If we shift our lens to the pre-pandemic times, it is easy to observe volatility to be an inherent trait of stock markets in India and around the globe.
As investors regain trust in the markets and economies prepare to pull themselves out of the recent slump, diversification will play a huge role in ensuring investment success.
Now traditionally, most Indian investors limited stock diversification to local markets alone. However, if the Indian economy goes through a slowdown, then regardless of the sector-wise or market capitalization-wise diversification, your portfolio can be affected.
While this can be one reason, today, we will look at 4 main reasons why Indian Investors can consider diversifying overseas, particularly US equities.
Before we begin, I would like to iterate that, the decision to diversify and the extent of diversification you wish to achieve totally depends on your risk profile and investment objectives. Please consider this article only as a reference point to build your own investment strategy and not as investment advice.
Where do you spend a lot of money? Amazon? Netflix? Samsung? Which platform do you use to watch videos? YouTube? Which social media platforms do you use the most? Facebook? Instagram? Twitter? Most Indians use global brands and spend a lot of time and money on them. However, how many of these stocks do they actually invest in?
Even if we are sitting in the fastest growing economy in the world, many global equity investment opportunities are not available in India.
Also, countries like the US are home to some of the largest technology and consumer companies in the world.
These companies are multiple times larger than the largest Indian companies making them good investment avenues. As an investor, owning stocks of companies that are spearheading the market trends can be beneficial to the overall returns of the portfolio. Hence, diversifying overseas can potentially bring more opportunities.
Investing in a country that has a track record of having markets that are less volatile than India can help investors diversify while keeping their risk exposure in check.
Over the years, it is easy to observe that foreign markets (especially the US markets) have a low correlation with the Indian markets. In fact, the correlation between the S&P 500 Index and the NASDAQ 100 Index with Indian indices is less than 15%! Also, in the US, investors can also gain exposure to a wider range of treasury-related products than in India.
Finally, ETFs are cheaper with expense ratios as low as 0.03% in the US. So when your Indian investments might get impacted due to volatility, your overseas investments can help balance out the risks.
Remember, a well-performing investment portfolio is one that allows you an opportunity to earn maximum returns by taking minimal risks.
While the US economy does not fly high at all times, on a global scale, the US dollar is considered one of the safest currencies. A quick look at history will tell you that every time the US economy is on the verge of a bad phase, it displays resilience and re-emerges stronger than ever before.
The Indian Rupee, however, is sensitive. If the global price of oil increases or there is a political situation in the country or a bad-monsoon-led increase in imports, the INR depreciates against the USD. Also, the inflation rates in India are much higher than in most developed countries. Regardless of how our country has performed over several decades, the INR has only depreciated against the dollar.
Trivia: The INR has depreciated 55% against the USD in the last 25 years!
Imagine if you would have invested in the US stock markets 25 years ago. Apart from the increase in stock price, the depreciating Rupee would have multiplied your returns two-fold while transferring the funds back to India. So, as an Indian investor, buying US stocks can help you ride the dollar wave and earn good returns even if the Indian economy is headed south.
We live in a highly connected world. And so, while devising an investment strategy, it is important to take into consideration factors including social, political, and macroeconomic situations.
The way the world is changing, most experts foresee a multi-polar world order in the future. So, investing overseas can help you plug some essential gaps in your stock portfolio and earn consistent returns.
To cite an example, even when the novel coronavirus has not declared a pandemic and had its presence only in China (January 2020), it had managed to impact stock markets around the globe. Hence, modern investors must ensure that they are aware of things happening around the world even if they are not considering overseas investments.
While investors have a bias to invest in their home countries, it is important for Indian investors to understand the changing dynamics of markets around the globe and create a portfolio with a global view. This will allow you to reap the benefits of investing abroad. However, it is important to exercise due diligence and analyze the company thoroughly before investing.