The Hindu Business Line : Global markets beckon

Have you ever thought about why investors from other countries invest such huge sums in the Indian stock market? Apart from the fact that the latter's performance has been commendable, a key reason is `diversification'. Though Indian stocks offer the promise of strong growth, there could always be other companies abroad that are doing equally well or even better. You may be missing out on the returns that such stocks or countries offer by restricting yourself to the local market.

If you are wondering why many of us never gave much thought to it, it was simply because our regulations did not permit it earlier. They do now. In other words, individual investors are allowed to invest up to $50,000 every year outside India. If you cannot do this on your own, mutual funds and portfolio managers can help you out within the limits prescribed for them.

The advantages

Investing in international markets has two advantages — performance and diversification. For example, in 2004, markets in Singapore, Brazil and Hong Kong bettered the returns delivered by Indian markets. Clearly, allocation of even a small amount to quality stocks in these countries could have perked up your portfolio returns. As for diversification, you may be surprised to know that the Morgan Stanley Capital International Index (MSCI) shows that the total value of listed companies in India is less than 1 per cent of the world market cap. This basically means that your portfolio, if invested in Indian stocks alone, captures a very small portion of the entire investment universe available to you.

How to invest?

So, if there is a particular market or region that you believe holds potential, you could consider investing there directly by buying stocks or through mutual funds or portfolio managers. For beginners, it is better to go through the last two options (after verifying the capabilities of the fund house or portfolio manager in international markets) at least initially, as lack of knowledge on such markets can prove to be injurious to your efforts.

Risks

Though international investing offers the benefit of diversification, there are risks too. At the outset, one needs to remember that stocks are stocks, whether listed in Mumbai, Taiwan or New York. So the risks associated with equities is in no way mitigated. What you can, at the most, tone down are risks internal to a country or a sector within a country. For instance, investing outside India may allow you to insulate your portfolio from a domestic slowdown in the capex cycle, inflation or policy related issues.

If your risk appetite allows, say, 50 per cent of the overall asset allocation to equities, then with this new option, you have to make do with investing a part of the 50 per cent in global markets. Of course, your portfolio allocation may require a change, if you were to add exposure to an asset like orange juice! (Yes, it is traded as a commodity.)

There could be other risks too to international investing. A depreciation in the currency of the country you invest in vis-a-vis the rupee, can dent your returns. Further, as India integrates with the global economy, the correlation of the Indian stock markets with other markets can increase, reducing the benefits of diversification.

Events or economic changes elsewhere can affect India as well. Nevertheless, there shall always be factors such as strong earnings in some companies or favourable policies in a country that could differentiate valuations and make a difference to the returns you earn. So be realistic in your expectations when you embark on international investing. To start with, view this as an option to diversify your investments and minimise the risks related to concentration in one market and one currency.

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