We are more constructive on EMs and Asia in particular: Manulife Investment Management

I remain cautiously optimistic and I believe that dips potentially present themselves as buying opportunities, says Luke Browne, Head-Asset Allocation, APAC.

What are your views on some of the risks which may be emerging at the horizon globally? Right now, tech stocks got a bit corrected and everybody got scared. What are your thoughts on that?
There has been a dramatic increase in volatility over the last few trading sessions. In our view, from a macro landscape, fundamentally nothing has changed. Clearly we have seen in the press that there have been some very large transactions going through the market in particular, in options strategies. What this led to was something of a squeeze that the traders take aims at banks across the street and our belief is that this is more of a technical correction with some of those positions being unwinded.

Indeed the central view of the team is that having a little bit of forth taken off the market is not a bad thing. So, I remain cautiously optimistic and I believe that dips potentially present themselves as buying opportunities.

How are you analysing the quality of recovery which we are talking about? Some are saying it is a V-shaped recovery. Some are saying it is a K-shaped recovery. How are you analysing the high frequency indicators globally to take a stock of the quality of recovery?
K-shape is a new one. I certainly had people talking about square root signs, Ws etc. It seems there is going to be a phased recovery. Clearly we can see some very strong numbers across the globe and a recovery in GDP in growth numbers.

“Emerging markets can be particularly influenced by the strength for weakness for the US dollar and so in the shorter term, we need to look for what happens with the US dollar.”

— Luke Browne

However, we are now getting to a critical juncture through the last quarter of this year and into 2021 where there is the potential for something of a stall out for a decline in the rate of recovery. Now that to me could be the catalyst we need to think much more cautiously about where we want to allocate to markets. The high frequency numbers are always critical to look at and interpretation is everything. We should not lose sight of the fact that 22 million people in the US lost their jobs. Now we have seen recoveries in these numbers but looking into the data beneath those top line figures, in order to understand the productivity that has been created by people returning to work, whether full time or part time but these are the kind of details that we need to look at to get a very detailed and solid understanding of the potential global recovery.

What are your thoughts on flows to emerging markets like India? Is there a case building for emerging markets to be recipients of bigger flows going forward?
I almost certainly do and from a strategic point of view, we remain constructive on emerging markets. By strategic I mean looking forward to the next five years where we see different asset classes performing on a relative basis.

We do like emerging markets over developed economies. Emerging markets can be particularly influenced by the strength for weakness for the US dollar and so in the shorter term, we need to look for what happens with the US dollar. Ongoing strength is likely to be something which is attractive for the emerging market and so we are carefully watching the demand for dollars and the flow of money. As liquidity gets added, should we see further weakness in the US dollar? As a medium term trend, we could see the dollar weakening again and should be supportive of emerging markets and allocations within.

The upcoming US election is something most money managers globally are watching out for very closely. Some are nervous that it could trigger volatility in risky assets. What are your thoughts there?
You are absolutely right and the way I look at these things is that uncertainty in markets typically leads to an accompanying rise in volatility. Now, we can look at certain indicators, for example, if you look at the VIX index and the reference of volatility in US equities, we do see that there is something of a hump in that curve around that election event risk.

So already to some extent there is a degree of uncertainty being priced in. Now in talking to our macro team and the economists we are much more relaxed about the eventual results of the election. Clearly we need to watch and see how the campaigns are evolving, what rhetoric we will get, what focus there will be from both the Biden and Trump camps. Post the election, my view is that we are going to continue to have support from the Fed, we are going to continue to have liquidity and on the fiscal side that should lead through into the economy.

But as we all know we need to watch the impact and effectiveness of any fiscal spending, what is going to happen with global inflation and what opportunities that gives us. I would sum that up by saying elections are a risk. However, in this case I do not see a particularly different outcome between Democrats and Republicans.

What would be a favourite asset class for investors in a post Covid world — three to four years going ahead?
The first thing to understand is what you are trying to achieve with your allocation. Those investors that are seeking greater stability and are looking longer term, need to remain constructive across the board. If you look into credit markets, select government bonds all the way through investment grade and to high yield. Now across equity markets, we are more constructive on emerging markets and indeed Asia from a strategic point of view.

I would encourage people to be looking within those markets, at managers who have particular presence on the ground and are able to add value through selecting the right individual securities within the broader index that they are looking at.

From a shorter term point of view, gold remains interesting and has utility in portfolios both of potential returns and also of somewhat defensive characteristics. If I look more specifically into Asia, we like China particularly in fixed income. We like Emerging Market debt and I have seen local currency as well as select US dollar currency and obviously these views evolve as we see the path of the US dollar strength weakness etc.

It is very much being opportunistic in the short term and understanding the evolution of markets whilst at the same time thinking more strategically about where the growth potential is and what is likely to drive returns in those portfolios in the medium term.

How far could we be from meaningful discovery of a vaccine as far as Covid is concerned? Do you think that world over people are coming to grip with this and are trying to figure out a way to live alongside this pandemic?
There are a number of dynamics in this. If we look at what has happened over the past two or three months, there have been a lot of headlines over the potential developments of the vaccine and this has been encouraging the markets because this leads to speeding up the opening up of the economies and less fear.

We have seen recently one of the frontrunners in the vaccine race ran into some issues in the trials and had to pause that. Now we did some work with our healthcare specialist who says this is normal while developing a vaccine. There is nothing to be alarmed about for that particular trial. The best guess for people is that should a vaccine be developed, it is likely to be available towards the end of this year or in Q1 of 2021.

Notwithstanding the vaccines, your observations around what is happening in Mumbai and opening up is a pretty consistent story across the globe. If we look into Europe notwithstanding the recent rises that we have seen in infection rates, it seems to be much more clustered around the young. I saw an interesting statistic the other day. If you look at the mortality rates of Covid, it is something like a thousand times more prevalent in over 80s than it is in the younger 30s.

I think economies and societies are becoming accustomed to the idea that things can be opened up. We need to tread more carefully with the older generation and those that might have underlying health issues but for the younger side of society, we should be pushing forward so opening schools, opening restaurants, returning to a degree of normalcy.

The one piece of caution and I must encourage everybody to look at is consumer behaviour and consumer trends. We need to watch those carefully and make sure that we understand those patterns and the impact that they can have on us across values.





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