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Last Updated : Jul 11, 2020 07:59 AM IST | Source: Moneycontrol.com

Like Amazon, Google, Facebook? Allocate 10-15% equity funds to global stocks

By investing across countries investors would get exposure to companies with the different business models, diverse revenue streams, currency differentials, and thus different risk-adjusted returns.

Moneycontrol Contributor @moneycontrolcom

Deepak Jasani

Asset allocation is at the heart of the investment planning process. Combining assets having low correlation reduces risk without reducing returns and at the same time, it improves the risk-reward trade-off for the investor.

An investor should diversify across industries, asset classes, and markets. Most Indian investors have a domestic bias as they mainly concentrate on Indian stocks and mutual funds, missing out on global growth opportunities.

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Asset under management (AUM) of Global funds investing out of India as on May 2020, is hardly 1 percent of the total Equity fund AUM.

HDFC Sec

Investing in international stocks/funds allow investors to benefit from international growth stories and diversifies/reduces the risk associated with an investment in a single country, especially in times of market volatility due to domestic factors.

However, one will have to be careful of the region or stock overlap in case of investing in more than one international fund.

Investing in the US is what comes to investor’s mind when given a thought on international investing and why not; they want to participate in growth stories of the biggest businesses - like Amazon, Google, Facebook, Microsoft; and that should be the focus for new investors venturing in international markets.

By investing in US-based companies, the investor is actually diversifying globally as these giants have revenue streams across the world much higher than the share of global revenues of Indian companies.

Additionally, investing in US stocks/ funds might also benefit investors from Rupee depreciation as falling rupee would increase fund returns.

At a later stage, they can perhaps look at other markets like ASEAN, China, Japan, Europe, etc., once they get comfortable with global investing.

By investing across countries investors would get exposure to companies with the different business models, diverse revenue streams, currency differentials, and thus different risk-adjusted returns.

Investing abroad helps Indian investors to gain access to high-quality businesses that are not listed in India. For instance, companies such as Google, Facebook Coca Cola, Mastercard, etc.

Sometimes, the domestic subsidiary of a multinational company may be richly valued in the home market; purchasing the stock of the parent may seem more prudent. Direct investment in global stocks is a route for active players who understand the landscape, tax considerations, and the risks involved.

Whichever country’s equity return has a lower correlation with Indian equity markets is preferred. Investors, however, should not be hopeful that by investing in international markets they would be protected during downturns in the domestic market.

Geographical diversification through equities will not eliminate positive correlation with the Indian market entirely as it is not a separate asset class altogether; it is horizontal diversification and a part of investor’s equity allocation.

Countries, economies and their stock markets have become highly interconnected. Indian markets are highly sensitive to foreign fund flows and thus global sentiments apart from India Inc’s fundamental situation.

We have faced the brunt of foreign outflows and its impact on the market during economic downturns. In fact, the correlation among global markets increases during such unusual times but over longer time horizons correlation (though positive) reduces.

This was observed in the GFC times in 2008-09 when all asset classes in all countries saw large dips. Mutual funds offer international exposure in different structures. Actively managed funds and passively managed funds (like ETFs, Index funds, and overseas funds-of-fund) as a cost-effective route are available for investors.

Investors through the MF route can invest in developed and emerging markets, in a single country-focused fund (the US, Japan, China, Brazil, Hong Kong, etc.), a regional (Europe, Asia), or a global fund. There are also other options available including theme-based international funds such as technology, commodities, Gold, Gold mining, etc.

As investments in the underlying securities of an international fund are in a foreign currency, they are exposed to currency risk. Investors must understand the implications of currency fluctuation before investing since a depreciation or appreciation of the Rupee can result in a potential capital gain or loss.

These funds are subject to country-specific economic and geopolitical risks. For instance, some countries could be exposed to regional upheavals and political unrest that could drag the economy.

Trade conflicts could also drag down the performance of companies in a country. Investors must take cognizance of such risks beforehand. Unfavorable tax treatment in India on these investments is another point to consider.

It is imperative for investors to invest based on their risk appetite and investment objectives as global investing in equities are considered a high-risk option.

At least 10-15 percent of total equity funds should be allocated towards these types of global funds, anything less would not lend market diversity nor meaningfully help counter Indian market volatility.

An investor in such funds has to have two views – relative attractiveness of global equities vs Indian equities and currency movement projection. Apart from return objective; diversification and dollar hedge should be on top of their minds.

(The author is Head Retail Research, HDFC Securities)

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on Jul 11, 2020 07:59 am
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