By Rishad Manekia
It is natural for Indian investors to think about investing in rupee terms. Our money is invested in Indian assets and we also spend our money in India in Rupees and therefore the default is to take the Rupee based returns of our investments.
This contrasts with global investors who tend to think of their returns in the global reserve currency which is the dollar. Should this matter to us?
I would argue that it does because, without realising it, we are spending more and more of our money in dollar terms. Indians spend a lot more today on foreign trips or to send their children for further studies abroad than ever before. Even for those that can’t afford this, the electronics we buy are all imported. That latest iPhone or Google Pixel is first priced in dollar terms before being converted into rupees.
Let’s take a hypothetical consumer: She will have a Xiaomi Android Phone, drive a Hyundai car, watch Amazon Prime on her Samsung TV, use an LG Washing Machine, do work on a Dell laptop and maybe have a Cadbury chocolate in her break time. None of these companies are listed on the Indian stock markets. If we are increasingly consuming brands that are global, why should we restrict our investments to the local markets?
The Rupee has had a tendency to depreciate over longer periods of time given the inflation differentials and macroeconomics of our country relative to the rest of the world. This means that a number of our purchases that are priced in dollars will continue to get more and more expensive.
It is therefore critical for us to look at our returns using a dollar base. If, for example, an investment we have made goes up by 5 per cent in rupee terms but the currency has depreciated by the same amount then we are back to square one.
The Dollex is the dollar-based return of the Sensex. The Sensex has returned roughly 7.5 per cent annually in Rupee terms over the last decade. But the dollar-based return of that, the dollex, is roughly 2 per cent in the same time period. The US markets have had the best performance by far in the last 10 years with an annual dollar return of roughly 11 per cent. This is not to say that this performance will be repeated in the next decade but it disproves the commonly perceived notion that Indian equities are the highest returning assets globally given our higher growth rates.
The US rally so far has been driven by tech firms like Apple, Google, Facebook, Netflix and Amazon. These companies have been moving from strength to strength and have only gotten stronger through this pandemic. And therefore the NASDAQ, which has a more tech-heavy focus, has given even higher returns than the S&P500 which is more broadly diversified over the US economy.
And these returns are now driving many Indian investors to look at allocations to US equities. According to AMFI data, the number of retail folios in international mutual funds has nearly tripled to 3.7 lakh as of September 2020 from 1.3 lakh a year ago.
However, all good things come to an end, and we cannot escape the fact that we are probably in the last legs of a long US bull market. Therefore, for investors comfortable with the risk of investing in international equities, it makes sense to look at more diversified portfolios to lower the risk. And, they should also consider other geographies like the Asian and European equity markets where valuations are lower and where the economies are recovering from the pandemic faster.
Asset allocation would be a prudent strategy: having a mix of exposure both to Indian assets and International assets makes the most sense. More risk-averse investors can look at Gold instead of International equities to hedge the currency risk. There are a number of mutual funds available to Indian investors that invest in dollar-based funds. It’s always better for Indian investors to go through professional managers or advisors who can guide them on the best way to invest in the US market and on whether international equities are appropriate for their risk appetite and portfolio.
(The author is Founder and MD, Kairos Capital Private Limited)