Indians should overcome the home country bias and ideally consider diversification of portfolio through investment opportunities in international markets.
By Anupam Guha
Indian economy is expected to record a sharp V-shaped recovery as the business environment normalizes. Despite this, Indians should overcome the home country bias and ideally consider diversification of portfolio through investment opportunities in international markets. This will diversify the extant geopolitical risk associated with emerging economies, especially during periods of global/ regional financial crisis (i.e., East Asian crisis (96-97), 9/11 terror attacks and global financial crisis of 2008-09). So should form part of investor’s portfolio as part of as a prudent asset allocation and risk mitigation strategy
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Indian economy has witnessed above average growth rate amongst the G-20 large economies, next only to China, over the last 20 years. This trend is expected to continue for the foreseeable future. According to the IMF, Indian economy contributes about 3.3% to the global Gross Domestic Product (GDP). Countries such as the USA and China contribute 23.6% and 15.5% to the global GDP, respectively.
It brings to fore a pertinent question in the minds of most investors, “Should we really be considering investments in overseas markets?” Clearly, India presents decent broad-based opportunities for growth, as corporate profitability generally tracks the GDP growth and the stock prices follow suit.
While the question remains a pertinent one, Indian investors still have a lot to benefit by investing in overseas markets. Here is my take on a few important points which corroborate the need for investing in overseas markets.
An extensive array of investment opportunities
Whenever you think about the top brands in the world or brands of products and services you use on a daily basis, more often than not, you will think about Apple, Google, Facebook, Microsoft, Samsung, Amazon, Netflix and the likes of these. And you will notice that brands that feature mostly prominently in your list, are not listed on the Indian Stock Exchanges.
So, despite India being amongst the fastest growing economies, it does not house some of the best brands a.k.a. companies in the world. Thus most of the opportunities for wealth creation arising out of the growth of such companies isn’t available for domestic investors. The leading companies of truly global nature, especially cutting edge technology and consumer internet/electronics space, which enjoy a deep moat are listed predominantly on the US stock exchanges. Also, exposure to next-gen innovation-led sectors like electric/autonomous vehicles (EV/AV), AI & ML (Artificial Intelligence & Machine Learning), robotics and bio-medical/ pharma can be taken through these markets. Also the United States, for instance, houses many of the largest consumer, banking and services companies, which are world leaders in their sectors.
So as an investor, allocating a part of the overall equity allocation to international equities can prove to be advantageous for boosting the overall returns of the portfolio.
Benefits of Geographical Diversification
Most investors are aware of the power of diversification and prudently manage diversification across asset classes, like equity, debt, gold, etc. Within equities too, investors with guidance from their advisors or wealth managers manage efficiently allocation between large cap or mid & small cap.
Similarly, investing a portion of your asset in overseas markets will add the benefit of diversification in your portfolio by not completely depending on the Indian stock markets or Indian economy, but by placing bets on the global GDP growth and consumer/technology spend and the companies/sectors which will ride on the wave for business and profitability.
This will help an investor mitigate the factors which impact the domestic stock markets and the overall economy in general. These factors could be both local or global, e.g. foreign investors pull money out from the emerging economies due to some global exigency and shifting assets to a safer haven investments like US treasuries or Gold, or changes in domestic regulations or policies which could have a knee jerk reaction in the stock market.
Thus adding an overseas flavor to an investors’ portfolio would give a geographical diversification based cushion to the investors overall portfolio.
Profit Rupee depreciation
There is a proven long term trend of depreciation of rupee versus currencies of developed economies which adds to investors’ returns year on year. It is well known that US dollar is the safe haven currency for global investors especially in times of a global crisis. This was evident as when the recent Covid-19 pandemic hit the world with a shock, Indian rupee depreciated almost 8.5% from the high on January 13, 2020 to the low on April 22, 2020.
Indian economy, historically has always been in a state of current account deficit and coupled with high structural inflation rate thereby leading to a higher interest rate regime compared to the developed economies, the Rupee always remains under depreciating pressure.
The long term rupee depreciation is in the range of 3-4% p.a. and this straight away bumps up the returns an investor makes on global/dollar investments.
Building a global currency pool
There has been a steady change in social and demographic profile of Indian investors. Now most of us are aligned to the global economy in terms of our consumption, thus making large substantial direct or indirect expenses in foreign currency. These include either kids’ education or medical expenses or business / travel requirements. So one could protect themselves from currency risk while planning for such future expenses by investing in foreign currency assets.
What are the various ways for Indian investors to invest globally?
One of the easiest ways for an Indian investor to invest in overseas markets is through Indian Mutual Fund houses offering feeder funds route into International Funds.
Such Feeder funds are a very convenient route to gain exposure to overseas markets investments, as there is no ceiling in terms of the amount an individual can invest and also the taxation treatment is widely known and thus the compliance and account opening requirement is minimal. Although this route is gaining prominence, especially after the recent pandemic scenario, there are very limited choices available to an investor to choose from the existing feeder funds.
This makes the alternate route which is utilizing the Liberalised Remittance Scheme (LRS) of RBI, a very sought after avenue to diversify globally. Under the LRS route, a resident Indian is allowed to remit up to US$ 250,000 in a financial year. This route too has been steadily expanding over the years and is mostly used by HNIs. However, many broking firms, like ICICI Securities etc., are foraying into this space to offer easier access to all investors and get a taste of overseas investments. ICICI securities, for instance, allows customers to invest digitally and seamlessly in equities, fixed income and ETFs listed in the US markets through a tie-up with a leading US-based broker/dealer.
In summary, while investors always have an inward looking home bias, it is important to take into consideration various changing dynamics of globalization. We are today more a global citizen then only Indians and thus creating a holistic global portfolio is the need of the hour.
(Anupam Guha is the head of Private Wealth Management, ICICI Securities. Views expressed are the author’s own.)