Globally, a lot of innovation is taking place through disruption of various traditional industries. Such innovation and disruption creates investment opportunities across geographies. Such opportunities are very limited in India in the listed space. Hence, to participate meaningfully in these opportunities, investors need to take exposure to several themes or emerging mega-trends outside India.
Reasons for Investing Internationally:
Winners keep changing:
Every country has its own strengths and weaknesses, and reactions to global news flows can be consequently different.
As can be seen in the chart above, no single country/region has been the best performer consecutively for a prolonged time period. In the last 10 years, the US has been the top performer in 6 years but only twice consecutively. International investments reduce single country/region-specific risk at portfolio level.
Correlation benefits:
Correlation shows the strength of relationship between two variables, in this case the stock market performance of one country vis-à-vis the other.
As against the general notion that Indian & US equity markets have high positive correlation, there have been periods of divergent movements, e.g. 2011, 2013, 2015-16, as given in the previous chart. Also, in the last 10 years, the correlation between India & US has been only 0.29.
Hedge against INR depreciation:
International exposure also carries with it exposure to different currencies. Whenever there is any depreciation in INR, the global portfolio could earn higher INR returns, which is depicted in the chart of the US S&P 500 index below.
Ability to participate in global themes:
Though India is one of the fastest growing economies in the world, it still lags behind the advanced economies with respect to innovation, since the major technology centric firms operate globally. E.g. names like Facebook, Amazon, Apple, Netflix, Google, etc. are not listed on Indian bourses.
Popular themes that are emanating across the globe are robotics, artificial intelligence, electric vehicles, industrial automations, e-commerce and cloud computing. Since these themes are expected to shape our future, it makes sense for domestic investors to participate in such global themes.
To summarize, international investing helps in diversifying single country risk, provides correlation benefits, provides currency diversification, and the opportunity to invest in some of the leading global brands & themes.
Modes of International Investing:
International Investing is possible either through domestic Mutual Funds, either through Index funds which mirror global indices, or actively managed funds, or by investing directly in foreign currency through the Liberalized Remittance Scheme…
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