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Patrick Mange, Head- Research & Strategy, BNP Paribas Asset Management, says that they are on an expansion path and India is one of the major parts of their strategy

Patrick Mange is a doctorate in Economics from Germany. During his Ph.D days he floated a company with a few university friends. Years later he sold his shares in the company and joined Deutsche Bank in Frankfurt before moving to Paris. In the beginning, he was in bond research. Afterwards, he worked for Merrill Lynch and subsequently moved to BNP Paribas as head of strategy and research.

He was recently in India after BNP Paribas took a 49.9 per cent stake in Sundaram AMC. Excerpts from an interview:


What is your view on global markets? The markets across the board have fallen and now there are worries like the middle-east crisis. So where do you see the global markets heading?
That is a hundred million dollar question! We are again in a transition phase in terms of monetary policies, economic growth and profit growth, at least in the US, which remains the benchmark and thus in focus as regards global equities. Such phases are characterised by low visibility and thus high volatility, which generally last for some time. We believe that markets, equities as well as bonds, are going to be quite choppy through the summer months if not a bit longer. But we are also convinced that equities will do well in the medium run, once investors recognise that we are not facing a hard landing and that profits growth is unlikely to collapse. We are still positive on equities but have progressively reduced the risk of our portfolio since the start of the year to take on jittery times ahead. We have also come back to close to neutral on government bonds. They are still expensive, but we think that yields are not likely to increase much from here.

There are certain exogenous factors - things related to geo-political events for example - that also have to be taken into account. If the middle-east crisis spreads, then we will have some more worries in the markets, as the likelihood of a faster downturn would meaningfully increase. But we don't expect this to happen. I believe that geo-political risk premium will remain in the markets for the next few years. But its importance in the eyes of investors will be variable as in the past. Among the global markets, we are overweight on the US after a long time. This means that we are automatically a bit more defensive since the US has a lower beta to the MSCI World. We are tactically underweight on Japan, a bet which was difficult to take because we are still positive on Japan in economic terms. But we are more positive on some other countries as regards cyclical positioning of the economy.

Among the emerging markets, we are currently underweight on India. But here again it is an alpha story not a beta story. We believe that there are some other markets in the rest of the emerging world, which are likely to outperform now.

We are tactically underweight on China too, despite strong economic growth. Growth is not everything. You make profits with volume, or you make profits with margins. And I believe that making profits with margins is better. And therefore, we would not bet upon China yet. But we would now start to bet upon South Korea, a market that has been strongly sold lately, and to some extent Taiwan. The tech news is getting in such a negative territory that it's difficult to believe it can get bad further. The rest of Asia is more or less neutral or underweight. We are overweight on the high beta Latin American markets. Markets like Chile, Brazil and Mexico are the ones we are looking at more closely. These markets also play the role of a commodity proxy or hedge. Thanks to commodity revenues, they have built up huge financial reserves and hence, look sheltered against any deep financial crisis. Generally we remain strategically bullish on emerging markets, which undoubtedly are in a much better shape from a structural point of view. They are the markets of today, not yesterday.

Do you find anything different or unusual about this country after coming here, in comparison to how you would have perceived it earlier?
Though I have been here for just one-and-a-half days, but I can tell you the weather is very different - very hot and humid. But joke aside, my first impression, and this it is more or less the same in other emerging markets like China, is that there is quite a lot of dynamism. That's visible when you walk on the street. That is something really positive, something indeed you do not fell anymore in old Europe. People here look alert, they aim for success and wealth. This makes the economy quite dynamic and India, as a low salary but high quality country can benefit a lot from globalization.

As everywhere, there are still things that need to be improved. On my journey from the airport, I saw huge differences to Europe in terms of physical infrastructure. While this is not completely independent from weather conditions, still with more appropriate infrastructure India could certainly attract even more businesses and thus raise even more its wealth level. I think what has helped India in the last three decades quite a lot is the reform process towards more deregulation of the economy, which was carried out in two phases and which is being carried out even today, though at a slower pace.

The risk in India, in my view, is less financial but more of societal, as unemployment remains too high. This is something the government, well aware of that as the budget shows, has to manage smartly. India has a lot of highly skilled people and that is certainly one of its major assets. You have good schools, good universities. It has been really a very pleasant surprise to see how skilled the finance industry is here. Sometimes, I don't see any difference with Europe regarding some specific skills.

There is a lot of potential, and that is why BNP Paribas is investing in India. But more here is needed to maintain this competitive edge.

To some extent things in India are similar to that back home in France. Here I am talking about the way the economy is being managed. There is a lot of regulation and huge administrative power, which is the same in France.

But is it good or bad? What is your opinion?
In our world of Internet and free flow of information, you can afford to have less of administration, and that remains the case for France and India. At my university, what I learnt is that an economy that is based upon the liberal way of doing things is the most effective to increase wealth. That doesn't mean that you don't have any rules. But you need to operate in a liberal frame, which gives some margin of manoeuvre to entrepreneurship to enable the most efficient allocation of resources. That's what I still miss to some extent in France, and that I think is also the case with India. You have to open and to deregulate at a pace which allows the economy to adapt smoothly to the new paradigm. It would be interesting for BNP Paribas to have the opportunity to sell more products, which are not authorised today. Another important thing is that you have a young population. That means you will have to provide more jobs to people. So you will have to continue to open up the economy and carry on the reforms process. I think Indian economy is very much ripe to be more open.

How do you plan to take forward your partnership with Sundaram?
Our partnership will be a win-win one. They will get some expertise from us and I hope I can contribute to their processes to some extent. I think Sundaram is working very well here and they are very experienced in their field. Sundaram is of big value to us for its huge expertise in India, which is still a very under-capitalised market. Where we can help is probably to build common processes in terms of stock and sector screening, top down allocations and those kinds of things.

We will work to exchange expertise with one basic idea in mind, which is to create value - for us and for the customers not only in India or Europe, but also across the world. We are on an expansion path and India is one of the major parts of our strategy to expand business.

What products are lacking in the Indian markets, for which there is a lot of scope?
There is a lot of scope to launch structured products. Structured products can be quite valuable in markets where the direction is not very clear, as it is the case today. A kind of structured product, which we have sold a lot at BNP in the last three years, was the one where you have a certain capital guarantee. But for these products you have to put in place some models, some strategies and this is the infrastructure we want to share with Sundaram. Moreover, having such products can be quite helpful in the context of pension plans as well.

I think we can certainly extend the range of products once the makers are deregulated further. I mean you would be able to sell, say, some Turkish funds to Indian clients, which is not possible today. We have a well-built research team and our asset allocation product - Global Tactical Asset Allocation (GTAA) - is getting more and more popular in Europe. But as you said, it's the plain vanilla products that still sell here and not the more sophisticated ones, like the GTAA. But this will very soon be the case in my view. Going forward, I think the advisory part in terms of asset allocation would be an important component of our contribution to Sundaram. We are doing it with some other emerging markets and we will be happy to do it with Sundaram. But obviously, the first priority is what is allowed and what is not. We will first look at what we can develop and sell, and later think about what we should sell tomorrow. I think this partnership will prove more and more fruitful.

What is your view on the flow of funds to India? When can we expect the foreign investors to return?
I think most of the de-leveraging of risk positions is behind us. As I told you, I am still positive on equities and I cannot believe in, what people call, a secular bear market when you have this kind of valuations. I would believe in a bear market if we had earnings collapsing, the economy firmly heading for recession and if we had valuations at overbought levels. But neither of this is the case today.

Now for the question, whether the flow of funds will return to India? Yes they will, certainly, knowing that structural investors have probably kept their long-term exposure to India and other emerging economies. At some stage more people will recognise that emerging markets are not the markets of yesterday, subject to the same effects than in the past, but the markets of tomorrow, much more resilient to exogenous shocks, thanks to deep structural reforms in economic and financial terms. I look at the emerging markets a bit like I would look at a product life cycle. In a product life cycle, you go through a phase of innovation towards one of maturation. And emerging markets are probably in the intermediary stage, between innovation and maturity. This translates into growth. It doesn't mean that the way towards maturity will be a linear one. There will be highs and lows, but the way certainly points up.

People who have defensive position will soon rethink it. Some so-called beta countries, to which India belongs, are starting to offer value again in the short term, while they definitely keep their strong potential in the long run. But I don't think its time to invest in them again heavily right now from a tactical point of view. As I said before, there will be some more difficult times ahead -one month, two months maybe a bit longer. And during this time people will keep a more defensive position. You are in a transition phase and you need to have a bit of the uncertainty factor after being out of the market. “A burnt child dreads fire”, i.e. it takes time to get used to a new market context.

But doesn't it sound like a chicken and egg story where markets will perhaps give more certain and positive cues only once the flow of funds returns, while the funds would wait for the certainty to return?
A big problem in the world today is the demographic problem, the aging of the population, though India is one of the exceptions. The demographic problem means a tougher asset/liability management, which means that a number of pension funds in the US and Europe will have to have a bigger portion of the emerging markets in their portfolios. This will bring additional structural money to the emerging markets and it will translate into more diversification of the investors' range. Once you get a more diversified investor base, the market will become more solid, particularly if the range of available financial tools increases. A more resilient market becomes more reassuring and thus more attractive. I believe this is what is to come, but it will be a gradual process.