Cumulative return and repatriation of the funds back in India is based on two factors, first from actual performance and secondly on the percentage appreciation or depreciation of the underlying foreign currency of such stock.
Who doesn’t want to gain exponentially? Your chances to profit from investing in stocks rises incrementally if you buy foreign stocks. You, in fact, are in a position to gain from two streams – From stock appreciation and secondly, from the currency exchange rate. The reverse is also true but the latter is not on individual investor’s control.
“An Indian investor buying foreign stocks must consider two key elements i.e. foreign currency exchange rate and the valuation of the rupee risk. The former has a huge impact on the expectation or forecast of the return that one is purporting to make from investing in foreign securities. This is because his cumulative return and repatriation of the funds back in India is based on two factors, first from actual performance of a particular foreign stock and secondly on the percentage appreciation or depreciation of the underlying foreign currency of such stock,” informs Abhay Vohra, Partner at Burgeon Law, a boutique law firm for startup investment ecosystem.
Sample this! You invest in foreign stock and it falls over 1-3- or 5 years period. And, still, you are not at a loss even after selling it. Yes, its true and even the reverse may happen. Your foreign stock price gains but you don’t end up in profits on selling it.
Welcome to the world of international investing where you are not only up against the stock price but also the currencies.
There are several different scenarios and in each case, the reverse can also happen.
If rupee weakens against dollar
If at the time of selling the stock A, the stock price has not changed but the rupee has weakened by 10 per cent or so against the dollar. While converting dollar back to INR, you stand to gain even though the price of the stock is at the same at the time of selling. Say, the rupee weakens to Rs 55, you stand to gain even while the stock has not appreciated. If the stock price has gained, you stand to gain from both – currency rate and stock appreciation.
If rupee strengthens against dollar
If at the time of selling the stock A, the stock price has not changed but the rupee has strengthened by 10 per cent or so against the dollar. While converting dollar back to INR, you stand to lose even though the price of the stock is at the same at the time of selling. Say, the rupee weakens to Rs 45, you stand to lose even while the stock has not appreciated. If the stock price also gains by an equal percentage, you are on the same ground.
If rupee-dollar exchange rate remains same
If at the time of selling which could be within a year or after 3,5 or 10 years, the exchange rate is the same, then it means there is no currency risk on your transaction on selling the stock. Say, the stock price has moved up by 25 per cent or fallen by an equal margin, the currency risk is absorbed.
Here’s Abhay explaining the impact of rupee (INR)-dollar(USD) exchange rate on your international investments:
Assuming investor A invests INR 100,000 in 2010 in foreign stock of B Company whose per stock price is USD 10, with the exchange rate being USD 50. Therefore, A gets 200 shares of B for his INR 100,000 investment. In 2020 he wants to exit when the exchange rate is INR 75 and the B’s share price is USD 12.5.
A’s return on B stock = 200 (No. of Shares) x USD 12.5 = USD 2500 (25% increase in value in terms of USD)
A’s repatriation to India in his bank account = USD 2500 X 75 (50% appreciation of the rupee value because of the exchange rate which was purchased at USD 50) = INR 187,500
Out of the profit of INR 87,500, INR 50,000 is the appreciation on account of exchange rate fluctuation and the remaining is the actual return of the stock.
Vice versa, the exchange rate going down may also significantly impact the investor’s portfolio negatively. For example, when you bought stock from US Stock exchange, the exchange rate was USD 1$ = USD 70. After one year when you sold the US Stock, the exchange rate was USD 1 = INR 64. Therefore, assuming the stock has maintained the price at which it was bought, an investor has already lost 8.8 per cent due to changes in the exchange rate.
With INR weakening, there is pressure on Indian stocks as it reflects negatively on the Indian economy and thereby on your Indian stock portfolio. “From 2009-2019, there has been a significant jump in the USD exchange rate. In a lot of cases what one will notice is that the contribution of percentage appreciation on account of foreign exchange has outweighed the actual stock appreciation,” says Abhay. You certainly won’t like missing out on such profit-making opportunities. The reason to diversify across economies is, therefore, an important element to not ignore while creating wealth from stocks.
There is a big trade-off in international investing. An ideal scenario will be that your foreign stocks appreciate and INR depreciates against dollar. In that case, you gain on both the grounds and its a double bonus. To make the best use of such opportunities to you need to start looking at international investing actively.