Shyamal Banerjee/Mint
Shyamal Banerjee/Mint

There’s more to investing in Indian equities than the rupee

Past performance is no guarantee of future performanceand that applies even on the downside

The email that I got on Friday the 13th (of December) was ominous. A client from Singapore wanted to call me over the weekend to discuss his portfolio. Like most non-resident Indian (NRI) clients, Venky, too, had a decision to make regarding a portion of his money—whether to invest in equities in his home country (Singapore, in his case) or in India. For 2013, the Singapore Straits index had fallen 3% while the Nifty (the 50-stock index on the National Stock Exchange in India) had risen 4.5%. I started feeling relieved till I found out that the Singapore dollar had risen 10.5% during the year. In comparable terms, despite the fall in the local stock index, Venky was actually marginally better off remaining invested in his home country in 2013.

Before my US and UK clients also called me, I decided to dedicate my entire weekend to complete an analysis of how their stock markets had performed in absolute terms as well as after reflecting the exchange rate movements. (Note: In this column, the equity indices compared are Dow Jones, Nasdaq, FTSE and Singapore Straits; the currencies are US dollar, pound and Singapore dollar.) What I arrived at are some rules that NRI investors can follow based on analysis of information across the past decade.

Asset allocation is the key

1) Past performance doesn’t guarantee future performance.

2) Winners rotate in all markets.

3) Staggering investment entry can reduce risks.

4) Global factors are difficult to comprehend; directional change can be swift.

Who can forget 2007? Not 2008. Market euphoria had taken over the world. Every day’s delay in investing in equity markets meant a loss in potential earnings. NRI investors were seriously considering moving all the funds needed for their future needs (education and retirement) from overseas into India so that they could benefit from the rising rupee and the buoyant markets.

Here is what the scoreboard of the previous five years (2003-07) looked like then: the rupee was up 18% against the US dollar and 1% over the Singapore dollar. The pound was up a marginal 1.5%. Nifty was up 461%. Straits index was a distant runner up with 160%; Nasdaq 112%; and Dow Jones and FTSE just around 60%. Who wanted to forego a three to six times return differential, with a currency gain thrown in as well?

Since the financial crisis, Nifty has more than doubled in value. That is still better than FTSE, Straits Index and Dow Jones (45-80%, in the same time frame), but worse than Nasdaq (185%). For someone who may have moved funds to India from overseas around that time, the loss has been on account of the currency depreciation: 29% against the US dollar, and 45% against the Singapore dollar and pound. In currency neutral terms, the returns on FTSE and Nifty are equal (nearly 110%); all other indices are better.

Nothing is really constant in the markets. While Nasdaq has been the clear winner in the past 1, 2 and 5 years, Nifty is miles ahead when we compare returns across the past decade. The pound is the currency with the highest appreciation against the rupee in the past one and two years, while the Singapore dollar is the leader over longer periods.

What clearly stands out is that currency is certainly an important factor in evaluating whether to move funds to India or not; but it cannot be the only one. Despite the rupee weakening by 36% against the US dollar and 85% against the Singapore dollar in the past 10 years, the currency neutral returns of Straits index, Nasdaq and Nifty are almost identical (221%, 221% and 228%, respectively). These are comparisons from a point-to-point basis (31 December 2003 to 13 December 2013). The one sure-shot way to reduce risks is to stagger the investment entry.

If an NRI investor had moved funds from the US to India at 39.24 a dollar towards the end of 2007, the loss in currency would be 58% (or 8% per annum). The financial planner approach would be to make a plan to transfer a certain percentage of annual savings to India, thereby increasing the average exchange rate at which the funds were brought into India. Of course, the planner would not have invested all funds at one go into equities, and a staggered, systematic entry could have cut risks of investing in the asset class as well.

The current mood in the Indian markets is sombre. As opposed to 2007, investors don’t want to move funds to India. In the past two years, Dow Jones and Nifty have matched returns in absolute terms, but not in US dollar terms. If your allocation to India was 10% of your financial assets, and that has dropped to 8%, my (a financial planner’s) suggestion would be to “top up" the Indian allocation. Past performance is no guarantee of future performance—and that applies even on the downside.

Lovaii Navlakhi is founder and chief executive officer, International Money Matters Pvt. Ltd.

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