Saudi Aramco’s valuation hit US$ 2 trillion valuations after its recent listing. This beats Chinese e-commerce giant Alibaba’s record $25 billion New York stock market debut in 2014 – currently the world’s largest IPO. Owing shares of Saudi Aramco is a dream for most Indians. Similarly owning shares of Microsoft, Apple, Google, and other Fortune 500 companies are a big desire for Indian investors owing to the growth opportunity that is offered by such corporates.
With the opportunity of investing in Indian markets declining for various reasons, the importance of investing in foreign currency assets or global assets and markets is gaining popularity.
For resident Indian, there is an opportunity under LRS, where capital account transactions are permitted resident individuals to acquire shares of both listed and unlisted overseas companies or debt instruments, investment in units of mutual funds/Exchange Traded Funds (ETFs), venture capital funds and promissory notes. As per RBI, the limit of $2,50,000 per financial year (FY) includes remittances for current account and capital account transactions (viz. private visit; gift/donation; going abroad on employment; emigration; maintenance of close relatives abroad; business trip; medical treatment abroad; studies abroad, purchasing real estate abroad, investing in foreign equities and debt) available to resident individuals.
US-INR MovementsIn the age of growing volatility across the financial products, currency fluctuation over the years has been no different. Along with several other global currencies in the developing economies, Indian Rupee, too, had its fair share of wild fluctuations against the US Dollar.
A falling Rupee against the US Dollar plays spoilsport, especially, for Indians planning to travel abroad, hits the budget of parents looking to send their children for overseas education. Not just that, the domestic hospitality sector also bears the brunt of high import prices of certain food and liquor items.
For the uninitiated, the Indian Rupee has depreciated to the tune of 39% in the past ten years against the US Dollar. As a generation that has imbibed global aspirations, such weakening rupee, most of the times lead to higher pay-outs or direct losses – especially when the liabilities or payments need to be met or made in US dollars.
However, despite the depreciation in the currency, the dollar remittances by Indians have increased over this period.
As more and more Indians travel abroad for leisure, employment, business, studies, medical treatment, etc. or continue to invest in global markets, assets or instruments – the demand for US Dollars will continue to strengthen.
The outward remittances from India have increased 10 times in the past 4 years alone! Indians remitted US$ 13.78 billion to overseas destinations in 2018-19 under the Liberalised Remittance Scheme (LRS).
Building Dollar-Dominated Assets
Investing in foreign assets helps the individual to diversify their investment portfolio to cover up the risk associated with the fluctuating economy as they can spread out their assets across geographical diversification rather than sticking to conventional asset classes like domestic equities, debt, commodities. Having some investments in international stocks can help diversify your portfolio or assets. In case your portfolio is relatively small, then the best route to invest in foreign stocks is through a mutual fund registered in India. Putting all eggs in one basket is dangerous. Likewise building all assets in a single-country focused basket can meet the same fate over a period. Some industry experts even recommend moving one’s portfolio away from a single country and single currency risk, in favour of a global portfolio.
On the other hand, investing in foreign assets shifts risk and acts as insurance against such wild swings in the domestic market. Secondly, companies listed on global capital markets are larger and have significant exposure to the developed markets and also exposure to several other emerging markets. The earnings of these global giants is primarily dollar-denominated sales (or in other hard currencies, such as euro, pound or yen). Thirdly, the profitability and valuations of these companies are different and dependent on broader factors as compared to Indian listed firms.
And the doubts are laid to rest when one compares the returns from global indices as well as the dollar as compared to the prominent Indian indices. In the past 10 years, the US Dollar has appreciated by 51.7% (4.26% CAGR) in terms of Indian Rupee equivalent. At the same time, NASDAQ 100 has grown 287% (14.65% CAGR). Compare it to Indian Nifty 100 – which, in the past 10 years has grown 139% (9.09% CAGR).
Even if India outperforms foreign markets, the lack of perfect correlation between different markets itself reduces portfolio risk. From a strategic asset allocation perspective as well, the developed global markets are nearly 75-80% of world markets. These are economies that are developed and operate very differently. Their inflation rates, employment rates, and growth rates are different. Their central banks’ policies are different, and the currencies are more stable.
Neeraj Sinha is Head – Retail, State Bank of Mauritius (India). Views expressed are the author’s personal.