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Last Updated : Jan 10, 2019 09:17 AM IST | Source: Moneycontrol.com

Why global equity portfolio is better than India-only one

Over the last 10 years S&P 500 has outperformed the Nifty 50, in rupee terms. The typical mistake investors make is comparing the dollar-returns of S&P 500 with the rupee-returns of Nifty 50.

Moneycontrol Contributor @moneycontrolcom

Vikas V Gupta

The capitalisation of the Indian stock market is a tad above $2 trillion or roughly 2-3 percent of the total world market cap. In comparison, the market-cap of just three global companies — Microsoft, Apple, and Amazon — put together exceeds that of India.

Benefit from a larger universe

To create a safe investment portfolio of nationally relevant companies in the Indian market, one could consider a capitalisation of around Rs 1,000 crore, or $150 million, as an apt eligibility criterion. But if the same criterion is applied to stocks across the world then over 3,000 US stocks, 1,000 European stocks, over 350 stocks in the UK, and over 1,000 stocks in Japan will fit the bill. In all, global markets have over 5,000 companies with a market cap above $150 million.

Imagine thousands of such interesting companies with stable businesses, strong balance sheets, persistent competitive advantages one could discover in such a large investment universe. Supernormal companies earning supernormal returns on investments. Hundreds of these companies might be available at deep discounts to their intrinsic values, i.e. supernormal prices.

Imagine being able to create a portfolio of such companies.

Benefit from exposure to larger economies

Global developed markets such as the US, EU, the UK, and Japan have companies operating primarily in developed economies that are large and different compared to the Indian stock markets. Many companies have revenues coming from emerging economies like India, China, Brazil, Mexico, Argentina, Indonesia, Turkey etc.

Thus, investors can benefit from a company listed in the highly regulated developed markets with strong corporate governance and stringent scrutiny from analysts and investors, but with revenues from the developed economies providing stability and that from emerging economies providing growth.

Benefit from what you consume

Stocks of many companies producing products and services consumed in India are unavailable for investments in the local market. For example, India consumes a lot of cold beverages, fast foods, smartphones, personal care & cosmetics, luxury goods, aerospace and defence, among other products and services which we have no way to take exposure to.

Benefit from comparable returns from the Indian and global markets

Contrary to popular belief, the returns from Indian market is not always higher than the global markets. In fact, over the last 10 years, S&P 500 has outperformed the Nifty 50, in rupee terms. The typical mistake investors make is comparing the dollar-returns of S&P 500 with the rupee-returns of Nifty 50. If both returns are converted to either USD or INR then the comparison is like-to-like.

A comparison of rupee returns for the global indexes vs. Nifty 50 shows they are quite comparable. See the table below for returns up to Dec 31, 2018, from the starting date in the last column.

Table

Since the above is price return data, one could add approximately 1.5 to 2 percent as additional returns from dividends to get a closer estimate of the total returns.

One can surmise the total long-term return for all markets is typically in the range of 12-14 percent. Sensex is an exception with higher returns. However, since Sensex and Nifty have a large overlap in the portfolio, the difference in Sensex and Nifty returns are due to the different inception dates. The returns of Sensex and Nifty have been similar since 1996. However, Sensex had exceptionally high returns between 1979 and 1996.

Further, these are just headline index returns. A selective portfolio of supernormal companies at supernormal prices could potentially provide much higher returns with alpha over the index returns.

Of course, bear in mind the long-term historical returns for any market, whether Indian or global, cannot be assumed to be repeated in the future.

It must also be noted the returns shown are in INR terms. Most websites will have USD or native currency returns rather than INR returns.

Benefit from the diversification of the portfolio

For an Indian investor, allocation to global markets would decrease portfolio beta significantly since the returns there have low correlation with the market here. This way the portfolio returns are maintained while reducing overall portfolio volatility, creating an alpha.

Many Indian investors may not be aware they can invest in global markets. It is possible via the LRS route provided by RBI (to be covered in detail in future articles).

Benefits of being aware of risks and caveats to the above thesis

All of the above makes sense only in the context of the right risk profile of the investor and the investment being suitable for the same. One should also keep in mind that the whole argument being made above is focused on convincing one to evaluate a new asset class, i.e. global equities, for addition to one’s portfolio and not a recommendation to make it the core allocation.

Also, there are significant details about the procedure for remitting money abroad for investments, about taxes, about country and currency risks etc. which one should become familiar with before embarking on the global equity investment journey.

In conclusion, an Indian investor should explore investing in the global stock markets, especially in the developed economies. To understand whether a global equity allocation makes sense for an investor, the investor should consult their financial advisor before taking any action.

The author is the Chief Executive Officer and Chief Investment Strategist, OmniScience Capital.
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First Published on Jan 10, 2019 09:17 am
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