A friend and I were discussing stocks the other day, when I mentioned, "I am so glad I exposed my portfolio to international stocks. It is an easy and excellent tool for diversification." But to my surprise, he said, "I didn’t know you could invest in the international markets. Besides, do we really need to?''
Here was a great opportunity to diversify assets and grow wealth and my friend was clueless. It got me thinking. How many people out there are missing out on this great opportunity? Do they even know how easy and accessible it is?
Unfortunately, much like my friend, most investors aren't privy to this information. Furthermore, they fail to recognise:
a) how easy it is to invest internationally and
b) how important it is to expose your portfolio to international stocks.
Indians were allowed to invest in international equities some 17 years ago (around 2003). Imagine having bought any of the top tech American companies then. Adjusted for dollars, you could have easily made a tiny fortune by now. But no one took advantage of that. And why would they? If you had a gourmet chef at home, would you eat out? That was the case with the Indian economy back then.
Incidentally, the Indian economy and by extension, the stock markets were doing very well around 2003, prompting investors to invest in their home country. It was also the time where terms like BRICS and India Inc were thrown around, further boosting investor confidence about India's future. Even the rupee was appreciating against the dollar, adding icing to the cake. Now, all of this eliminated any need for Indian investors to seek returns outside their home country.
But even now, most people refrain from investing internationally. They argue: why to invest elsewhere when our own country is expected to outperform other markets. What they don’t know is that, this is not entirely true. As, over the long-term, there have been several periods where the US index has outperformed the Indian index (adjusted for currency fluctuations) and vice-versa. If you look at the period after the financial crisis, the dollar adjusted BSE 30, referred to as Dollex 30 has underperformed the Dow Jones Industrial Average significantly.
Now, I am not saying that you invest in the international markets for the returns only. You must invest because there is a lack of synchronicity between the Indian and international markets ie., they are not co-related. Which is a great mark of well-diversified assets.
Investing in international stocks is not just about returns
The concept is simple really. Every economy is in a different stage of development with its local triggers for growth and slowdown. So for some local reasons, if your money lying in one part of the world doesn’t do well, you still have some in the other part doing just fine. And therefore, investing in international markets is a great diversification tool, where your primary reward is lower volatility (more stable returns) and your risks:
buying the stocks of a country, you don't have first-hand information on and
the risks currencies carry, where an appreciating home currency (Indian Rupee) or a depreciating foreign currency can eat into your returns.
Since currency plays such a big role in investing internationally, it begs the question - how is the Indian currency likely to perform going-forward?
How is the Indian currency likely to perform over the long-term?
To answer this, we need to understand how the country will grow. India’s GDP per capita is lower compared to most developed countries, implying there is plenty of room for growth. And while the economy will undergo ups and downs, there is no doubt it will continue to grow over the long-term.
But India will require money to fund this growth, making it a capital hungry country. All of which can weaken its currency, exposing it to the risk of continued depreciation.
What per cent of your portfolio should be international stocks?
Unfortunately, there is no thumb rule for this. But a recent survey revealed that nearly 40% of HNI's (High Networth Individuals) expenses are in foreign currency. Now, this can be a good starting point. You can link the proportion of your international exposure to any future liabilities in foreign currency. A classic example is of parents who intend to send their kids to the US for further education. But having said that, the bottom line is that if stocks are a part of your long-term portfolio, a small proportion of that (10-20%) must be invested in international stocks, to facilitate diversification.
How to invest in international stocks?
For investing in the international stock markets (most investors prefer the US), you can either buy US stocks directly or invest in a US-based index fund.
Alternatively, you can approach Indian brokerage firms that have tie-ups with international brokerage firms.
But before you take the plunge, ensure that you check on:
the investments limits set by the government
the brokerage charges on foreign transactions
the tax on capital gains from international transactions
The above-mentioned investments routes bode well for investors with large exposure to international stocks. However, investors with smaller portfolios (few lakhs of rupees) can invest in Indian mutual funds investing in international stocks.