The big question is – how much to invest in international markets?
Are you missing out on the real action when it comes to investments? Look at where the high net worth individuals (HNIs) and ultra HNIs are putting their money for wealth creation. According to the Reserve Bank of India, in 2018-19, $422 million was spent by Indians on buying equity and debt instruments outside India. It shows Indians have already been diversifying across asset-classes too. According to the Karvy India Wealth Report 2019, the proportion of global individual wealth in key asset classes was 25.7 per cent in equities, 45.5 per cent in debt, 15.8 per cent in real estate, and the balance 13 per cent in alternate assets, including gold.
Even investments in real estate have been growing. According to Knight Frank, the independent global property consultancy, India’s outbound capital into commercial real estate increased by 92 per cent to US$0.7bn in 12 months to Q1 2019. Also, according to the Knight Frank Wealth Report 2019, the results of Attitudes Survey found that 24 per cent of Indian Ultra HNIs have property investments, excluding first and second homes, outside India, up from 21 per cent the previous year.
If you haven’t got your rupee invested there, you probably are missing out on the real action. According to the Securities Industry and Financial Markets Association (SIFMA), a US industry trade group, the US equity markets represent a huge 38 per cent of the $85 trillion in global equity market cap.
As an investor, when you invest in the US stocks through S&P 500 index, NYSE Composite, Nasdaq Composite or any other US indices, you have a pie of the global economy as well. The US stock market offers the opportunity to spread your investment across bonds, ETFs and shares of some of the biggest companies in the world. As per SIFMA, on average, around 6.9 billion shares are traded on US equity markets every day.
And, there are good enough reasons for the Indian investors to include the US stocks in their portfolio. For an Indian investor who has all the money exposed only to one’s nation’s economy, there is a big amount of risk – the country risk. Any over-exposure to one single economy leaves the portfolio vulnerable to any downturn in the economy.
Further, one fails to make good use of the rising stock market in other parts of the world. According to data analyzed by Portfolio Visualizer, an online software platform for portfolio and investment analytics, from 1986 till 2018, the US stock market had risen about 10 per cent annually, while the developed markets and emerging markets had generated about 6.5 per cent annually.
The net effect of diversifying abroad is reflected in your portfolio. When overseas markets such as the US stock market gains and there is a downward trend in the Indian markets, the overall impact on your portfolio is much less. The same is true when the reverse happens, but your portfolio still remains less impacted. This may not hold true always but diversifying across global markets has the potential to generate a high risk-adjusted return. Building a diversified stock portfolio helps over the long term as most global markets or indices are not co-related to a large extent and thus have the potential to hedge your portfolio when the markets move in opposite directions. Incidentally, the S&P 500 index, which is often regarded as the best single gauge of large-cap US equities, is considered to have a very low correlation with the Indian equity market.
Exposure to the US markets is also recommended for the reason that investment products such as ETFs, Index funds etc are much more evolved there and are available at low expense ratio. Remember, costs of a financial product eat into the returns and, therefore, holding low-cost investments help. The Nasdaq ETF Market is a thriving platform for ETFs and there are more than 309 exchange-traded products track Nasdaq indexes.
The big question is – how much to invest in international markets? That depends on your personal risk profile, the size of your portfolio, among others. Some suggest holding a 50:50 portfolio between domestic and international stocks, while the ratio may vary as well. To start with, for a visible impact of diversification, one should keep at least 20 per cent exposed to international markets and over time increase it.
According to a study done by Mayank Joshipura, professor & chairperson (Finance), School of Business Management, NMIMS, Mumbai, the US markets have outperformed the Indian markets both in absolute as well as risk-adjusted terms on a total return basis performance of the US and Indian markets for the past 28 years. For this, he compared Dow Jones Industrial Average (DJIA) and BSE Dollex 30. Thus, historically, it has been seen that international diversification has considerably improved the risk-adjusted returns for a savvy investor.