‘After note ban, we are in a wait-and-watch mode on India’

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 P

At a macro level, how long do you see the developed market (DM) versus the emerging market (EM) battle play out?

There is a sea change, and 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. A stronger dollar, exchange rate history shows, is in general a headwind for the EMs, 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?

On a medium-term view, I think there has been a big reduction in some aspects of economic policy uncertainty. If you nix out the trade protection issues with China, the US economy will get a boost over the next three years – till 2019, perhaps. I don’t believe the US is completely out of resources. Growth can be pushed up. 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 Donald Trump can work magic and stimulate the US economy while keeping additional imports zero and nor do I think that would be his intention.

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 longterm 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.

IF INDIAN MARKETS FELL BECAUSE OF DEMONETISATION, THAT WOULD SURELY BE A GOOD BUYING OPPORTUNITY FOR LONG-TERM INVESTORS, AS THIS IS A TEMPORARY SETBACK TO AGGREGATE DEMAND. HOWEVER, FOREIGN INVESTORS ARE STILL PUZZLED OVER THE MOVE