Rajesh Cheruvu
Due to higher inflation, India will always have a depreciating bias against hard currencies such as the greenback. The Indian Rupee (INR) has depreciated at an average rate of around 4.5 percent per annum against the US Dollar for the last 45 years.
In addition, a risk of larger, disorderly depreciation due to geopolitical issues remains a potential drag. Consequently, the currency alone can be a strong driver for pushing offshore investments.
Secondly, with rising income levels, significant direct and/or indirect expenses incurred by an Indian is actually dollar — or foreign currency —denominated.
For instance, many HNIs send their children for higher studies abroad, global travel is on the rise for affluent India as is the demand for global healthcare. Investing in foreign assets generating foreign income can act as a hedge for these expenses.
Thirdly, investment markets abroad are much wider and deeper. Innovations such as EV (electric vehicles), Emerging Tech., AI (Artificial Intelligence), ML (Machine Learning), etc. are much more rapid abroad.
Governance of businesses is much more transparent and efficient in developed markets. Debt markets are tremendously vast, liquid, and not myopically focused on only the 10-year G-Sec instrument like in India.
Certain emerging markets’ growth can be quite eye-catching. India is not the only country with potentially higher real growth.
China, Indonesia, and a few other economies too represent niche investment opportunities. Lastly, the volatility of developed markets is markedly lesser on account of lower macro, currency and political risks.
This would help to reduce an Indian investor’s largely domestically titled portfolio’s overall beta as correlations (and volatility) resulting from the inclusion of offshore assets would go down.
Net-net, implementing a top-down approach starting with geographic exposure, then progressing sectorally and finally bottom-up-wise via individual securities would be the most pragmatic way to systematically develop a strategic asset allocation for one’s offshore investments.
(The author is CIO, Validus Wealth)
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