Active funds can gain from passive flows: Manulife Investment CIO

File photo of Chris Conkey
Foreign investors’ tendency to make large passive investments based on index allocations rather than fundamentals can create market inefficiencies that actively-managed funds can use to their advantage, says US-based CHRIS CONKEY, chief investment officer of Manulife Investment Management, managing $394 billion of assets. In conversation with Jash Kriplani, Conkey shares his outlook on India, emerging markets (EMs), and how India can benefit from lingering trade differences between the US and China. Edited excerpts:

What do you make of growth uncertainty in India?

We see it as a J-curve experience. The government is putting in place a lot of policies, which if well-executed, should lead to much stronger growth. It is going to be dependent upon privatisation and how India deals with widening deficit. Most importantly, it is going to depend upon growth of investors in tier-II and tier-III cities, their ability to stay the course, and participate in the capital markets. Also, the government can facilitate capital investments through targeted tax policies. Focusing on a larger set of factors and then focusing on execution is by far the biggest challenge for the government.

How are you positioned on EMs?

We are currently overweight on developed market equities versus EMs in our shorter-term allocation. On fixed income side, we are overweight EM debt vis-à-vis developed market debt. In the longer term (three-five-year period), we are overweight EM in both fixed income and equity. In the EMs, the challenges stem from slowing Chinese growth. We feel the recovery is going to be muted. The recent fiscal move from China is less than what they have put out in the past. We think that is going to lead to lower EM growth, particularly in Southeast Asia and China. The second challenge is that while there have been some indications of resolution on trade issues, we still think there is lot of uncertainty in terms of clarity and details. Such geopolitical uncertainty has an impact on business’ ability to allocate capital. We are seeing this transpiring in North America and Europe, where people have slowed down the pact of hiring as they are not sure how it will play out.

What is your outlook for India?

We hold a positive long-term outlook on India from a structural perspective. Demographics, middle-class growth, and steps taken by the government are positive from an investment perspective. There have been some challenges to growth due to lack of investments. Shorter-term challenges come from potential oil price spike, uptick in inflation. We view these challenges as cyclical in nature and not structural.  

Passive funds are gaining investor interest. What is your outlook on future of active fund management in India?

Foreign investors have historically been swing investors in India. Typically, they have approached India by making it an almost beta trade. They would buy largest and most liquid names. That has created opportunities for active managers to discern the true value of the companies. Large passive flows can create dislocations in the market. There is indiscriminate buying and selling regardless of underlying value created by a company. So, there is a lot of room in terms of capitalising on market inefficiencies in India.

Is India well-placed to take advantage of trade issues between the US and China?

There is an opportunity for other countries to be part of the transition of the supply chain. It takes a long time to execute this, but given education levels of the local population and mindset of the government to make regulatory environment more conducive, India would be well-aligned to benefit from this. As India increases its exports, its vulnerability to oil prices will come down. The two sectors where India has increased its market share are engineering and chemicals. Three-four years ago, we had started to see this in consumer durables and electronics. Now, we are seeing it in engineering and chemicals. China also faces a demographic issue. On the other hand, India has surplus people with good education levels and surplus power. Also, a large domestic market. These factors are now coming together, acting as catalysts.

Is India insulated from global challenges?

We feel India is insulated from the challenges that are impacting world at the margin. Globally, we are on borderline manufacturing recession on account of uncertainty on global trade agreements. India’s economy is more domestically-driven, which both insulates it from the challenges facing global economy and creates opportunities. The government’s policy in terms of privatisation, in terms of rebuilding savings, investments, creates opportunities to gain from this domestic growth and also offset slowdown in exports.

What is your outlook on US Fed’s monetary policy?

We feel there is potential for one more cut in CY20. But aside from that, we actually think that the Fed could be on hold for few more years. The reality is that the impact of declining productivity, demographic challenges, and manufacturing challenges are going to lead to a low inflation environment. We think risk assets as a result are in a sweet spot. According to our chief economist, while the last decade was all about the monetary policy, the decade of 20s is most likely going to be about fiscal policy. With monetary policy, the marginal turn is just not there, with rates already being so low.

Do you see any spillover on the Indian economy from the debate on the Citizenship Bill?

We wouldn’t like to comment on the Citizenship Bill. As we have seen in most economies when there are issues that can be either positive or negative, it can lead to distractions for short-term growth. China is one example, where we have seen strong growth due to festivities. From our perspective, we are focusing on long-term growth potential of India.

Escalations between the US and Iran have eased. But what can be the potential ramifications of such issues on India?

West Asia is one more element in the geopolitical puzzle, with China still being the linchpin. India accounts for 22 per cent of Iraq’s crude oil exports. If Iraq turns out to be a centrepiece of any ground conflict, that would have a real problem in terms of oil transportation. This geopolitical issue will create some level of risk in the world. If inflation and growth go up, it would most likely lead to US Fed keeping rates lower for a longer period, which will have a positive rub-off on EMs.

Market analyst Chris Wood has said that the ultimate target for gold price is at $4,200. What is your outlook on gold?

Gold is viewed as a safe haven from the perspective of the US. It is seen as more of a hedge against volatility. However, there can be several differing perspectives on gold across the world. In China and India, gold is considered as an investment. However, gold is nearly 20 per cent down from its top of 2011 (in dollar terms). In terms of rupee, it is 20 per cent higher. For EM investors, gold returns are in a way hedge against depreciation of local currency. Also, in last two-three years, it is not easy for anyone to route undeclared money through gold in India, which was the case earlier. Gold can go to high levels when there are some major dislocations in the financial market, but globally, the risks are actually receding. There is also more clarity on how much longer the US Fed holds interest rates.  


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