Go Global, Invest Internationally!

Go Global, Invest Internationally!

Equity portfolio management is all about maximising returns while minimising risks. Most professional investors are able to understand this relation very well which makes them good at managing long-term portfolios. By diversifying the portfolio across different countries, the risk is expected to be minimised and returns maximised by identifying the most suitable growth opportunities. Now this option of international investing is available for individual investors so that they can buy trending stocks listed outside India. But should investors invest offshore when the Indian market is one of the most lucrative markets? Geyatee Deshpande explains why it makes sense to do so

Consider this: foreign institutional investors (FIIs) have been net sellers of Indian equities in 2020. Apart from some exceptional years such as 2008 when the global financial crisis (GFC) took place, FIIs have been buying Indian equities through almost all the years since India opened the gates for foreign investments. In fact, FIIs are investing in India because India is an attractive destination for American investors and also for the fact that India offers one of the best risk-reward relationships in the emerging market space. This makes Indian equities irresistible for global investors. When this is the case, does it make sense for Indian investors to invest in global equities?

Logically thinking, it would not be right for Indian investors to even think of investing offshore. But that is not the reality. Opines Rohit Mantri, an investor in Indian markets: “I have been investing in Indian markets since 20 odd years and my portfolio has grown by a good 18+ per cent on an annualised basis. I am happy with my portfolio returns but when I see some of the popular stocks in the US making all-time highs and delivering excellent returns and that too in USD, I am tempted to seriously consider parking at least 10 per cent of my portfolio in offshore markets, especially the US markets.”

“I am exploring both options i.e. offshore mutual funds and opening an international trading account which will allow me to buy trending stocks such as Google, Apple, Netflix, etc. The logic is simple – money should go where the best opportunities are. If the best opportunities are in offshore markets, so be it. I am willing to consider the pros and cons of such investments with an open mind,” he adds. Indeed, the time has come for investors to be completely flexible and broadminded when it comes to international investing. While the Indian markets are growth-oriented, there is no doubt that the offshore markets have, time and again, thrown up some lucrative investing opportunities which cannot be ignored by smart investors.

While the attractiveness of the Indian market and the growth opportunities that they provide could be amongst the best in the world, it would be foolish to perceive that India will always offer the best investment opportunity in the world and that only by investing in India can one generate the best return on investments. What investors need to understand is that one should look at international investing opportunities with an open mind for the same reason or reasons that FIIs seek to invest in India, namely, diversification and growth opportunities. Diversification is the biggest advantage of investing offshore followed by growth opportunities. To clearly understand what sort of growth opportunities exist beyond the Indian borders, we can look at the performance of some of the equity markets globally. The table below highlights the best performing investable indices across the world.

It can be seen from the above table that the Indian index – MSCI India – definitely is not amongst the best performing indices both on YTD as well as on a one-year basis. By simply ignoring the investment opportunities in offshore markets, individual investors could be missing an opportunity to optimise returns on his or her monies. Investor focus has to be on optimal risk-adjusted returns and that may well happen by investing internationally and not necessarily by investing in local markets only. Investors can participate in offshore markets by either opting to invest in international mutual funds or simply by opening an international trading account and buying and selling select shares just like they do for Indian markets.

The below mentioned table highlights how majority of international funds have outperformed the Sensex even as a majority of the large-cap mutual funds that invest primarily in Indian markets have underperformed the Sensex. Note that the Sensex has inched up by 3.71 per cent in the past one year while the table below highlights the performance of several international mutual funds denominated in Indian rupees that have outperformed the Sensex by huge margins, such as Franklin Asian Equity Fund (G) and Nippon India US Equity Opportunity Fund (G). At least six of the seven available international funds have outperformed the Sensex.


Some investors might find it not attractive to invest in international markets via international funds and may like to hunt for opportunities in the US, European or Asian markets where a specific theme is emerging. For example, Facebook, Apple, Amazon, Netflix and Alphabet or Google (FAANG) stocks in US have single-handedly pulled NASDAQ to record highs and have created billions of dollars in wealth for shareholders. Clearly those investors who explored technology stocks in the US markets and bought one or all of the FAANG stocks are now a happier lot as compared to investors who chose to ignore international investing. The rupee depreciation has also worked in favour of investors who opted for offshore investing.



Another factor that should prompt investors to look actively at international investing opportunities is valuation. There is always a possibility that a particular market offers better growth opportunity at lower valuation. That opportunity may emerge in US equities or in some other Asian market or an emerging market. Right now with a PE of 28 for the Sensex, the India markets look fairly valued as compared to its global peers.




Overseas investing experience has changed radically over the past 35 years. Accounting standards have generally converged and derivatives for hedging currency and market risk are now widely available.

Higher Dividend Yield

One of the strong reasons why long-term investors should seek opportunities in global markets is also to avail the higher dividend yield opportunities. It is possible that offshore markets provide an attractive dividend yield as compared to the local markets. The table below reflects how the Singapore markets and the markets in Spain offer much higher dividend yield than their Indian counterpart or even the US markets for that matter. Higher dividend yield is a much sought after quality by investors globally.



Conclusion

No doubt there is considerable convergence in the global equity markets, yet, the world equity markets still diverge in many ways. Such important divergence in world equity markets can be used by intelligent investors to optimise portfolio returns while minimising risks. A smart investor understands that opportunities that are scarce in one market may be more prevalent in other markets. As such, international investing is in vogue. American equity investors in 1980 devoted just 1 per cent of their portfolio to foreign stocks while by 1984 American mutual fund investors were allocating 6.5 per cent of their assets to world funds. Come 2014 and the allocation reached 25 per cent for US-based investors in world funds.

Clearly the home bias in investing exists but it is shrinking. The same attitude may be seen in Indian investors in the coming years. International investing will be a serious option for Indian investors as offshore investing can offer diversification benefits along with growth opportunities. The larger set of opportunities can be tapped and with the emergence of efficient derivatives’ market the risks associated with international investing can be hedged. Currency risk is one of the most important risk factors while investing offshore.

This risk can be minimised with hedging practices. However, individual investors may not be conversant with the mechanics, tactics and dynamics of hedging. Hence, when individual investors choose to invest directly in US equities or any other markets, he or she would be taking exposure to the currency risk as well. Those investors who want to broaden their perspective and want to access a large number of companies meeting with the characteristics they target and at the same time are looking for stocks offering better dividend yields will definitely look at international investing opportunities. While currency risk could be a deterrent for those looking at international investing opportunities, it also provides investors a chance to have diversified currency exposure. It is a matter of perspective!

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