Stock Markets: You can add a global flavour to your equity portfolio

Published: February 20, 2019 12:56:01 AM

The US markets have outperformed Indian markets both in absolute as well as risk-adjusted terms on a total return basis in the last 28 years.

Stock markets: You can add a global flavour to your equity portfolio (Illustration: SHYAM Kumar Prasad)Stock markets: You can add a global flavour to your equity portfolio (Illustration: SHYAM Kumar Prasad)

By Mayank Joshipura

Sir John Templeton once said; “The only investor who shouldn’t diversify are those who are right 100% of the time.” Diversification across asset classes and diversification within the asset class provides stability to the portfolio. Most of us understand the merit of diversification and we spread our investments across asset classes. We also look to diversify within an asset class such as equity by investing in small-cap, mid-cap, and large-cap stocks. However, we have rarely thought about adding an international flavour to our equity portfolio. One of the major reasons for lack of preference towards global equity is the illusion about the superior performance of the Indian equity market over global equity markets.

The reality check
Indian equities have a rocky start to the calendar year 2019. Most global equity markets are up 5-15% in dollar terms. India is the only major market with negative year-to-date returns as on February 12, 2019. Yes, we may be one of the fastest growing economies but we have never delivered consistent outperformance as far as equity returns are concerned over more mature and developed markets such as the US.

Let us look at the performance of the US and Indian markets for the past 28 years. To ensure that the fruits of India’s reform story are reflected in my analysis, I have used data starting from December 1990. I use two of the oldest market indices from the US and India. Dow Jones Industrial Average (DJIA), a proxy for US markets and BSE Dollex 30 (Dollar Sensex) a proxy for the Indian markets. Both indices have 30 constituent stocks. Using BSE Dollex 30 ensures that we use dollar returns to measure the performance of both US and Indian markets.

US markets outperform Indian markets
The US markets have outperformed Indian markets both in absolute as well as risk-adjusted terms on a total return basis (see graphic). Remember both DJIA and Dollex-30 do not include dividend yield. DJIA’s dividend yield is more than double than that of Sensex and that is the reason DJIA outperforms Dollex in absolute terms as well.

Surprising! Isn’t it? I am also surprised! We think that Indian markets should outperform in absolute terms whereas US markets should outperform in risk-adjusted terms. But the reality is different. Lower absolute return from Indian markets and that too in post-1991 era. Besides, Indian markets are two and a half times more volatile than US markets.

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The reward-to-risk ratio for DJIA is 0.54 compared to 0.23 for Dollex-30. If this is the reality, what attracts global investors to Indian markets? For that, let us look at the difference between one-year maximum returns for Dollex-30 and DJIA. It is 87.73% for Dollex-30 compared to 33.45% for DJIA. Such positive skewness in returns attracts investors towards Indian markets.

So assuming an investor has a great sense of moving in and out of the markets at the right time, Indian equity markets present a great opportunity. If not, then the fact remains that $100 invested in both Dollex-30, and DJIA at the end of 2007 were worth $72.44 and $78.61 at the end of 2009, respectively. This is despite the stellar performance of Indian markets in 2009. So we keep on seeing global money chasing Indian equity markets for diversification benefits and in search of rare exceptional returns.

Should you invest in global equities?
With regulations eased, it has become easier to invest in global markets including the US. It offers twin advantage of diversification and superior risk-adjusted returns to Indian investors. There are mutual funds investing in global equities and exchange traded funds (ETFs) tracking global indices listed on Indian exchanges. If you want to go through some regulatory formalities and have a sizable corpus, you can invest in global stocks and ETFs through many Indian and foreign brokers. So what are you waiting for? Start working towards adding a global flavour to your equity portfolio.

The writer is professor & chairperson (Finance), School of Business Management, NMIMS, Mumbai

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