With upward mobility of the urban middle-class and more income at disposal, Indian investors are increasingly looking to diversify their investment portfolio and equities have become a new favorite. Especially over the past year, a rising trend in investors looking at products around US-listed equities has become visible. The need for such diversification is also necessitated by market volatility, brought about by the COVID19 pandemic. Not to mention, a wide array of benefits that investors can get from a well-diversified portfolio.
For one, equity markets in developed nations are comparatively more stable than it emerging market peers. The interest of small investors better protected as companies are guided by stricter corporate governance norms. Besides, if investments are spread out across geographies, the volatility in one can be offset by the stability in another, since the correlation between different markets is low. There is also space for a small investor with limited capital to invest in stocks outside India through fractional trading.
Global diversification also comes with the dual benefit of superior markets and stronger currencies. Currencies in developed markets are generally stronger and appreciating against the basket of currencies in emerging markets. The Indian Rupee, for example, depreciated 44% against the USD in the last 10 years. Indian investors buy stocks in Indian rupees, but the US stocks are denominated in US Dollars. This helps protect INR wealth from eroding when the US dollar is rising. This depreciation in the Indian Rupee is cushioned well by global diversification as dollar-denominated.
By exploring global markets, especially the US, investors get an opportunity to take home a slice of iconic companies in areas such as healthcare, new technologies, science, analytics, etc. Companies of the likes of Google, Facebook, Tesla, Netflix, Apple, and Samsung, become a click away for investors. They can take part in the growth stories of these companies benefit from their different phases of evolution and expansion.
Additionally, the window to the world’s largest markets, the US, opens up for Indian investors the moment they decide to diversify. US listed companies account for around 35-40% of the world’s market capitalization, not to mention, the US’s economy is 10 times bigger than India’s.
Therefore, the US could be a stepping stone for any investors looking to explore global markets at any point in time. The experience in US equities would boost investor confidence and worldview as much as it would bring in benefits that are typical to geographical diversification.
Article by Ms. Ashma Zaveri, Chief Operating Officer, MNCL.