G-sec benchmark and RBI's move to purchase illiquid securities under G-SAP program kept bond market sentiments weak.
  • Even though July CPI inflation marginally moderated to 6.26% vs 6.30% in May and lower than market's expectation of 6.60%, this was the second consecutive month of CPI breaching RBI's inflation tolerance band of 2%-6%. This print was backed by lower core inflation this month, helped by favorable base effect.
  • June GST revenues (collected in July) were higher than May as economic activity picked up following the easing of state-wide restrictions. Total GST collections for this month was 1.16 lakh crore as compared to around 0.93 lakh crore in the previous month.
  • Normalization was also witnessed on the trade deficit front. Exports in July increased 48% to US$35.2 billion over July 2020 and by 8.2% over June 2021. Exports continued to remain strong as commodity prices and global demand remain strong. Imports in July increased 59% over July 2020 to US$46.4 billion and by 10.8% over June 2021. Domestic demand continues to improve though much weaker compared to global growth.
  • On the global front, the Federal Open Market Committee (FOMC) made one more baby step towards tapering of bond purchases. In previous meetings, it was only the "talks about taper" but this time it was "deep dive into timing, pace and composition of taper" - a typical Fed style of preparing markets.

Source: Bloomberg, RBI

Fixed Income Market: Outlook

  • The RBI Monetary Policy Committee (MPC) voted unanimously on 6th August to leave the policy repo rate unchanged at 4% and continue with the accommodative stance as long as necessary.
  • RBI's guidance on CPI inflation was also keenly eyed by market participants with the last 2 CPI readings breaching RBI's tolerance band of 4% +/- 2%. The MPC estimates headline CPI inflation at 5% for 4QFY21, 5.2% for 1QFY22, 5.2% in 2QFY22, 4.4% in 3QFY22 and 5.1% for 4QFY22. We will be watchful of (1) high global commodity prices, (2) higher logistics cost, (3) monsoon-related developments, and (4) supply-side risks emanating from any prolonged localized lockdowns.
  • RBI governor's media comments in the month of July gave further credence to this fact citing the current spike in inflation as by and large transitory in nature and inflation could moderate by the third quarter. "What is transitory in nature needs to be watched very carefully. Any hurried or hasty action could completely pull down the economy, at a time when the revival is nascent and hesitant."
  • On the government expenditure front, Center has transferred Rs. 75,000 crores (without additional borrowing) to the States for GST compensation shortfall. However, clarity is still awaited on whether the entire Rs. 1.59 lakh crore will be financed through borrowings in 2HFY22.
  • In long maturity tax free bonds space, yields have now started to inch higher with few institutional players (banks & insurance companies) coming to book profits and trim their holdings this month with the view that yields have now bottomed out.

Source: IDFC AMC, Bloomberg, MFI Explorer

Yield curves - observe or act

The steepness in Sovereign yield curve is more evident than corporates with SDLs being most attractive.

Source: Bloomberg, RBI, ABSLAMC

Spreads observe or act

Source: Bloomberg, RBI, SBI MF Research desk

Fixed Income Market: Update

  • "It is necessary sometimes to take one step backward to take two steps forward." - Vladimir Lenin
  • Lenin would certainly have not thought of bond market before saying this but the current market is following it to the tee. The market participants and regulators across the Globe are facing this uncertain scenario. Whenever the yields are expected to commence its textbook journey of upward movement, there are few recurring points which acts as a dampener of sentiments - additional action towards liquidity by regulator, inflation being a transitory hump, pep up talk towards growth, not using tools to manage liquidity (VRRR), etc.
  • That leaves everyone scrambling to pick a shed which protects in rainy days but also has provisions for sunshine. In terms of fixed income options, it means either increase duration in the portfolio or go down the credit play. Though both have their own nuances and could have some merit to the portfolio, we believe that with keeping blended duration of 1 - 3 yrs, the following allocations through mutual funds may be considered to keep health of portfolio intact:
    • Capturing steepness in yield curve to match investment horizon
    • Up to 24 M through Arbitrage Mutual Funds / other suggested mutual funds
    • Greater than 24 M through Passive Roll Down Mutual Funds
  • RBI has to manage the smooth transition towards normalization in liquidity/ yield curve and still push growth. Few factors which are key and need to be observed in upcoming RBI policy-
    • Growth & inflation projection
    • Use of Liquidity absorption tools including Variable Reverse Repo Rate
    • RBI intervention - in forex and domestic market
  • Selective Arbitrage Mutual Funds with an investment horizon of 6 -12 M may be considered (though with interim volatility).

Source: IDFC AMC, Bloomberg, MFI Explorer

Indicative Prevailing Yields Across Investment Options

Arbitrage funds can be looked at from a 6 months to 1 year perspective.
All rates are tentative pre-tax estimates based on yields as of 31st July 2021.
These are only indicative results and the actual returns may differ depending on underlying schemes, tenure of holding 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 August 9th , 2021 and for Regular Plans with Growth option. Corpus size is as on July, 2021.


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 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 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

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