Home / Opinion / Columns /  Strong rupee an opportunity to invest in the US

Since April 2020, the rupee has appreciated significantly against the dollar from nearly 76 to 73.5 per dollar. The futures for November 2021 are being traded at nearly 76.5 forecasting a 4% depreciation in about a year’s time. We are getting more dollars per rupee today than the past nine months and, based on the futures data, compared to the next year. For investors who have been planning to invest in the US markets, it makes sense to get serious and use this opportunity to start remitting their money at favourable rates.

Naturally, all investments should be subject to being part of your financial plans, asset allocation strategy, risk profile and suitability analysis whether carried out yourself or with your adviser’s help. Assuming that a global allocation is suitable, it is an opportune time to start investing abroad. If you have already been investing abroad, then it may make sense to start adding to it in a systematic manner. Probably a lump sum investment followed by a monthly systematic investment plan (SIP) might make sense for a lot of investors. This has the advantage of averaging out any dollar-rupee movement and not having to time it.

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Once you have decided to start investing abroad, the next question is in what asset class and which country or regions should you choose. In our opinion, the highest risk-adjusted returns with high liquidity are provided by listed equities and, hence, this should be the major asset class when investing abroad. In terms of region, the choice is between developed markets and other emerging markets. Given that you are already investing in emerging market equities—Indian equities—portfolio diversification requires that you invest in the developed markets.

Within the developed markets, the choice is primarily between the US and Europe. Here, the US market clearly emerges better situated given that it has higher risk-adjusted return in the long-run and has many more listed, investible, stocks compared to Europe. By investible stocks we mean stocks with reasonably, large revenues, market caps and liquidity.

The US market has two other advantages—it has more companies focused on innovative sectors that are creating the future economy and companies that have globally dominant positions. The innovation-oriented companies put one on the winning side of the technology disruption wave, which started about a decade back and is likely to last for the next two decades. This technology disruption is riding on the back of progress in the digital infrastructure such as higher processing power (more powerful semiconductor chips), more widespread sensing and data collection, including via internet of things (IoT), higher quality data management (data centres and cloud), more analytical prowess (analytics and artificial intelligence), more bandwidth (4G and now 5G), and ubiquitous adoption of consumer devices (smartphones and wearables). New business models based on the availability of these technologies have emerged and both the companies creating the digital infrastructure and the ones using them are on the right side of the disruption.

The other category where the US has an advantage are more globally dominant companies. Nearly 45-50% of revenues of the US firms come from international sales. This provides exposure to other developed economies as well as other emerging economies. The next question, naturally, is whether it makes sense to invest in the US markets now. For that, we can do a quick comparison of the US and Indian markets and check which one is relatively more attractive.

We compare the S&P BSE Sensex with S&P 500. Since, this year’s earnings are impacted by the lockdowns for both the US and Indian markets, it makes sense to look at the PE (projected) for both. According to the factsheets, the PE (projected) for Sensex is 27.44 while that for S&P 500 is 22.94. Another valuation indicator is the dividend yield. The indicated dividend yield for Sensex is 0.94% against 1.59% for the S&P 500. Both the data points would lead one to infer that the US markets are significantly undervalued compared with Indian markets.

What is expected from the US economy in the mid-term? On 16 December, the US Federal Reserve released its summary of economic projections or the dot-plot. The median projection for the US GDP (nominal) is 6% for 2021, 5.1% for 2022, 4.4% for 2023 and 3.8% for the longer run.

The above data and analysis lead one to conclude that it is an opportune time to start investing in the US equities as part of a long-term global diversification and asset allocation plan.

Vikas Gupta, founder of Omniscience Capital

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