Go International With Your Stocks
International investing is increasingly gaining in popularity with an increasing number of Indians offered options to invest in internal equities, whether through direct equity exposure or via international mutual funds. Shreya Chaware explains why it is the right time to expose your long-term equity portfolio to international equities while highlighting the risks of doing so
Investing in equities is a game that one needs play intelligently. Sans proper management of the portfolio, there is always a chance of underperforming the markets and with consistent underperformance there is always a possibility that the investors give up on the asset class itself. An intelligent way to manage one’s portfolio involves taking decisions which lead to maximising portfolio returns for a given level of portfolio risks or minimising risks for a given level of portfolio returns. International investing appeals to the same logic of maximising returns for a given level of risk and minimising risk for a given level of expected returns. This is the very reason why one should consider investing in international equities.
Says Rohit Mashelkar, an investor with experience of over five years in international investing: “I have had a fantastic experience of investing in international equities. I have invested in stocks such as Google and Facebook and am holding on to my investments. I find that the list of quality stocks available at reasonable prices is way bigger in the US markets than even in Asian markets. The valuations are much more affordable in several cases so that I scan for long-term investment opportunities. The real reason I looked at international stocks was the scope of opportunities available. It’s a huge opportunity in terms of size and scale.”
“I started with international mutual funds and then slowly as I started researching more on the US’ markets I developed the confidence to invest in individual stocks listed on NASDAQ and NYSE. I must admit the brokerage or the transaction cost is very high at almost 1 per cent for delivery, which is almost 4-5 times as charged by Indian brokerages to their clients. But I think by exposing myself to international equities I have become a better investor not only because I have started generating above average returns but also because I am able to generate higher returns per unit of risk. That matters to me in the long run. Another advantage is that I have started tracking US’ markets and that gives me a definite edge over the rest of the investors.”
The Appeal Factor
Investors are getting attracted to international investing options because they offer huge set of opportunities previously untapped. Of late, investors have been getting more openminded about international investing opportunities as not only the awareness increased and also because investors are using several listed international products such as Samsung, Facebook, Amazon, Nestle, Microsoft, etc. Also, one of the strong reasons why investors need to explore international markets is because of the possibility of taking exposure in sunrise sectors. Indian markets, in that sense, do not allow the listing of start-up companies.
Only the established and profitable companies are allowed to list on the bourses. Whereas in the developed countries investors can take exposure to sunrise sectors such as artificial intelligence, machine learning, electric vehicle technology, etc. Huge amount of money can be made by betting on such dark horses which could be unprofitable right now but may turn out to be multibaggers in the coming years. Tesla is one example of a stock that lot of investors have taken a liking for while betting on new technology. If one looks at the global markets, especially the developed ones, the US and European markets tend to fall less than the emerging market counterparts.
For example, in the 2008 market crash the Sensex tanked close to 59 per cent while the DJIA tanked by not more than 34 per cent. By investing internationally any investor ends up diversifying the portfolio which essentially means that the risk or volatility is minimised or smothered. Apart from the obvious reasons of diversifying internationally and taking fresh currency exposure knowingly, one of the strong reasons why investors should take exposure to international markets is the ‘bargain in value’. It is evident that the Indian markets are perceived to be growth markets and hence the PE multiples are almost always sky-high when compared to stocks in the developed markets.
For example, Siemens AG trades at a much lower PE multiple than Siemens India. Proctor and Gamble trades at much lower multiples in the UK markets than the subsidiary of the same company in India. In India the PE multiples are high and hence value bargain is possible when one looks with an open mind to invest internationally. While India remains a shining story in the emerging market pack, the truth is that a market capitalisation of close to USD 2 trillion is tantamount to only approximately 3 per cent of the global market capitalisation. This essentially means that investors who are primarily focusing on Indian equities are tapping only 3 per cent of the total opportunities available at any point of time.
The Risk Factor
The risks involved in international investing are well-known and documented. International investing is usually considered less liquid and the transaction costs are very high. Apart from possible low liquidity (depending on which market one prefers) and high transaction costs, the other known risk in investing internationally is the currency volatility. These known risks can easily be managed by choosing liquid international markets to invest in, as for example, US markets, European markets or the markets of Japan, South Korea or Singapore.
Avoid investing in third world markets where the promise of returns could be very high but the safety of money could be debatable. Meanwhile, currency volatility can be hedged with some additional cost. Usually currency hedging comes with a cost and cannot be afforded by small investors. The hedging cost will be detrimental to several investors with lesser amount to invest in global equities. For small investors the mutual fund route is perfect to get exposure to global markets.
Conclusion
Like it or not and comfortable or not, the time for international investing has come. The number of platforms available to participate in the US markets is also increasing these days. It is said that supply creates its own demand. It is only a matter of time before Indian investors grab the international equity investing opportunity with both hands. The advantages of international investing far outweigh the risks involved in international investing if participation is done with sound basic research keeping in mind the investment objective and risk profile. The mere size of opportunity should keep every investor interested in international equities apart from the scope for normalising volatility which can prove to be priceless in volatile times.
The opportunity to invest in sunrise sectors and stocks is something unique that international investing can introduce to the Indian investors. The benefits of owning dollar-denominated assets cannot be underestimated. As the portfolio size of investors swell with rising stock prices, it makes tremendous sense to park at least 5-10 per cent of the overall portfolio to international equities with a bias of developed markets and a preference for US dollar assets.