Rate hike by US Fed is not a good sign for emerging markets (EMs). On the other hand, the ongoing Russia-Ukraine war has pushed up prices of crude oil, which doesn’t bode well for Indian economy, due to its dependence on oil imports.
Despite the global headwinds, Michael Dommermuth, head of asset and wealth management-Asia at Manulife Investment Management, says the global asset manager is overweight on India within the EM pack. He says there are several factors that put India in a much better position now to deal with rising oil prices. Dommermuth says Manulife, which globally manages $856 billion of assets and is a 49% partner in Mahindra Manulife Mutual Fund, will keep its focus on active fund management and not shift to passive funds, as there is huge scope to deliver outperformance in emerging markets like India. Edited excerpts:
Why do you think India is better-positioned to deal with rise in oil prices?
India has undertaken a number of reforms, such as formalisation of its economy, incentivising domestic manufacturing, digitalisation, import substitution, as well as increasing exports. This is creating stability in India’s current account, it is giving the government the flexibility in terms of monetary policy. The government’s FX reserves are at almost record high. So, despite the rising oil prices, India is far more resilient today in dealing with this challenge than it was earlier. Indian investors should stick to active fund management, as especially in circumstances like this, active fund management tends to do better than passive funds.
While stagflation is generally bad for all emerging markets, some markets are going to be in a better position to deal with these headwinds. Markets with strong current account, strong FX reserves, net exporters of energy and food will be better-placed.
In the current global environment, when there is risk of consolidating money supply and contracting balance-sheets of central banks, there can be periods of downturns in markets and active fund managers can use these periods to pick investments at attractive valuations.
How global headwinds – fears of US recession, US Fed rate hike – can impact your allocation towards India?
The Russia-Ukraine war has led to uncertainty on US Fed’s interest rate stance. US Fed had signaled that it may accelerate interest rate hikes, but we will have to wait and watch what direction the Fed takes as commodity prices have increased on the back on the ongoing conflict. What we are seeing is not demand-led inflation, but cost-led inflation, and so monetary policy may not be an effective tool to handle this.
When we look at our asset allocation, we are overweight on India. The big variable that would shape our future holdings would be the length of time oil prices remain at elevated levels.
Market indicators suggest that one-year out, oil prices could moderate. But this moderation, may purely be because of demand destruction. We also need to watch out how these elevated oil prices impact prices of other items and if that is the case, US Fed may need to review its stance on rates.
What kind of international products Indian investors can expect from Mahindra Manulife?
As our first international fund, we launched the Asia Pacific REIT Fund. We like this strategy because it has an income-tilt. Strategies with that type of income tilt tend to be more stable in terms of their NAVs. So, the type of strategies we would like to offer here are those that are not at all tightly correlated with the Indian market. Our understanding is that most of our customers broadly have Indian market exposure. So, even a 10 percent exposure to an uncorrelated asset would help our customers enormously.
In India, we have seen passive funds getting popular. Do you expect passives to become a big play here like in developed markets?
Across Asia, the only countries where ETFs is a huge market, is Japan and Taiwan. And most of that's institutional buying rather than real retail buying. Here in India, ETFs is probably about 11 percent of mutual fund AUM. For the really big asset management companies with large equity fund sizes, their ability to bring value over time diminishes, given how big they are vis-à-vis the market. For a player like that, it is understandable that they might also look at ETFs.
We have no plans to go the ETF route. We are deeply-rooted active asset managers. In Indian markets, I see active management adding particular value in the mid-cap and small-cap market, outperforming the benchmark over a consistent period of time. And this is also true for different Asian markets, where mid- and small-cap companies are under-researched and offer investment opportunities for fund managers.
Why foreign asset managers have not found it easy in India?
A number of global asset managers came to Asia with a belief that they can get quick results, but Asia needs patience. We have been in the Asian market for 120 years through World War II, the Asian financial crisis, SARS, the global financial crisis, and now COVID-19. Every time Asia experience these hardships, it emerges vastly stronger than before. The same is true of India. We would not be where we are without Mahindra’s partnership. If you look at the past, most of the foreign asset managers that went solo didn’t do as well, but it is those with joint ventures that command a large market share.
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