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As monetary policies become normalised, markets will see more volatility says Principal International President and CEO Luis Valdés. In an interview with Ashley Coutinho, he says strong global growth will help emerging markets. Edited excerpts:
What are your views on global equities against the backdrop of the recent sell-off and subsequent rebound in US equities?
Market corrections are inevitable. The calm in the US markets was unprecedented. Usually, the S&P Index experiences a 5 per cent drop every 90 days. Until a few days back, over 400 days had passed since the S&P’s last 5 per cent slump, the longest since 1929. A correction against a backdrop of strong macroeconomic fundamental tends to be short-lived. Central bank actions are likely to influence investor sentiment. Markets are now accustomed to ultra-accommodative central banks but as monetary policies are normalised, markets will also normalise, including volatility and duration of market cycles.
Emerging markets showed resilience amid the steep sell-off. What are the factors responsible for this?
Emerging markets have seen stable macroeconomic conditions, with relatively strong sovereign balance sheets and adequate levels of foreign exchange reserves, floating exchange rates, moderate current account deficits and fair FDI flows. These conditions will not change and these markets should continue to show resilience. Further, strong global growth, higher commodity prices and recovery in global trade volumes have helped the emerging markets.
What about your focus on retail? How has 2017 been a turnaround year for Principal Financial Group?
For global equities, 2017 was a favourable year and it helped fuel assets under management and flows. About 83 per cent of our actively managed mutual funds, exchange-traded funds and collective investment trusts are in the top two Morningstar quartiles based on a five-year performance. We take a long-term view on asset management for pension and retail investments. Our success is rooted in best global asset management practices. As a result, our success in the retail market will transcend market performance realised in any one year.
The Indian capital market regulator introduced norms for categorisation of schemes. What are your views on it?
Having clear product categorisation is beneficial as it will help investors understand the strategy they have invested in. This will reduce chances of style drift and make product comparison easier. It will result in a more level playing field and simplification of choices for investors.
The Indian asset management industry has grown to Rs 22 trillion. What changes do you foresee for the industry?
Several secular growth indicators show that the industry is poised for significant growth. While the share of traditional products will continue to be significant, we see greater demand for products that will offer diversification and align with target investors’ interests. For instance, there could be greater demand for global (offshore) asset management strategies and for target date/target risk asset allocation funds. There could be more focus on investment management procedures.
As the industry evolves, we see higher regulatory requirements regarding governance, oversight and transparency. This could be in the form of fee transparency for advisors and manufacturers, and a clear delineation between advisors who provide objective financial and investment advice and are paid a fee versus those selling through commission arrangements.
As on December 31, Principal ranked 28 among the 40 fund houses in India, with assets of about Rs 70 billion. The largest MF player is 45 times your size. How do you propose to improve your ranking?
Principal is committed to growth in India. We are optimistic about the market and will continue to invest and explore growth opportunities that enable us to bring our global financial expertise to local businesses, particularly using digital tools and infrastructure. India has a large emerging middle class, with a growing need for long-term savings and investment products, and this is going to increase. As in all markets, we are open to growth opportunities and business relationships that help us to serve our customers better.
Punjab National Bank has recently exited its joint venture with Principal. Are you confident that you are here for the long haul?
We see opportunity in India today. We are making further investments here by assuming full ownership and committing resources to business growth and enhancing our digital footprint in the country. We can leverage our global investment management practices and product development expertise. We are uniquely suited to bring global asset management practices to our India operations. We can leverage our proprietary global distribution network to bring global asset management capabilities and strategies to local clients. We have a strong business relationship with PNB and will continue having it as an important distributor for our long-term saving solutions in India.
How will the emergence of artificial intelligence affect the asset management and pension industry globally?
Principal has taken great strides in implementing machine learning in its global systematic strategies and has created solutions that outperform passive strategies at similar or lower fees. We can deliver these solutions in retail mutual fund vehicles and within pension products. We have sleeves of these technology-supported strategies in our Hong Kong Mandatory Provident Funds.