The two ways of investing offshore are either through the LRS route or by investing in rupee-denominated feeder funds that invest in offshore indices or stocks.
The geographic diversification and the ability to invest in companies that may or may not operate in India are good reasons to invest offshore.Something that was looking inevitable has happened in the Indian economic landscape. Moody’s Investors Service (Moody’s) has downgraded the Government of India’s foreign-currency and local-currency long-term issuer ratings to Baa3 from Baa2. Further, the agency has kept the economic outlook negative.
While the rating is a reflection on the state of the economy, do the stock market investors also have to be concerned? “There is a fundamental difference between the way the stock market perceives the market as compared to the rating agencies like Moody’s. A rating agency considers factors over months to determine an upgrade or a downgrade. This means that the stock markets have already lived through those factors and moved ahead,” says Harsh Jain, Co-founder and COO, Groww.
The immediate impact on stock market indices was understandably muted when the news about downgrade came. “In the near term the driver of the equity market remains sentiment around the pandemic, easing of working conditions and liquidity support,” says Sameer Kaul, MD & CEO, TrustPlutus Wealth Managers.
But, if it is going to take time for the economic growth to rebound, is it time for Indian investors to look at opportunities in other countries?
International investing
While the government and the RBI have already taken several measures to bring back the nation on the growth path, some equity investors will start looking at international investing. While this may be the right approach, diversifying one’s portfolio with international funds has always been suggested by the financial planners.
Not all global economies will move in tandem and hence the low co-relation between developed and emerging economies can be used as an advantage. So, by investing abroad, one is able to manage the country risk better. Also, there are geopolitical factors that play a role in the stock market returns.
“Indian investors should focus on investing in global equities since fixed-income yields are negligible offshore. The two ways of investing offshore are either through the LRS route or by investing in rupee-denominated feeder funds that invest into offshore indices or stocks,” says Kaul.
“Indian investors can consider investing directly in foreign stocks or take the mutual fund route. They can look at international feeder funds that focus on specific geographies or themes based on their preferences,” says Jain.
Comparative Returns
Currently, the 1-year and 10-year annualized return of Nifty 50 has been nearly a negative 15 per cent and 7.25 per cent, respectively.
Thanks to the Fed stimulus perhaps, the S&P 500 index even after crashing by almost 30 per cent since January 2020 has rebounded and is currently down by about 2 per cent YTD.
The 1-year and 10-year returns are close to 11 per cent for the periods for the S&P 500 index. The same goes for Nasdaq and other US indices which have rebounded well.
Even Japan’s Nikkei 225 index has now generated close to 10 per cent return even after falling since January 2020.
Investing abroad
The US remains the first choice for most investors looking to invest abroad. One can not only invest directly in stocks such as Apple, Facebook, Amazon or Netflix, amongst others, one may also take exposure to US blue chip stocks through international mutual funds too.
Some of the international funds available to Indian investors are – Franklin India Feeder Franklin US Opportunities, ICICI Prudential US Bluechip Equity, Kotak Global Emerging Market and Motilal Oswal S&P 500 Index Fund.
For more on why should one invest globally and what are the factors to look at:
Read – International Investing: Should you consider adding global stocks to portfolio?
FII action on Indian stocks
“For the first time in 22 years, Moody’s downgraded India’s sovereign rating to Baa3 – the lowest investment grade. While domestic investors seem unperturbed by this change, foreign institutional investors tend to look at these ratings as an indicator of where the economy is heading. As a result, we can expect some impact on the FII inflows into India’s debt and equity markets. This can eventually result in lower returns for domestic investors. Hence, many experts recommend Indian investors to consider investing in international markets through domestic funds,” says Jain.
However, volatility will remain part and parcel of the stock market movements. “As long as India does not get downgraded further into junk status, this rating action is unlikely to impact debt or equity markets. Please be aware that India continues to offer attractive yields to investors especially those from developed markets who are either getting zero or negative returns on their fixed-income investments. As far as the equity markets are concerned, evidence that money will continue to chase quality was apparent in the QIP that was successfully closed by Kotak Bank,” says Kaul.
Sum Up
The COVID-19 pandemic has impacted global economies and growth rate of almost all of them will falter. It is better to diversify across geographies to make sure the entire risk is not borne by a single country. The currency exchange rate risk should, however, be kept into consideration while investing abroad. “International investing for those who can afford it is a good geographical diversification and must be looked at all points in time and not necessarily in times like now. As we have stated earlier, the geographic diversification and the ability to invest in companies that may or may not operate in India are good reasons to invest offshore,” adds Kaul.
Still, before venturing to earn in dollars, ensure you have the basic covered about foreign markets and economies. “Foreign markets should be invested in only when investors understand the landscape, and if it aligns with their goals and risk profiles,” adds Jain.
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