Why US is the perfect market to diversify away from India’s risk | The Financial Express

Why US is the perfect market to diversify away from India’s risk

The US is the center of the financial world and is nearly 40% of both the global fixed-income and equity markets.

Why US is the perfect market to diversify away from India’s risk
It is prudent to not try to time the currency market and keep investing a part of one’s savings in USD-denominated investments.

The US economy is facing multi-decade high inflation pressures. And, the US Fed has already hiked policy rates by 3.75% in 2022 but with limited success on the inflation front. Presently, US stocks are in a bear market but should they be shunned by Indian investors? Also, there’s the US dollar which is strengthening against the Indian Rupee which has its own impact on US investments. Atanuu Agarrwal, Co-founder, Upside AI, in an exclusive interview with Sunil Dhawan of financialexpess.com talks about the reasons for Indians to consider investing in the US stock market from a long-term perspective. Excerpts:

Why should Indian investors diversify in the US market?

The India opportunity remains very compelling and is generally an attractive growth market. However, India is still a very small portion of the world GDP (< 5%). So, it is imperative to have some diversification away from India’s risk. And the US is the perfect market to do so.

The US really is the center of the financial world and is nearly 40% of both the global fixed-income and equity markets, with a combined size of more than $100 trillion.

Also, an investor may have certain USD-linked expenses in the long term (education, health, etc.) – it is always helpful to start building a USD corpus at the current exchange rate, as over the long term it will only keep getting more expensive from an INR-USD perspective.

Also Read: Easy access to global equity markets

How much has INR depreciated against USD in YTD, 1-year, and over the last 5 years?

If you look at the depreciation of the last 1 year it seems to be an outlier – nearly 10% as of 19-Oct-2022 (82.86 vs. 74.79.) And because it seems so precipitous, one could infer or hope for some mean reversion.

However, if we take the current rate and compare it over longer periods of time like 5 years (nearly 5% p.a.) or 10 years (nearly 4% p.a.), or even 20 years (nearly 3% p.a.), the rate seems to make sense. As mentioned earlier, currency rates, like any quoted security, don’t follow some linear pattern.

Also Read: Amazon, Meta, Alphabet, Apple and Microsoft’s outlook: Making sense of big tech earnings

How does the currency exchange rate of INR Vs USD impact investments in the US stock market?

Right now, it does seem unattractive to convert INR to USD because the rate is higher than it was 6-12 months ago. However, in the long term, the INR will most likely keep depreciating against the dollar because of the difference in stable long-term inflation rates between the two countries.

And the depreciation will be lumpy/non-linear. So, generally, USD investments will be beneficial to Indian investors from this perspective. It is prudent to not try to time the currency market and keep investing a part of one’s savings in USD-denominated investments.

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First published on: 07-11-2022 at 11:31 IST