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Should you have an exposure to equity markets abroad?

Many experts believed that India being the developing economy, it would bear fruitful investment in the years to come. However, at the time of global turmoil, our market, along with other emerging economies tumbled much more than the US markets! So, should Indian investors also invest his money in global market? Read this space to know why.

June 12, 2013 / 15:24 IST
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India, it is believed, is an economy which has phenomenal potential and one of the major economies which can grow over 5%, in real terms for decades. We had all believed that Indian economy has structurally shifted to a much higher plane, in terms of GDP growth at 8.5-9%, a few years back. Some of the worthies even started talking about double digit growth. In hindsight, it had just been wishful thinking, without substance – for we never put in place the infrastructure or the enabling environment for such high growth to take root.

The dream lies in tatters. All in the BRIC grouping are in doldrums, with only China in a reasonably good shape.  We thought that since we are a developing economy ( by many indicators we are actually under developed ) and since the population is young, there will be lots of growth here. By corollary, we expected the “developing” economies like ours to offer much higher returns on our investment, due to the explosive growth rate. Again, this remains on paper. When the global meltdown happened, our market, along with other emerging economies tumbled much more than the US markets! This happened, inspite of the fact that it was the epicentre of the crisis itself! Now, what about the returns since… The annualised returns that Sensex has offered is a 5% & 4.5% for three and five year periods. Nasdaq has given returns of 16.8% & 7% respectively, for the same time periods. It is instructive to look at the performance of various markets. Emerging markets as a group have done worse than the US & UK markets, in terms of annualised returns.  Malaysia was an exception. Please refer to the table.

NameTypeAs of Date1-Year3-Year5-Year
 
Morningstar Stock Indexes
Broad Market     
US MarketTR4146128.2518.876.5
      
NameTypeAs of Date1-Year3-Year5-Year
      
Other Domestic Stock Indexes
DJ Industrial Average TRTR4146125.6918.977.54
NASDAQ Composite PRPR4146122.5416.866.99
NYSE Composite PR---4146124.4112.830.44
Russell 2000 TRTR4146131.7918.497.46
S&P 500 TRTR4146127.8218.616.19
S&P MidCap 400TR4146130.6619.617.88
Foreign Indexes
DJ Malaysia PR USDTR4146117.4915.498.49
Euronext BEL 20 PR EURPR4146124.642.84-6.51
Euronext Paris CAC 40 NR EURTR4146129.817.45-0.99
Euronext Paris CAC 40 PR EURPR4146126.14.29-4.18
FSE DAX PR EURPR4146129.948.010.3
FSE DAX TR EURTR4146134.3511.813.94
FTSE 100 TR GBPTR4146121.9311.995.52
FTSE 250 PR GBPPR4146130.3413.97.33
Hang Seng Hong Kong Composite PR HKDTR4155317.563.15-2
Hang Seng HSI PR HKDPR4155317.113.34-1.51
Nikkei 225 Average PR JPYPR4155359.7612.3-0.73
S&P BSE SENSEX India INRPR4146116.75.014.53
S&P/TSX Composite PRPR414616.742.46-3.74
Shanghai SE Composite PR CNYPR41461-3.59-4.16-7.86
                                                        What should Indian investors do? When we invest, we will definitely have a home country bias.  This is a universal phenomenon. However, we have clear proof that inspite of poor GDP numbers, the US & UK stock markets have given far better returns than most emerging markets. It will indeed be prudent to invest a portion of one’s assets in such markets.  While we can debate the quantum of investments in markets abroad, upto a 20% allocation seems fair. How to invest? Participating in these markets is best done through mutual funds, as a normal investor or even their advisor may know nothing about those markets or the companies there. Now, choosing correct schemes to invest is also a massive exercise in itself as there are thousands of schemes out there. Also, the entry load in most of these schemes is high at 4%or more, for retail investors. The workaround is to participate in Indian MF schemes, investing abroad. Again, even here, those managing the investments from India would either have access to research from abroad or have a feeder fund which invests in a fund abroad. A feeder fund is preferred as the main fund ( which receives the investment ) would be an existing performing fund, managed by fund managers sitting in those markets and managing the investments. Also, since these Indian schemes collect and invest as an institution, the entry/ marketing charges are normally not there. This benefits the Indian investor, though he may pay another 0.5-0.75% more for a feeder fund, as compared to a normal indian equity MF scheme. What kind of funds could one invest in? The funds that invest into broad index or are diversified would be the ones to look out for. Since markets abroad are far more efficient, index funds may be a better bet as outperformance could be very difficult for managed funds. Apart from index funds, once can look for specific funds that invest in different themes like real assets ( as opposed to financial or IP assets ) like L&T Global real assets fund, real estate like ING Global Real Estate Fund, Index oriented like MOST Nasdaq 100 etc.  One can look at broad emerging market funds too, which invest across the globe. There is one more major advantage to investing in these global funds. Companies which form a part of these global funds have global foot print and hence anyway participate in the growth happening worldwide. That way, though these are US or UK head quartered companies, they are truly global.    There is a word of caution. The investments are subject to currency movements and that can affect returns. Need to keep that in mind while investing. We need to change & emerge out of our reverie. There  are other markets which are performing better and we should have an open mind to diversify our investments there.  No point in adopting an ostrich approach, thinking Indian markets can beat all other markets. We know better now! Suresh Sadagopan is the founder of Ladder7 Financial Advisories
first published: Jun 12, 2013 11:57 am

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