By Rajesh Cheruvu
Indian investors’ allocation to financial markets and assets has risen since 2014 as the balance shifts from real assets like real estate and gold. This phenomenon can be made from the growth in SIP inflows in Feb 2014 from USD 100 Million a month to USD 1.6 Billion a month. Similarly, Demat accounts grew dramatically in the past three years, from 41 Million in March 2020 to 100 Million.
Ongoing government expansive fiscal policies focusing on infrastructure spending and propping up domestic manufacturing through production-linked incentives and the fifth successive year of normal monsoons helping healthy growth consumption. As the Indian economy thrives, it’s an obvious choice of resident investors as an exciting time to invest in the local markets.
However, in an increasingly interconnected world with globalising consumption patterns, diversifying investments beyond the local markets is an essential consideration from risk management and investment discipline perspectives.
Geographic diversification provides several benefits, including reducing risk, access to newer opportunities, currency diversification, improvement in returns profile, and hedging against inflation. Investing in different markets and asset classes can minimise the impact of macro events, potentially leading to more stable returns over the long term.
Increasingly Indians are becoming global citizens in terms of their consumption of global lifestyle products, leisure travels, health care services, and education for their next-gen kids. In India, the start-up ecosystem has been thriving strongly since 2012 onwards with the support of PE and VC funds. Most of such new-generation businesses are not accessible to retail investors, given their size. However, such new business opportunities are available in public markets to participate in for retail households.
Across the world, many business segments are seeing changes driven by economic and regulatory changes. Energy is one such segment emphasising multi-lateral agencies’ green and clean strategic objectives. The break out of the rift between Russia and Ukraine a year ago appears, accelerating the government’s emphasis on alternative energies and sources given the price and supply variations since then.
India being the Emerging market and the net importer of energy and other commodities would keep the trade fundamentals structurally exposed to external dynamics. Hence, domestic currency depreciation is given the trade gaps. Also, Inflation and interest rate differentials have a role to play in capital flows in and out of the market from time to time. Effectively wealth or cash assets are gradually losing their value, although they appear to be growing in nominal terms.
The US dollar is one of the world’s most widely traded currencies, meaning investing in a range of international markets can be done in USD terms. However, it’s essential to remember that the stock market can be volatile in the short term, and it’s critical to focus on long-term fundamentals rather than short-term market fluctuations.
A well-diversified global portfolio should include various forms of investments and asset classes. Market-neutral investing opportunities like hedge funds, life settlement schemes, low-cost debt and equity allocation through ETFs are options apart from investing in companies to reduce risk and exploit opportunities.
The global markets offer a range of low-cost opportunities for investors looking to de-risk their portfolios from the local market concentration and vagaries of such exposure. Given the complexity of the access to the market and deciphering of the opportunities and suitability, investors must take the assistance of informed advisors.
The matured nature of developed markets offers greater opportunities to invest in global business franchises. However, the absence of timely exit from such great businesses has led to poor investing experience for investors, with many such businesses collapsing overnight. Word of caution to note is constant monitoring, and timely action with changing business fundamentals without the obsession with names is a must.
In conclusion, while the Indian market remains a substantial investment opportunity and a realistic option for resident investors, geographic diversification provides additional benefits to investors.
(Author is Managing Director and Chief Investment Officer, LGT Wealth India)