Equity & Debt Strategy

Mid - March’ 2020

Equity Market Update
&
Equity MF Strategy
Markets spooked by COVID-19
Maintain neutral stance on equities with 60:40 allocation to large & mid caps

►Markets globally have been rattled by the spread of COVID-19 Drawdowns > 10% in the Nifty and subsequent 1-year returns
outside of China. The sharp fall in some of the stocks indicate that
market participants are extrapolating lower earnings and a high 120% Fall from Peak to bottom 1-Year return from Bottom%
cost of equity (lower valuations) in perpetuity. 100%
80%
►The spread of COVID-19 is a significant unknown for the market 60%
and at this stage there is relatively low basis to predict how events
40%
will play out given (1) this could be a once in a century pandemic
20%
and (2) the fact that medical experts are still grappling to come to
0%
terms with this pandemic..
-20%
►While the uncertainty may well last for 6-9 months, the change in -40%
intrinsic values of businesses due to a single year of weak earnings -60%
is unlikely to be material. Equities are a perpetual asset class. The -80%

Apr-92

Oct-99

Jan-04

Oct-05

Jan-08

Jan-18

Jan-20
May-06

Aug-18
Mar-05

Jul-07

Nov-10
Mar-15

Jun-19
Feb-94
Sep-94

Feb-00

Feb-07
recent market reaction though is significantly more extreme.

►Also the market reaction to the Yes Bank crisis has been strange
with sharp declines in the equity values of most private sector
banks despite what appears to be a significantly better capital
position and asset quality metrics.
►As we have seen several times in the past, the world will
eventually recover from this challenge and the best approach
would be to look at equities as part ownership in operating
businesses, take a 3-5 year view and evaluate medium to long
term prospects of underlying businesses regardless of how their
stock prices behave.
►Our Strategy: We maintain a neutral stance and a large-cap to
mid-cap allocation of 60-40. Markets could swing sharply to the
upside if there is a containment of the coronavirus situation.
However, one needs to wait and watch news flows on this front
over the next few weeks.
►For investors, below their strategic allocation, the current situation
provides a good opportunity to rebalance to strategic allocation
over next couple of months, as markets go through an uncertain
period - tracking COVID-19 developments and local news flow on
financial stability.

Source: Bloomberg; All data are as of 17th March 2020

Confidential | 3
Sell-off across most global markets

►The sell-off in equity markets has been across the globe and broad- 1st March Performance as on 29th Feb’2020
based. China has been a relative out-performer Index Performance to 17th
March 1m 3m 6m 12m
►US 10-Yr Treasury Yield dropped below 0.5% for the first time ever
US S&P 500 -19.2% -8.4% -5.9% 0.9% 6.1%
during March, reflecting serious concerns about a downturn in US
economy UK FTSE 100 -23.2% -9.7% -10.4% -8.7% -7.0%
Japan Nikkei 225 -19.5% -8.9% -9.2% 2.1% -1.1%
►Central banks across the world have taken a series of measures to Germany (DAX) -27.8% -8.4% -10.2% -0.4% 3.3%
counter the near term growth shock with the Fed Funds rate now at Korea KOSPI -15.8% -6.2% -4.8% 1.0% -9.5%
25 bps and a new QE program. We expect a fiscal stimulus is also
Brazil IBOV -31.7% -8.4% -3.8% 3.0% 9.0%
likely across major economies given rates already near zero in most
Russia MOEX -20.6% -9.5% -5.1% 1.6% 12.1%
developed markets
India SENSEX -20.2% -6.0% -6.1% 2.6% 6.8%
►Central Banks have far less ammunition to deploy than they did China SHCOMP -3.5% -3.2% 0.3% -0.2% -2.1%
during the global financial crisis a decade ago – with India being one Indonesia Jakarta -18.3% -8.2% -9.3% -13.8% -15.4%
of the few exceptions where rates still have room to the down-side.

7 Germany 10 Yr Govt. Bond Yield

US 10 Yr Govt. Bond Yield US Fed Assets (USD Tn) UK 10 Yr Govt. Bond Yield

3.5 Japan 10 Yr Govt. Bond Yield

US 2 Yr Govt. Bond Yield 5.0
3
4.5 2
2.5 4.3
2
4.0
1.5
1 3.5 3.8 -3

Feb-08
Feb-09
Feb-10
Feb-11
Feb-12
Feb-13
Feb-14
Feb-15
Feb-16
Feb-17
Feb-18
Feb-19
Feb-20
0.5
0 3.0
Feb-17 Aug-17 Feb-18 Aug-18 Feb-19 Aug-19 Feb-20

Source: Bloomberg; All data are as of 17th March 2020

Confidential | 4
Valuations at attractive levels

►Valuations are lower than medium term averages based on all the metrics. Mid-caps have seen their third cycle of under-performance in the last 15 years
►Given the polarization in stocks within the indices, the valuations for broader markets are significantly more attractive

5-Yr Current Premium/

Valuation Metrics
Average Value (Discount) 25
Nifty 1 Year Forward PE ratio
Nifty Trailing 12M PE ratio 22.55 19.08 -15%
20
Nifty 1 Year Forward PE ratio 16.89 13.26 -21%
NSE Nifty Next 50 One Year Forward PE Ratio 20.17 17.06 -15% 15

Nifty Midcap 100 One Year Forward PE ratio 17.81 13.51 -24% 13.2559
10
Market Cap to GDP 76% 61% -15%
Nifty Trailing 12M P/B ratio 2.86 2.18 -24% 5

NSE Nifty Next 50 Trailing P/B Ratio 2.87 2.50 -13%

Nifty Midcap 100 Trailing 12M P/B Ratio 2.19 1.77 -19%
Premium of Nifty 50 One Year Fwd PE over MSCI EM Index 1 Yr Fwd PE 42.64% 33.42% -9%
7 Nifty Trailing 12M P/B ratio
Premium of Nifty 50 One Year Fwd PE over S&P 500 Index 1 Yr Fwd PE 0.40% -0.53% -1%
6
10 Yr Govt. Bond Yield % - Nifty Earnings Yield % 1.26% -1.29% -3%
5
1.7 4
3 year returns of Nifty Midcap 100/3 year returns of
1.5 Nifty 100 3
2
1.3
1
1.1 0

0.9

0.7
Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 Mar-18 Mar-20

Source: Bloomberg; All data are as of 17th March 2020 Confidential | 5

 Relative valuations are much more attractive now

Yield Gap (%) Nifty Earnings Yield %

Premium of Nifty 50 One Year Forward PE over MSCI EM Index
14 10 Yr Govt. Bond Yield % 4.00 1 Yr Forward PE
80%
Sep-18, 69.58%
12 2.00
60%
10
0.00
8 40%
-2.00
6 Mar-20, 32.69%
20%
-4.00
4
0%
2 -6.00

0 -8.00 -20%

Mar-12
Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19

Mar-20
Dec-05

Dec-08

Dec-11

Dec-14

Dec-17
Mar-05

Jun-07
Mar-08

Jun-10
Mar-11

Jun-13
Mar-14

Jun-16
Mar-17

Jun-19
Mar-20
Sep-06

Sep-09

Sep-12

Sep-15

Sep-18

Date Yield Gap Remarks

Panic selling post demonetization and Trump election. The negative yield gap was a short lived window – it was back to 1.0% by Feb 2017.
Nov 2016 (0.4)%
Equities did extremely well in a rising yield environment till 2018.
Risk free yield of 8% vs. elevated index valuations prompted taking risk off the table in Aug 2018. Midcap indices had already started losing
Sep 2018 2.8% momentum from the start of the year and declined further. While India has always been expensive, the 67% premium to emerging markets
looked unjustified
Equities were relatively attractive driven by the post-budget capitulation and fall in yields over the last one year. While no signs of recovery
Aug 2019 0.5% were visible compelling valuations and one sided market positioning tilted the odds in favour of a rally in the event of a crisis response from
the government.
The Yield Gap is negative making equities relatively very attractive. The yield gap was ~130 bps during Jan’2020 & has fallen to an extent
Mar 2020 (1.3)% wherein it has become negative ~130 bps – implying investors are willing to pay a higher valuation for no-growth assets (bonds) over
growth assets (equities)

Source: Bloomberg; All data are as of 17th March 2020 Confidential | 6

Macros point to some recovery – virus impact yet to reflect

►Some bright patches are beginning to show up in the economy

►High frequency macro indicators like Manufacturing & Service PMI have substantially expanded in Jan-Feb
►Food Inflation is still in double-digits which is a positive for the rural economy

India Manufacturing PMI

56 55.3 India Services PMI Scheduled Commercial Banks - Bank Credit
54.5 60 YoY%
57.5
58 18%
54 55.5
52.7 56 15%
52 54 12%
52 9%
50
50 6%
48
46 3%
48 44 0%
Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-18 Jul-18 Nov-18 Mar-19 Jul-19 Nov-19

IIP YoY% Food Inflation GST Collections (INR Bn)

10%
15% 1200
5% 2.01% 1150 1108
10%
0% 11% 1100 1035 1054
5% 1050 1032

-5% 1000
0%
950
-10% -5%
900
Feb-19
Nov-18

Nov-19
May-19

Aug-19

Jan-19 Apr-19 Jul-19 Oct-19 Jan-20

All data are as of 17th March 2020

Source: IHS Markit, Bloomberg, RBI, Ministry of Finance Confidential | 7
Falling oil prices – positive for India

►The rift in the OPEC+ cartel is a key impact of the demand weakness due to the COVID-19 situation. OPEC+ had effectively been cutting output
by 2.1 million bpd and had sought further cuts that would have brought the total to about 3.6 million bpd, but Moscow's rejection of that plan
led to the collapse of the whole deal.

►Saudi Arabia has said that it would boost its oil supplies to a record high in April’2020. They have stated that they would increase their crude
production from the current levels of ~9.7 mn bpd to ~12.3 mn bpd by April’2020

►If the rift sustains for longer it could imply a prolonged phase of low oil prices. This puts India’s current account situation in a very comfortable
position. Coupled with record high forex reserves, India’s ability to withstand currency and other external shocks is much better than previous
crises.

►According to estimates, while Saudi Arabia is the lowest cost producer, it needs an oil price of around $80 to balance its budget. Russia’s
breakeven is estimated at around $42 and is also aided by significant reserves it has built over the years.

Saudi Arabia Crude Production (mn bpd) Brent Crude Oil USD
13 140
Expected
12 increase of 120

11 ~2.5 mn bpd 100

Dec-19, 66
10 80

9 60 2014 Oil
Price Crash
8 40
Jan-16, 34.74
7 20 Mar-20, 30.04

Source: Bloomberg, all data are as of 17th March’2020

Confidential | 8
Key non-COVID Risk: Yes Bank’s fallout

►Stock prices of several private sector lenders have taken a hit since RBI took the step to supersede the board of Yes Bank. We believe that while
the regulator’s action will take it’s due course, the market’s knee jerk reaction to banking stocks could be a temporary phenomenon, as the
markets may have been taken by surprise by such a sudden development. though prima facie it appears that most of the major banks are in a
comfortable capital position and asset quality, addressing these exaggerated fears should be a priority for policymakers so as to cool down the
market sentiments.
►Unless we see a quick recovery in the stock prices of these banks, we could see a vicious Stock Performance
Stock Name th to 17th Mar 2020)
cycle with lenders in aggregate turning cautious – due to fears of capital availability. The (5
risk aversion could in-turn hurt credit flow and the growth recovery.
RBL Bank -45%
►Deposit growth in private sector banks – especially smaller ones could significantly slow
Indusind Bank -44%
down
Total Assets (INR Crs.) CRAR - Tier 1 Ratio % GNPA Ratio % South Indian Bank -30%
Ujjivan SFB 17,360 27.50% 0.90% Federal Bank -30%
HDFC Bank 13,95,336 17.10% 1.42%
AU Small Finance -28%
AU Small Finance 38,394 16.50% 1.90%
Axis Bank 8,19,039 15.54% 5.00% Axis Bank -28%
RBL Bank 91,458 15.02% 3.33% ICICI Bank -27%
ICICI Bank 10,07,068 14.98% 5.95%
Ujjivan SFB -26%
City Union Bank 48,483 14.86% 3.50%
Karur Vysya Bank 72,655 14.14% 8.92% Karur Vysya Bank -23%
Indusind Bank 4,24,127 13.49% 2.18% City Union Bank -18%
Federal Bank 1,72,791 12.62% 2.99%
DCB Bank -17%
DCB Bank 38,057 12.30% 2.15%
South Indian Bank 96,530 9.58% 4.96% HDFC Bank -15%

Note: Minimum CRAR Tier-1 ratio required is 9.50%.

Source: Company results, BASEL-III disclosures; All numbers are as per the latest available data
Confidential | 9
 Recommended Funds’ Performances
Scheme Name Corpus (In crs.) 1 Year 3 Years 5 Years Investor Suitability
Large Cap Funds
Axis Bluechip Fund 11,824 -2.46 9.80 6.53 All Risk Profiles except Secure
HDFC Top 100 Fund 16,819 -26.98 -3.67 0.27 All Risk Profiles except Secure
ICICI Prudential Bluechip Fund 23,609 -20.26 -0.93 1.84 All Risk Profiles except Secure
Mirae Asset Large Cap Fund 16,734 -18.13 1.39 4.35 All Risk Profiles except Secure
UTI Nifty Next 50 Index Fund 540 -20.44 - - All Risk Profiles except Secure

Large & Mid Cap Funds

Invesco India Growth Opportunities Fund 2,498 -14.86 3.04 3.65 All Risk Profiles except Secure
Kotak Equity Opportunities Fund 3,168 -13.64 0.61 3.83 All Risk Profiles except Secure
Sundaram Large and Mid Cap Fund 1,167 -13.74 2.33 4.80 All Risk Profiles except Secure

Multi Cap Funds (Multi Cap/ Value/ Focused/ Dividend Yield/ Contra)
Axis Focused 25 Fund 9,764 -4.30 7.45 7.15 All Risk Profiles except Secure
Invesco India Contra Fund 4,668 -18.64 1.65 4.06 All Risk Profiles except Secure
ICICI Prudential Multicap Fund 5,082 -23.74 -3.68 1.71 All Risk Profiles except Secure
Kotak Standard Multicap Fund 29,460 -17.01 0.35 4.17 All Risk Profiles except Secure
SBI Magnum Multicap Fund 8,494 -15.65 0.32 4.22 All Risk Profiles except Secure

Mid & Small Cap Funds (Mid Cap/Small Cap)

Axis Small Cap Fund 2,507 4.50 7.13 7.88 All Risk Profiles except Secure
DSP Midcap Fund 7,458 -9.25 0.90 5.92 All Risk Profiles except Secure
HDFC Small Cap Fund 9,154 -31.22 -2.55 2.81 All Risk Profiles except Secure
Kotak Emerging Equity Fund 6,848 -11.22 -0.15 5.35 All Risk Profiles except Secure
Kotak Small Cap Fund 1,633 -14.15 -3.28 2.94 All Risk Profiles except Secure
Mirae Asset Midcap Fund 2,015 - - - All Risk Profiles except Secure
Nippon India Growth Fund 7,154 -11.87 0.71 3.60 All Risk Profiles except Secure

Indices
Nifty -21.37 -0.71 0.55
Source: MFI Explorer
Confidential | 10
Returns are CAGR as on Mar 17, 2020 and for Regular Plans with Growth option. Corpus size is as on Feb, 2020.
Recommended Funds’ Performances

Scheme Name Corpus (In crs.) 1 Year 3 Years 5 Years Investor Suitability
Thematic/Sectoral Funds
Kotak Pioneer Fund 681 - - -
Sundaram Rural and Consumption Fund 1,816 -14.51 -0.94 6.58 All Risk Profiles except Secure
Sundaram Services Fund 1,293 -7.70 - - All Risk Profiles except Secure

Solution Oriented - Retirement Funds

Tata Retirement Savings Fund - Moderate Plan 1,142 -12.17 1.92 4.55 All Risk Profiles except Secure

Solution Oriented - Children's Funds

HDFC Children’s Gift Fund 3,083 -13.65 1.84 4.09 All Risk Profiles except Secure
ICICI Prudential Child Care Fund (Gift Plan) 644 -13.79 -1.12 2.88 All Risk Profiles except Secure

Aggressive Hybrid Funds

SBI Equity Hybrid Fund 32,470 -5.11 5.14 5.59 All Risk Profiles except Secure
Sundaram Equity Hybrid Fund 1,806 -9.38 3.01 3.97 All Risk Profiles except Secure

Balanced Advantage Funds (Balanced Advantage OR Dynamic Asset

Allocation)
ICICI Prudential Asset Allocator Fund 7,375 -8.47 3.33 5.35 All Risk Profiles except Secure
ICICI Prudential Balanced Advantage Fund 28,092 -9.63 1.78 4.38 All Risk Profiles except Secure
Kotak Balanced Advantage Fund 3,845 -6.57 - - All Risk Profiles except Secure
SBI Dynamic Asset Allocation Fund 614 -11.55 1.16 -

Indices
Nifty -21.37 -0.71 0.55

Source: MFI Explorer

Confidential | 11
Returns are CAGR as on Mar 17, 2020 and for Regular Plans with Growth option. Corpus size is as on Feb, 2020.
Debt Market Update
&
Debt MF Strategy
Global & Domestic Macro Dynamics:

The global economy has been rattled by the spread of Covid-19, with disruptions seen in tourism, global supply chains, exports and the financial markets. Risk-off has
been triggered by the fall out between OPEC & its allies and this further poses downside risks to the already fragile global economic growth. Benign domestic and
global growth concerns to remain key focus for MPC.

Outlook Remarks

Global Rates Globally, central bank have cut policy rates, while governments have started to announce packages to
fight the epidemic. Rate environment is likely remain extremely benign.
INR’s outlook will also depend on the extent of easing by DM central banks and the oil price trajectory.
Global Exchange Rate
We expect USD-INR to trade in the range of 70-75 against the USD in CY2020
The global economy has been rattled by the spread of Covid-19, with disruptions seen in
Economy
tourism, global supply chains, exports and the financial markets

With global central banks working in tandem to cut rates to defend growth in respective economies.
Monetary Policy There could be room with RBI for 50 bps of rate cuts with greater emphasis on transmission.

The gross supply of govt. bonds in FY21 ( G-Sec + SDL) looks in excess of Rs. 14.25 trn. OMO Purchases &
Bonds Supply
FPI buying are essential to cushion the supply.
RBI expects GDP growth at 6.0% in FY21. However, we currently peg the FY21 GDP growth forecast at
Growth
Domestic 5.5% The economic challenges in FY20 are likely to spill over to FY21
February CPI inflation moderated to 6.58% Expect CPI inflation to move back into the RBI’s band of 2-
Inflation 6% from March and to trend towards 3.5% by March 2021

Fiscal Policy Fiscal deficit for FY20 is pegged at 3.8% and invoked “escape clause” under FRBM Act
which allows deviation of up to 0.5%. FY21 estimated at 3.5% but upside risks remain.

Negative Positive

Source: Bloomberg Confidential | 13

Turmoil in global financial markets

Risk sentiments globally turned quite fragile from end February, stimulated by spread of corona virus which prompted the authorities worldwide
to consider a coordinated policy response. Fed’s unscheduled policy rate cut of 50 bps & subsequently 100 bps has been supplemented by rate
cuts by central banks in Hong Kong, Canada, Australia, Malaysia in an attempt shield their economies from downside risks to growth

Global Central Bank Rate Cuts

50 44
cutting rates in CY 20
No of Central Banks

40

30
21
20 14
9
10

0
1 2 3 4
S Africa Thailand UK UK (-0.50)
Turkey Brazil Canada Canada (-1.00)
Malaysia Philippines Hong Kong Hong Kong (-0.50)
Russia Saudi Arabia Saudi Arabia (-0.50)
Turkey USA USA (-1.50)
Major
China Malaysia Australia (-0.25)
Central
Banks Indonesia Australia Thailand (-0.25)
Cutting Brazil (-0.25)
Rates Philippines (-0.25)
Russia (-0.25)
China (-0.10)
Indonesia (-0.25)
S Africa (-0.25)
Turkey (-1.25)
Malaysia (-0.50)

Source: Bloomberg Confidential | 14

 Global yields at all time lows

The US Fed has cuts its key rate to 0.00% - 0.25%, matching the record low level it hit during the 2008 financial crisis and where it was held until
December 2015. While ECB chose not to cut rates, it has used tools to boost the QE programme focused on private assets, together with very
attractive targeted longer-term refinancing operations.

US Treasury: Easing Bond Yields : Drop of ~100 bps since 1st Jan German Bund Yields have dropped by 40bps to deeper negative territory

0.00
2.00
1.92 -0.10
1.80 -0.19
-0.20
1.60
-0.30
1.40
-0.40
1.20 1.16 -0.50
1.00 -0.59
-0.60 -0.67
0.80
0.70 -0.70
0.60
-0.80
0.40 -0.77
-0.90
0.20
-1.00
0.00
3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y
3M 6M 1Y 2Y 3Y 5Y 7Y 10Y
1st Jan 20 1st Mar 20 Latest
Latest 1st Jan 20 1st March 20

Source: Bloomberg, Data as on 16th March 2020

Confidential | 15
Global growth to face significant headwinds on back of Covid-19

With many countries already under lock-down, escalating coronavirus crisis is expected to tip the global economy into a downturn. As a result,
we could see global growth below 2.9%, which it delivered last year and the weakest since the global financial crisis.

Chinese PMI data drops off cliff due to coronavirus driven slowdown Global PMI has just crashed due to COVID19 spreading globally,
extending further especially in China

China PMI Data 59

60
57
55 54.1
50 55

50
45 53
In %

40
51
35 35.7
49
30 29.6

25 47 47.2

20 45
Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20

Mar-10

Mar-13

Mar-16

Mar-19
Dec-10

Dec-13

Dec-16

Dec-19
Jun-09

Sep-11
Jun-12

Sep-14
Jun-15

Sep-17
Jun-18
China PMI Manufacturing China PMI Non Manufacturing

Source: Bloomberg, Data as on 8th March 2020

Confidential | 16
 Domestic Macro

In the current adverse environment, there is some room for India to benefit given the heavy dependence on oil imports. A US$10 per barrel fall in oil
prices leads to an improvement in CAD by US$13-15 bn annually, lowers inflation by 30-40 bps and increases GDP by 20-30 bps. CPI inflation is set to
re-enter the RBI’s target band of 2-6% from March, opening up space for the MPC. The recent correction in oil prices is likely to result in a downward
revision to inflation trajectory

Relative drop in headline inflation to 6.58% in Feb; Core inflation

Moderating Economic Growth
maintains around 4.08%
7.0 14.00

5.8 5.7 12.00

6.0 5.6 5.6 5.6
5.4
5.1 10.00
9.45
5.0 4.8 4.7
4.5 8.00
6.58
4.0 6.00

4.00 4.08
3.0
2.00

2.0 0.00

-2.00
1.0
-4.00

Jan 19

May 19
Mar 19

Jan 20
Jul 18
Aug 18

Jul 19
Aug 19
Feb 19

Feb 20
Jun 18

Oct 18

Apr 19

Jun 19

Oct 19
Sep 18

Nov 18

Sep 19

Nov 19
Dec 18

Dec 19
0.0
Q3 FY19 Q4 FY19 Q1 FY20 Q2 FY20 Q3 FY20
GDP GVA
CPI (YoY%) Core Inflation Food Inflation

Source: Bloomberg, Data as on 13th March 2020

Confidential | 17
RBI actions

The Indian central bank adopts and implements new tools on the lines of global central banks – Operation Twist (US Fed); LTRO (ECB), FX Swaps
(Global Central Banks).

• Simultaneous purchase and sale of securities, i.e. the 'Operation Details of Operation TwistM
Twist' by RBI which was first conducted on December 23, was held
OMO Purchase OMO Sale
twice in January to influence the benchmark 10 Y G Sec yield
Maturity Maturity
Opration Quantum Quantum
• Operation Twist is the name given to a monetary policy tool that Year of G Year of G
Month in Cr in Cr
sec Sec
the US Federal Reserve had initiated to influence the prevailing rate
of interest in the markets Dec-20 2029 20,000 2020 15,326

• The action will bring down the long end of the curve, although 2024 3,993
higher supply would be available in the short end, high liquidity in Jan-20 2026 9,311 2020 10,000
the system will absorb the supply 2029 6,696 2021 2,950

Long Term Repo Operations • On February 6, the RBI announced the infusion of ₹1 lakh
crore into the system in phases, through the LTRO
Date Tenure Allotted Amount Cr
• To further improve monetary transmission RBI will
02 March 2020 3 Year 25,028 conduct long-term repo operation (LTRO) in multiple
tranches up to Rs 1,000 crores at policy rate
24 Feb 2020 1 Year 25,021
• RBI has proposed to conduct another six months USD
sell/buy swap on March 23 to provide liquidity to markets
17 Feb 2020 3 Year 25,035

Source: Bloomberg, Data as on 5th March 2020

Confidential | 18
Government bond supply expected to be quite high for FY21

The supply of G-Sec and SDL has been steadily rising over previous years. The gross supply of govt. bonds in FY21 ( G-Sec + SDL) looks in excess of Rs.
14.25 trn in FY2021. OMO Purchases and FPI participation, along with buying from PSU Banks are essential to absorb this supply.

G Sec and SDL Borrowings RBI OMO Purchases

3.5
14 2.99
3.0

12
2.5
In Lac Crores

6.50

In Lac Crores
10 5.95 2.0

1.5
8
4.91 4.78
4.01 4.19 1.11
2.49 0.95
1.0
2.00 0.72
6 7.80 0.56
7.10 0.5
5.64 5.92 5.85 5.82 5.88 5.71 0.23
4 0.01
FY14 FY15 FY16 FY17 FY18 FY19 FY20 E FY21 B
0.0
FY14 FY15 FY16 FY17 FY18 FY19 FY20
G Sec SDL

Source: RBI Website, Market Information, Data as on 1st Feb 2020, OMO Data excluding Operation Twist
Confidential | 19
 10 Year benchmark yield remains sticky

Inspite of significant easing in financial conditions – Repo being cut by 60 bps since July 2019, global central bank easing, higher banking liquidity,
Operation Twist, FX Swap and LTRO announcement by RBI, the long end rates have not fallen meaningfully.

Indicator Mid July 19 Indicator Latest

7.00 Repo 5.75% Repo 5.15%
G Sec 10 Y 6.33% Operation G Sec 10 Y 6.21%
US Treasury Yields 2.02% Twist US Treasury Yields 0.70%
6.90 US Fed Rate 2.25% -2.50% Announced US Fed Rate 0.00% - 0.25%
Brent Oil $ 64.35 Brent Oil $ 35.04
India Banking Liquidity 1.4 Lac Cr 10 Y Index India Banking Liquidity 2.9 Lac Cr
6.80
switches to
new GSec Budget: FY20 no further
borrowing announced
6.70
US Fed cuts
rate by 25 Bps
US Fed had cut
6.60 Rate by 50 Bps
due and further
6.50 Corporate by 100 Bps
Tax Cut
6.40
GDP growth RBI
6.333 slumps to
6.30 announces
4.5% 1Y&3Y
Rate cut by 35 Bps, LTRO
6.20 RBI announces dividend of Rs. 1.76 Lac cr 6.208
Inflation @ 3.15%; GDP @ 5%
6.10

6.00
15-Jul-19 15-Aug-19 15-Sep-19 15-Oct-19 15-Nov-19 15-Dec-19 15-Jan-20 15-Feb-20 15-Mar-20

Source: Bloomberg, Data as on 16th March 2020

Confidential | 20
Improved transmission of rate cuts in money market & high quality segment

Monetary transmission has been full and reasonably swift across various money market segments, G-Sec and AAA segment. LTRO
announcement and subsequent execution has led to better transmission on the shorter end of the curve

Indicative Yield Movement

Instrument Class Segment Jan 2019 13-Mar-20
(Bps)
Repo 6.50 5.15 -1.35

Treasury Bills 1 Year 6.91 4.96 -1.95

Certificate of Deposits 1 Year 7.93 5.63 -2.31

1 Year 8.18 6.11 -2.07

3 Year 8.49 6.56 -1.94
AAA PSU Bonds
5 Year 8.50 6.92 -1.57
10 Year 8.50 7.40 -1.10

3 Year 7.18 5.14 -2.04

G Sec 5 Year 7.18 5.68 -1.50
10 Year 7.40 6.19 -1.21

Source: Bloomberg, Data as on 16th March 2020 Confidential | 21

Credit market transmission remains absent

Compared to high rated and quality issuers, credit issuers (Sub AAA) haven’t seen any benefit of 135 bps of rate cuts over last 12 months. Credit
profiles of corporates are likely to remain under pressure as the economy faces prolonged economic slowdown. As per India Ratings, up to
INR10.5 Trn is vulnerable to default in the next three years leading to Rs. 1.37 Trn of expected credit cost.

Issuer - NABARD HDFC Ltd. Bajaj Finance Vedanta Muthoot Finance Shriram Transport UPPCL

Month/ Rating - AAA PSU AAA HFC AAA NBFC AA Corporate AA NBFC AA NBFC A+ Corporate

Jun-18 8.1% 8.9% 9.1% 9.4% 10.1% 9.8% 10.60%

Sep-18 7.2% 9.1% 9.4% 9.9% 10.6% 10.3% 10.3%

Dec-19 6.8% 8.2% 8.5% 9.4% 10.4% 10.3% 11.0%

Mar-19 7.0% 8.5% 8.5% 9.7% 10.3% 10.8% 11.3%

Jun-19 6.6% 8.1% 8.3% 9.7% 10.5% 11.8% 11.2%

Sep-19 6.1% 7.5% 7.7% 9.5% 10.8% 11.3% 11.1%

Dec-19 5.90% 7.1% 7.4% 9.2% 9.50% 11.7% 10.7%

Feb-20 5.80% 6.40% 6.80% 8.45% 8.80% 10.80% 10.40%

Source: Ind Ra, ICRA & Nippon AMC, Average maturity ranging from 12 – 18 months Confidential | 22
Fixed Income – Strategy and Allocations

We now expect RBI to cut repo rate by 50bps on back of growth concerns and financial market volatility arising from the spread of Covid-
19. Our strategy is largely anchored around short end of the curve. We are also taking exposure to selective AA+/ AA Issuers through
funds to lock higher spread.

• Lingering growth concerns and financial market volatility arising from the spread of Covid-19 could push MPC to cut rates by upto 50bps and
retain its focus on easing liquidity.
• Targeted liquidity operations & specific dispensations to banks for credit sector seems to be on the cards.
• We continue to maintain our stance of focusing on short term as core fixed income allocation. The recent inch-up in short end yields gives a
good entry point to add and top allocations. 3Year active short term and roll down portfolios are still delivering 7% centric gross yields.
• We like the 10 year AAA passive roll down strategies on absolute and relative basis. These strategies could also act as proxy duration
strategies and may be used tactically.
• We remain extremely watchful on credit strategies, more so with economic logjam on the back of Covid-19.
• However, selective strategies with majority AAA rated underlying and AA rated allocations in the form of all seasons and short term can be
explored.

Source : AMCs, other Financial websites Confidential | 23

 Recommended Debt Funds’ Performances
Scheme Name Corpus (In crs.) 6m 1Yr 2Yr Investor Suitability
Short Term 1-3 yrs (Corporate Bond/ Banking & PSU/Short Duration
Active
Aditya Birla Sun Life Banking & PSU Debt Fund 10,056 5.95 8.86 8.12 All Risk Profiles except Secure
Aditya Birla Sun Life Corporate Bond Fund 17,606 6.42 8.62 8.16 All Risk Profiles except Secure
HDFC Corporate Bond Fund 13,389 5.97 8.88 8.23 All Risk Profiles except Secure
HDFC Short Term Debt Fund 12,216 6.89 8.61 8.05 All Risk Profiles except Secure
ICICI Prudential Banking & PSU Debt Fund 8,955 6.04 8.74 7.40 All Risk Profiles except Secure
ICICI Prudential Short Term Fund 13,470 6.85 8.63 7.58 All Risk Profiles except Secure
Kotak Banking and PSU Debt Fund 5,225 6.99 9.50 8.57 All Risk Profiles except Secure
SBI Short Term Debt Fund 11,961 6.35 8.34 7.54 All Risk Profiles except Secure

Passive
IDFC Corporate Bond Fund 13,672 4.02 6.44 6.78 All Risk Profiles
Kotak Floating Rate Fund 71 4.72 - - All Risk Profiles except Secure
L&T Banking and PSU Debt Fund 3,800 5.22 8.32 7.22 All Risk Profiles
L&T Triple Ace Bond Fund 3,081 7.63 12.33 9.30 All Risk Profiles

Dynamic Debt (Medium to Long Duration/ Dynamic Bond/Gilt)

Active
IDFC Corporate Bond Fund 13,672 4.02 6.44 6.78 All Risk Profiles except Secure
Kotak Floating Rate Fund 71 4.72 - - All Risk Profiles except Secure
L&T Banking and PSU Debt Fund 3,800 5.22 8.32 7.22 All Risk Profiles except Secure
L&T Triple Ace Bond Fund 3,081 7.63 12.33 9.30 All Risk Profiles except Secure

Passive
Axis Dynamic Bond Fund 420 8.86 11.37 9.28 All Risk Profiles

Source: MFI Explorer

Confidential | 24
Returns are CAGR as on Mar 17, 2020 and for Regular Plans with Growth option. Corpus size is as on Feb, 2020.
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 in-
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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
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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Confidential | 25