In a mere three years, the Indian mutual fund market will grow to $600 billion and overtake Japan as the second-largest in Asia.

Paul Lorentz, Global CEO, Manulife, and Manulife Asia Head Michael Dommermuth were in conversation with ETNOW, a business and finance news channel in India. The interview is notable for its insights on the Indian mutual fund industry. Here are some key takeaways from the interview.

Paul Lorentz on the global investing situation

Interest rates could be staying lower for longer, which means everyone is searching for yield. Therefore, there is a global shift in favor of income solutions. And because markets are more connected today than they used to be in the past, they move in tandem.

Moreover, European investors are increasingly interested in Manulife’s Asia fixed-income capabilities and are willing to shop overseas for that all-important yield.

“We are one of the leaders in creating those solutions globally,” said Lorentz. “It is set up for a lot of success going forward.”

“We have over 450 investment professionals around the globe with on the ground credit expertise; they have deep local understanding,” he added.

Michael Dommermuth on India

Economy and markets

Michael is very gung ho on the outlook for the Indian economy. The major positives working in its favor are the demographics of its labor and the burgeoning middle class.

As a result, rising incomes will “fuel the vast growth of affluence within the region.”

“Every time you talk about a rising middle class in Asia, you are really talking about the rise of the middle class in India,” Dommermuth said.

Meanwhile, there has been much concern about the slowing of economic growth in India from 7 – 8% to 5%. His comment: “Growth has softened in India, but for most nations 5% growth would be total joy! This is a natural teething problem for the type of significant reforms that India has undergone.”

Is there a disconnect between the slowing growth in India’s economy but the torrid rally in its stock markets?

Actually, what is improving is infrastructure, a stronger private banking sector, and a formalization of the economy. However, the kickers will come from impending privatization of government enterprises, corporate tax reductions and reforms, and other tax changes that could channel savings into the Indian economy via capital formation.

Lastly, India could be a beneficiary of trade reallocations arising from the US-China trade tensions.

India’s mutual fund industry

The size of the Indian mutual fund market is currently about $ 390 billion. According to Dommermuth, India will be the fastest-growing mutual fund market in Asia. Within three years it will surpass $600 billion in size and overtake Japan to become the second-largest mutual fund market in the region.

However, mutual funds penetration is still woefully small. Out of a population of 1.3 billion, only 30 million people invest in mutual funds. There must be higher penetration – for example as in Thailand and Malaysia – with levels reaching a ratio of mutual fund AUM to GDP of 30%.

Further, with the structural changes in India’s mutual fund industry, particularly after demonetization, most of this growth will come from Indian cities outside of its top 30.

Manulife has a 49% stake in Mahindra Asset Management, India.

The last word from Paul Lorentz

There is tremendous scope to align India’s mutual fund industry AUM with other emerging markets and developed markets, said Lorentz.

“You look at some of the demographics and the fundamental shift in wealth that will be created and that will get redeployed back into the market,” he observed.

“We are in the very early stages in India and are set for a very long runway,” he said. “The GDP is going to grow itself.”

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