Not past returns, this should be your reason to invest in international equities
- International investing allows you to participate in companies at a scale which you will not find in India yet
- By investing international, you get access to unique opportunities
Investments in international equity by Indian investors have surged over the last few months as investors have seen high returns from this asset class during the pandemic. But in the past three weeks, as US technology stocks fell, the markets have come down from the peak. Here we will not discuss 'why, and by how much' the international stocks went up or have come down, but try to understand what you can expect from investing in international equities. Here, we will try to bring out a right frame of mind to invest in international equities, if at all your risk profile allows.
So, the same set of investors who were amused by the high returns till a few weeks ago have started worrying by seeing their returns going down from annualized 39% to annualised 32% in a few days. They had invested in international funds thinking that this is the new wave and it will continue in the same way. This is chasing the best performing theme and timing the market and is an absolute wrong way to start.
First point to understand while investing in international equities is that you are still investing in equities, and the risk of market volatility remains the same. Yes, it obviously provides your portfolio a better diversification but international equities do not means that the stocks like Amazon, Facebook, Apple, Netflix and likes cannot go down. So, beware of the risks.
"Investing after seeing high returns in the past generally leads to disappointment. Additionally international equities also face risks associated with equity investing including political,economic & fiscal risks which is currently being ignored. US elections in the near term will add volatility to global markets. Foreign exchange fluctuations can be a risk in the short term," says Suraj Shroff, founder of Infiniti Investments.
If not past performance then what should be a good reason to invest in the international equity market? The first one could be that it allows you to participate in companies at a scale which you will not find in India yet. By investing international, you get access to unique opportunities.
"International equity is a great way to get exposure to companies and sectors which are not available in the Indian markets. E-commerce, search engines, payment infrastructure, cloud computing, electric mobility, enterprise software, digital OTT platforms are some of the sectors which are showing good growth globally but we don't have listed companies in India," says Suraj Shroff.
The second reason could be India being a high inflation economy, it might be a good idea to have same allocation in dollar terms. Yogesh Kalwani, Head - Investments, InCred Wealth explains, "India historically has been a high inflation economy relative to developed markets, hence over a long period, Rupee tends to depreciate as compared to USD. When INR depreciates, the return of global investments in USD increases. Rupee depreciation has been ~4.7% p.a. in the last 10 years, that has added to returns of Global Equity investments."
How much should you allocate? Most investors know that they should not allocate more than 10 to 15% of their portfolio in international equities. They should stick to it. However it is not necessary for them to invest if their risk appetite does not allow or if they do not understand it.
What kind of returns can you expect from international equities ? Will they differ greatly from the returns generated by domestic equities?
Well, you should not expect the kind of returns seen in the past from investing internationally unless there is unrest at the macro level or some pandemic strikes again. (God forbid..!!)
"In the last 10 years, US equities have significantly outperformed India equities. Going forward, we believe both international and Indian equity funds may hold similar return profile. However, by adding International funds to the portfolio, investors reduce single currency and market risk," says Yogesh Kalwani.
Kalwani adds that equity returns are a function of earnings growth and P/E multiple change. He says, "International fund portfolio companies are set to deliver a projected earnings growth of 15% to 20% p.a which may eventually translate into portfolio returns over the long term."
Keep your return expectations under check, do not invest on the basis of abnormal returns generated in the past and invest only of you believe you need global diversification.
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