Three big stalwarts of the mutual fund industry, Nilesh Shah, MD, Kotak Mahindra Asset Management Co Ltd; Manish Gunwanicio, CIO - Equity Investments, Nippon India Mutual Fund; and Aashish P Sommaiyaa, Managing Director & CEO; Motilal Oswal Asset Management, talks about things that can boost the domestic stock markets, what should be done on this Diwali, what can be the positive trigger for the market among others during a candid chat with Anil Singhvi, Managing Editor, Zee Business. Edited Excerpts:

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Q: What is your outlook on the mood and atmosphere for this year's Diwali in terms of stocks market? Is it positive, neutral or little paranoid?
Nilesh: Traders of weekly options are in a problem and same is the case of investors of mid-cap and small-cap. However, the environment is slightly better for investors of the large-caps. But, it is a moment to cheer for those who were waiting for an opportunity to invest because it is the right time and opportunity when he can invest at lower prices and valuations. 

Q: Do you think that we will get an opportunity to see a 20-20 match like situation between this Diwali and next year's Diwali?
Nilesh: We can get an opportunity to see such a 20-20 kind of situation, probably, in small and mid-cap stocks. But, I can't provide a date when such an event will occur in the 365 days. Thus, you will have to play like a test match with a hope that there will be a week or month where you will get a chance to score like 20-20 matches.

Q: On looking back it seems that we haven't seen a period that was enjoyed. So, should we look back or forward on this Diwali?
Manish: One must always look forward in the case of equities. The market is still in good shape though there has been a lot of slowdown in the economy. If we compare the situations between the two Diwali's then car sales have been a disappointing one since last Diwali. But, it is a time when we should look forward to things that has happened and I feel that there will be an improvement in the economy. A perfect work has happened in the economy last year and that is the domestic interest rate and monetary conditions were tightened enough due to NBFC crisis. When it comes to global growth then it has been the slowest one in the last 10 years. However, there is a mean reversion of such things and it does towards an average.

Q: After a long gap, this is the first Diwali where an investor is thinking about what he/she should do. What is your take on this Diwali from the perspective of the investors?
Aashish: As you said that this is the first time when the investors are thinking about should they celebrate this Diwali or not. Interestingly, this is also the first Diwali where people are sitting in television studios and asking people to celebrate Diwali this time. Have a look on the statements of big banks, the Reserve Bank of India and the finance ministry and it is being said that a loan of Rs82,000 crore has been sanctioned in a fortnight and the interest rates have been brought down by 135 basis points (bps) in last six months.

There was a currency depreciation during the last Diwali and liquidity conditions of the banking system was negative but I think that there is an Rs2.50 lakh crore surplus liquidity is available today. However, the banks are providing money to each other and depositing it at RBI but the problem is related to the kind of credits that they are providing. So in all these years, this is the first time in many years where I have seen this combination of loose monetary policy and loose fiscal policy. Thus, people should celebrate Diwali because as Manish has said, equity is always forward-looking and that's why they should celebrate Diwali.

Q: If you have a look at the Sensex and Nifty then it seems that the corrections haven't happened in the right sense and people should wait for a few more days before investing. In the case of the mid-cap and small-cap, it seems that we are is a bear market. What should be done and how it can be done?
Nilesh: We should celebrate Diwali for President Trump for three reasons that will strengthen our markets as well as the economy and they are (i) He has stated the tariff war between the US and China due which several manufacturers are relocating themselves from China, which provides a penalty corner/goal opportunity to India and the government should make ways to bring them to India. It will give a boost to our growth. (ii) He tweets every time whenever there is a rise in oil price, which helps to bring it down. Interestingly, oil prices are like Raahu and Ketu as when oil prices go up India comes down and vice versa happens when oil prices are down. So, we should celebrate Diwali for President Trump so that he keeps it down. (iii) He has said that why American savings should move to China. Now, FPI investments are based on MSCI emerging market index and our market cap is $2 trillion whereas China's market cap is around $6 trillion. Earlier our weight was around 9% and Chinas's was around 28%, i.e. 2:6 ratio was almost equal but we are getting 8 from 9 and then will get to 7 but they, China, has moved up from 28 to 32 and then will be 50. On the completion of the cycle, India's weight in MSCI against China will be one-seventh instead of one-third, which means FPIs money will move more to China instead of India. And, we have seen FPIs selling in September 2019 quarter. However, President Trump has raised the issue that why American money is being sent to China and I feel that his appeal will be heard at the MSCI, which in result may decrease China's weight and this event is likely to move FPIs investment towards India. Thus, President Trump has given three reasons to celebrate Diwali like he is pulling out manufacturers from China, keeping the oil prices under limits and may divert FPIs flow towards India.

Q: What propels you to buy the stocks every day at least when the FPIs are selling them?
Manish: Equity is a game which gets attractive when the prices are low because you are buying a business through the stocks. I feel you can comfortably invest in the mid-cap and small-cap at present because the margin is safety is quite high at present. If you compare the asset incentive sectors in mid and small caps like real estate, cement, utilities, hotels and hospitals with the replacement cost or book value or dividend yield then they are available at attractive prices. As of now, no one is quite interested towards it and that's why they are available, but whensoever there is a change on our macro - in next one-two years - and there is an inflow of liquidity then it, the stocks, will do better than an FD.

Q: Several large-cap has turned up to be a mid-cap and mid-cap has turned to be small-cap since the last Diwali. Do you think that things will reverse by next Diwali?
Nilesh: FPIs have sold stocks of around $4.50 billion in the September quarter in the listed segments, where maximum companies are profitable while they have brought around $36 billion in the unlisted segment through private equity venture capitals between January to August 2019. Generally, these are loss-making companies in the unlisted segment. So, they are buying the unlisted loss-making company and selling profit-making listed companies and this is something that makes us confident that we should buy because they will return someday in the future and if not then President Trump is sitting over there.

Q: Do you think that this a right time for investors who for the first time have seen their NAV (Net asset value) in the negative zone to be confident and invest more?
Aashish: People should invest more when things are negative, at present, because the companies have quality and prospects. So, business is a business and your opinion must not be based on the price because the change in business may bring a change in rates but it's not necessary that change in rates can change the nature of the business. So, I think, your confidence should be boosted at least when a product that was available at Rs100 is made available at Rs70. Generally, people think of investing when they are confident, however, they get confident at the wrong time. Secondly, I have seen two things and they are (i) people overestimate their liquidity need and (ii) they underestimate the holding period because when the value of Rs100 turn up to be Rs80 then they start behaving that they need money tomorrow itself. This decline from Rs100 to Rs80 is a notional loss thus it doesn't arise a need where you need your money the second day.

Q: How and in which order the returns will come in four asset class, namely equity, fix an income that includes mutual fund schemes, property and gold, in the next 1 year?
Nilesh: I think, maximum returns will come from equity especially in mid-cap and small-cap, then from the property but location-specific in which both, commercial and residential, will do well; which will be followed by fixed income and Gold.

Manish: Returns will be minimum from property and gold and I am quite bearish on them. When it comes to property, then I feel rental yield is very low against the mortgage in India, but, mortgage and rental yield is almost the same in the developed market. Rental yield stands around 2-2.5% in our country but mortgage yield stands at 8% and this gap is too high. I had certain confusion on equity and fixed income because when sequenced fixed income will do well against equity as liquidity concern is a big problem in our economy at present. So, bringing growth will be a difficult task with this credit spread, which should be brought down. But, I feel more gains can be seen in the case of equity but when sequenced there is a need to reduce the credit spread or else it will be difficult to grow.

Aashish: I think, equity, fixed income, property and gold.

Q: Everyone of you thinks that equity will outperform which means the percentage of growth from this Diwali to 2020 Diwali will be more then what we achieved between 2019 Diwali and this Diwali, which stands around 10%? Do you think that Nifty will provide a double-digit growth while mid-cap and small-cap will give a return of around 25%?
Nilesh: It is difficult to state about the kind of return one can yield in the next year. As several times, out of 12 months of a year, there are two months which remains quite positive while the remaining 10 remain negative. But, the positive of the two months is such high that they can cover the losses of 10 months. You in one of your tweets regarding weekly option have said that a day's loss is enough to take away your profits of the last 18 months. Thus, instead of thinking about the kind of return one can get, he/she should think about the business in which they are investing, the promoter of the business and the quality of their portfolio.

There has not been a divergence between large-cap and small-cap in the last one year but there has been a divergence between quality and wastage. There is a common thread in every stock that fell by almost 80-95%, and they were (i) There business model was a wrong one, (ii) there were governance issues in them and (iii) there was a doubt on their quality. So, quality VS non-quality divergence has had a major impact on the returns. Thus, pay more attention to the quality instead of the returns, because they will give good returns, maybe in a year or two. It may give good returns within a month as well.

Q: Manish, you have said that equity and fixed income will remain almost same which means returns will restrict itself between 8-10%? 
Manish: It is not so but I think, low credit spreads can lead to healthy returns in fixed income. And, as far as equities are concerned, then I think it will be a difficult task to get more return on it without bringing down the credit spreads. See, there is a liquidity tightness at present and it will be difficult to bring growth in the economy without easing it. However, there is a gradual easing on the liquidity tightness that was in force for the last year. And in the process, the cost of funding has gone down for good NBFCs and corporate houses. But it should be broad-based to strengthen the economy and I think, it will happen in the next 3-6 months. Thus, the overall return on equity can be more but initially, returns should be made on a fixed income, which will make things better for equities.

Q: Do you think the coming year will provide returns that will be beyond our imagination?
Aashish: We keep a tab on the numbers. Have a look at the returns a person who invested five years ago and you will find that it is in double-digit. Those who invested in the mutual fund - five years ago - has got a double-digit return on his investments despite the returns of the last two years has almost been at the zero levels. But, problem props up with those who joined the league two years back from here as not got anything and one should think about what he can earn in the next three years.

I would like to use this platform to explain the investors and viewers that equity asset class is not a linear one. I have met people who invested in the small-cap two years back and were saying that their returns are standing at - (minus) 20 levels and they feel that it will not grow even they get old. They think linearly.

The NAVs have gone up by almost 8-9% in September and this is the biggest proof of the fact that if two bad years can spoil the average of five years then one good year has abilities to improve the average of bad three years. People are into the habit of looking at the number in CGAR (Compounded Annual Growth Rate), which is misleading because 1 bad year has the power of damaging the average of five years while one good year can improve the shape of three bad years. For instance, NAVs grew by 8-9% in August and September and have changed the compounded interest of previous of a person who entered into the market three years ago by almost 3 per cent. Equity is a non-linear asset class. During last Diwali, we were facing certain problems like ILFS, continuous rate hikes in the US, calibrated tightening in India, increasing oil prices which reached the mark of $88 and projections were that it may go up to $125, depreciating Rupee which stood at 74 against dollar and was supposed to go up to 85, forecasts of hung-Parliament and banks were collapsing. However, when we look at this year's Diwali then almost everything has changed the US, as well as India, are cutting their rates, oil stands at $60 and we are not facing a hung-Parliamentary condition and the government is quite attentive and in a fire-fighting mode.

Q: Provide one big reason for a boom in the market by next Diwali and one reason that can what can spoil the mood of the market?
Nilesh: Bullishness or slowdown will depend on a single factor and that is the corrective steps that are taken to revive the economic growth. Our economy grew by just 5% in the June quarter and RBI has estimated that it will grow by 5.3% in the September quarter but we will have to wait for it. The market will go up if the economy grows by 5% or 5.3% or more and will go down if it declines from the 5% level. Thus, market conditions will be determined by the steps that are taken to take the economy above 5.3% or below 5%.

Manish: As I have said that it will depend on what goes on. As in there is a need to ease the domestic monetary conditions, trust deficit and credit spread and I think it is happening and will happen in the next two quarters. I think it is going to be a positive trigger. However, two things can act as the negative triggers and they are (i) If oil prices move up by $15-20 due to some geo-political reasons, which is going to be a major blow and (ii) If US-China trade war pulls down the global growth because this the lowest growth in the last 10 years and any depreciation in growth from this level will create a debt issue somewhere. What happens when the growth comes to its extreme low point than it sinks some of the other leveraged entity. Thus, there must be an improvement in US-China relations as it will give a push to the global growth.

Aashish: Some aggressive steps taken by the government can be the main reason for bullishness. There is an economic cycle that turns the economy bullish or brings a slowdown and in the same way, there is a cycle in the ruling dispensation, i.e. the government, in which a socialistic trend continues for 3-5 years. Thus, politics determines economics. And at times, economy backfires and leads to a trend in which the economy determines the politics. Interestingly, there is no right or wrong in it as it repeats itself in a country like ours. For instance, it was 2012 when they, the government, has to increase diesel prices overnight, however, it was a politically unfavourable decision. Thus, this is how the economy backfires and that's why I feel the government will have to take some aggressive steps. It is known that the GDP numbers of the September quarters is likely to be a bad one and people will react negatively if it happens. I don't have any hope with this quarter but feel that January-February onwards there will be a change in mood.

Q: Any 'Mantra' for mutual fund investors on this Diwali?
Aashish: Don't change your opinion after having an eye on the rates as wild swings that are based on the rates is an unhealthy sign and you must have faith.

Manish: Asset allocation - i.e. the stocks and schemes in which he/she has invested - in the secret of every investor who has made good money. So at a time, when more or less there has been a slowdown in the broader market for the last 18 months, then the investors are advised not to change their allocation in a fear. They can increase their long-term allocation of the equities instead of reducing it.

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Nilesh: Be a regular investor and keep your SIP on. Yes, it is true, SIP returns of 3-5 years haven't been as good as you were hoping about but have SIPs of 7 years is still a good one. Secondly, be a disciplined investor and as Manish has said concentrate in asset allocation and buy more equities when the market is low and buy less when it is high. However, valuations in mid-cap and small-cap are favourable for you. Thirdly, be a long-term investor as Aashish has said that people estimate their liquidity needs more and reduce their holding period. But, nothing happens overnight, even a mango tree produces fruits after a gap of 12 years since its plantation and the same happens in case of investment, where you should wait for a long period to reap the best fruits on your investments.

(NOTE: Zee Business brings to you an exclusive line up of programming for Diwali 2019 with experts, insights & sharp acumen under Zee Business Damdar Diwali show. A Diwali treat for you! Starting soon from October 14 only on Zee Business.in)