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India well placed to benefit from 2015 macros: Dan Houston

Dan Houston, President & COO of Principal Financial Group, continues to remain positive on India for 2015 on the back of falling oil prices and reform push by the Modi government.

The World Bank has lowered its global growth forecast for 2015 and 2016 due to disappointing economic prospects in the euro zone, Japan and some major emerging economies that offset the benefit of lower oil prices.

In an interview to CNBC-TV18, Houstan said though Europe may see some deflationary pressure, he sees lot of economic prosperity going on in India and US. He also expects Latin American economies to improve further.

“We have seen some softening throughout South East Asia. However all in all net-net on global growth this year it is going to be a pleasantly surprising for us,” he said, adding that one of the key drivers would be low oil prices.

Below is the transcript of Dan Houston’s interview with CNBC-TV18’s Menaka Doshi and Senthil Chengalvarayan.

Menaka: Do you think 2015 is going to be a definite improvement on 2013 and 2014 or are you feeling very cautious at this point?

A: We all would be very well served to continue to be cautious. 2014 was certainly a good year here in India with the markets up over 30 percent. However we have got some favourable tailwinds right now.  We have the benefits of lower oil costs, of a Prime Minister who is very enthusiastic about pushing through some reforms to ignite the growth here in India. So, all in all we will end up being pleasantly surprised by 2015.

Menaka: Will fears regard to the deflationary pressures in Europe and Japan outweigh the growth prospects in emerging markets like India and of course the big global engine of growth that is the US?

A: We are only speculating at this point in time but clearly there is a lot of economic prosperity going on here in India as well as in the US. I think the Latin American economy continues to improve. We have seen some softening throughout South East Asia. However all in all net-net on global growth this year it is going to be a pleasantly surprising for us. Again one of the drivers of that is going to be low oil prices and also the seeking of alternative energy sources from around the world and certainly without as much consumption.

Senthil: Lower commodity prices are good for countries like India but certainly are going to have their impact on other parts of the globe. How long can India be insulated from that?

A: It is a global society that we live in today. The markets are interconnected but I go back to 2008-2009 timeframes when the US was certainly suffering through some of its worst economic times of all time and yet if you looked at Latin America, the Latin American economies did just fine.

Again if you just think about the macro issues going on around the world we have growing population, we have generally recovering economies, we have banks getting better capitalised year by year and again the demand for consumers continues to remain quite healthy around the world and with the exception of a few pockets of some deflationary environments it seems again to be quite positive all in all.

Senthil: How are flows going to be? As you were pointing out earlier in the show we have seen the 10-year yield in the US drop to 1.87 percent, clearly a flight to safety. So, is that going to affect flows into emerging markets and India in particular?

A: This is likely to be temporary. There just seems to be a little bit of pressure right now as you said to flight to quality. The US dollar and treasuries as you said are pushed down below 2 percent. Remember just a year ago there was much speculation that US treasury rate, the 10-year treasury rate would be much closer to 3 percent, then 2 percent. So, we are all just a little bit surprised.

I think we should be reminded of how sensitive the markets have become, there is more volatility but any sort of movement towards the US could be in fact relatively temporary as we continue to see how the rest of the world sorts out over the course of the next Q1 and Q2 of 2015.

Menaka: How are you interpreting this US 10-year yield or the message coming in from the bond market? Is it an interpretation or may be the assessment that the Fed will really not make any hasty steps towards increasing rates or is it that the bond market in fact believes that consumption is going to be sluggish in the US and therefore with the kind of weak inflation that we have seen both in the US and ofcourse much weaker in Europe rising rates is not a scenario that we need to confront anytime soon definitely not in 2015.

A: That certainly seems to be the bias today that the fed is unlikely to make any changes. Chairman Yellen has been very careful along with her deputies, ensuring that the recovery in the US continues to progress upwards. As you know we are not incurring any sort of inflationary pressures in the US at this point in time, wages are kind of in at 2.5-3 percent increase estimates for 2015 and overall cost of goods, overall broader CPI is still quite modest. So, at this point in time there is really not a reason for the Fed to think that they have to intervene and increase interest rates anytime in the near future. I think there is also little bit of sensitivity to the job as recovery, meaning we have relatively low unemployment certainly down from where it was five years ago but there is a question of whether we have a large percentage of the population potentially under employed from what their real contribution could be. So, we have to sort through that.

If we look at the number of actual jobs that are directly impacted by lower energy costs that is not a huge number perhaps – 20000-30000 jobs directly impacted as a result of lower oil prices but that can cascade down into other service and support areas that would have otherwise serviced the oil sector.

Menaka: As a global business leader, are you feeling confident enough given everything we have just discussed to expand or invest in 2015 or will it still be a year as you pointed out that you will play very cautiously?

A: We view 2015 as another solid year for the Principal Financial Group to deploy capital, looking for acquisitions looking to of course make investments in countries like India. Earlier this week I was in Pune, dedicating some additional space. We now have over 870 employees in Pune providing a great deal of support for businesses around the globe. So, I don’t anticipate holding back at all.

In Mumbai we have had meetings over the course of last couple of days talking about our growth of our advisory business here along with growing our mutual fund, launching additional products throughout 2015, emphasising asset allocation solutions and risk based products. So frankly we couldn’t be more optimistic about the opportunities that present themselves here in India.

Menaka: You are interested in the insurance space so I am going to ask for your comment on the way you see India having gone about increasing its foreign investment limit in insurance. We fail to be able to get that approved by Parliament and therefore we have an executive decision by the government that has currently upped the limit but of course this will eventually need Parliamentary approval. What is your view on the insurance sector here?

A: Well, our view primarily around the world as asset management and asset accumulation, our insurance markets, our insurance businesses are confined to the USA market and in the USA market we use our insurance products to primarily support small to medium size businesses, for business owner executive solutions as well as non-qualified deferred compensation. Having said that any time that you can get foreign investment in a country, you are bringing in additional fresh investment dollars, it helps potentially bring in new products, it brings in a sense of energy, enthusiasm, new products, new direct channels, possibly new technologies so again you have to embrace non-domestic players to come in and make those investments in your local markets.

Menaka: On the asset management of mutual fund side are you enthused by the kind of return of local investors that you have seen to the mutual fund business in the last year or so in markets like India, what is your outlook on that front?

A: Certainly if you look at last year’s equity markets in India are up over a 30 percent, you have to be pretty enthusiastic about that. We are fortunate in the Principal Financial Group that we have, very strong equity performance, very strong debt performance, fixed income performance that is, so again we remain very enthusiastic. When you look at India, savings rates of over 30 percent, that is the envy of the world to think that you have a populous that is setting aside that much of their disposable income, saving for long term retirement savings. There is certainly a mix between purchases of real estate and gold, other commodities as well, bank deposits. The next evolutionary phase of the investment landscape here in India is likely to be publicly traded equity, publicly traded bonds where a potential yield could be more beneficial to those savers. Converting savers into investors and certainly that is a big part of what our strategy here in India.

Menaka: You mentioned when you were talking about India’s potential that you might be looking at growing your business via acquisitions, do you have that strategy lined up for India as well? So are you looking at something to buy in the asset management space or maybe like you said you are doing Insurance only in the USA, maybe even an entry in insurance here?

A: I don’t envision us in entering the insurance market here in the Indian market at least in the foreseeable future but we are always inquisitive about opportunities to make acquisitions in India whether it is around asset management or distribution that would support asset management. Our advisory platform that we are rolling out has the potential to grow the organic growth.

We certainly are looking for the right acquisition, but having said that we feel very confident about our strategy that would allow us to continue to grow in an organic manner. In addition to that of course we want to roll out new products as well.

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