 "After note ban, we are in a wait-and-watch mode on India: Geoff Lewis")
Demonetisation was a shock to both domestic and foreign investors, says Hong Kong-based Geoff Lewis, senior strategist (Asia) at Manulife Asset Management, which has around $301 billion in assets under management globally. Edited excerpts of a talk with Puneet Wadhwa:
At a macro level, how long do you see the developed market (DM) versus the emerging market (EM) battle play out?
I think there is a sea change, and I think the switch to a looser fiscal / tighter money stance is dollar positive. This, in turn, is a headwind for the EMs. Investors in emerging markets in 2017 will have to be selective. We were of the view before the outcome of the US Presidential election that it was too early to become really positive on the outlook for EMs. There was no big pick-up in world trade, for example. We just haven’t seen that yet; there was, however, improvement in the Purchasing Managers Indices (PMIs) in recent months, but the improvement for the DMs outweighed smaller improvements in the EMs.
So we were of the view that global investors would not be returning en masse to the EMs just yet, although we certainly felt that there was a case for no longer being under-weight the asset class. And perhaps being overweight in parts of the EM universe, such as Asia (ex-Japan). But a stronger US dollar (USD) exchange rate history shows is in general a headwind for the Emerging Markets, as it crimps the dollar purchasing power of their export revenues, much of which is commodities, which are also pressured by dollar strength.
How much of Donald Trump’s campaign will get translated into policy action once he assumes office, and what does it mean for EMs?
Everybody is talking about policy uncertainty; and the Bloom, Baker, Davis uncertainty index rose to a new peak just after the outcome of the US Presidential election on November 8. To my mind, on a medium-term view, I think there has been a big reduction in some aspects of economic policy uncertainty. Because there could be nothing more uncertain for the US economy than the prospect of another four years of economic gridlock, as it would have done under a Clinton presidency and a right-wing Republican majority House. There is some uncertainty as to how closely and smoothly President Trump will work with the Republican leadership under Paul Ryan in Congress. I think one should start by assuming that they intend to create an effective partnership, and that they will find many areas of agreement.
If you nix out the trade protection issues with China, then the US economy will get an economic boost over the next three years – till 2019, perhaps. I don’t believe that the US is completely out of resources. Growth can be pushed up. Displaced workers who dropped out of the labour force will come back. So the total growth boost will be a factor of whatever multiplier number one assumes. Then if import demand in the US picks up due to the boost to growth, it will be a positive for global trade, which will be very good for the EMs. I don’t think that Donald Trump can work magic and stimulate the US economy while keeping additional imports zero, nor do I think that would be his intention.
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Are you looking to hike allocation to any particular region or economy over the next three to six months?
We are okay with the asset allocation we had before November 8. We were overweight the US, underweight Europe, overweight Asia and underweight the rest of the EM universe. What we have done recently – and this is a move which you can say is supported by the Trump victory – is to be short yen and long Topix. This is another way to play Donald Trump’s proposed stimulus measures. We have moved Japan from underweight to neutral over the past month.
How are you viewing India as an investment destination after the demonetisation move?
We are in a wait-and-watch mode as regards India. The demonetisation event is likely to have a negative short-term impact. I believe it is not going to run smoothly, though there might be significant benefits to India in the long run. We believe India is more of a defensive and a domestic growth story. It is less dependent on exports to the US. In valuation terms, it is a market which still looks a bit expensive to us. On top of that, there is a puzzle in the macro economic data – the GDP (gross domestic product) numbers doesn’t seem to match the industrial production (IIP) and the other micro economic data. We remain neutral on India right now.
Are foreign investors now more uncertain about the road ahead for economic growth, given the demonetisation impact?
Demonetisation was a policy move that came as a shock to everyone – domestic and foreign investors. While everyone understands what the motivation is and the fact that it could bring long-term benefits, it is not going smoothly as far as we can see. For a long-term investor, if Indian markets fell because of this, that would surely be a good buying opportunity, as this is a temporary setback to aggregate demand. However, foreign investors are still puzzled over the move.
Would you call demonetisation a bold move or a mis-step?
We can see what the objective is and the fact that such measures could not be introduced gradually. There is simply a huge part of the Indian economy that still runs almost exclusively on cash, and you cannot really persuade those people to give that up overnight.
The move does show, however, that Prime Minister Narendra Modi is not afraid to take the bull by the horns, which is good, as we need these reforms from governments, who need to take on and challenge vested interests. And, it takes time to get things done; so, maintaining the appetite for reform is critical. Clearly, demonetisation is only a short-term demand shock, which does not have any long-term negative implications for the Indian economic story. I do not see this as having much additional impact on the FII (foreign institutional investor) portfolio holdings over and above the dollar, higher global bond yields, etc.
Are the markets being too pessimistic about the global and domestic uncertainties?
The Indian rupee is holding up better than the average EM currency. Normally, one doesn’t get more than the average portfolio outflow from the Indian markets as historically equity inflows are quite sticky. Given India’s advantages I would be surprised if there was a large scale panic selling as in 2013. Though we have seen some selling over the past few weeks, we don’t think the overall situation will be as bad as the Taper Tantrum of three years ago.
Having said that, a lot will still depend on what happens to the US dollar in 2017. India has a very credible central bank, good domestic fundamentals and has not over-borrowed in foreign currency. Against this backdrop, I feel the rupee will continue to be relatively firm amongst EM currencies.