Investing beyond borders: Risk or opportunity?

While Indians are significant consumers of foreign products, why do we maintain a distance from investment in those very names that are growing, largely, on the back of our consumption power?

Updated: Aug 29, 2019 03:51:32 PM UTC
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The Indian investor has come of age in terms of ploughing in to a variety of asset classes. The shift from traditional investment like real estate and gold has also come only 15 years ago, when India’s equity market broke out on the upside. It was one of the most predictable shift of choice of asset class as the traditional segment was staring at exuberant inflows.

But, as our emerging and gradually liberalising economy began to offer Indian investors rapidly evolving domestic investment choices such as equities and fixed income, eyes and ears were generally shut to opportunities in international markets. And, that is nothing new. Even the developed world has had its own share of looking only inward for sustained period of time.

Almost every possible instance of global investing was deemed risky. I remember when I simultaneously played the dual role of a US-registered stock broker and global portfolio manager for two large Wall Street firms, the global equity portfolio was defined as the most aggressive versus its domestic counterpart. Unsurprisingly, it was the former that performed the best among all categories. I could not resist buying Toyota, Novartis or Unilever in my managed portfolios as they were opportunities, not risks. In fact, global allocation reduced the volatility and rendered the better than desired performance.

Wall Street, which had already embarked on a secular (multi-year) bull run in 1982, got the biggest boost in 1994 after the historical NAFTA (North American Free Trade Agreement) between the USA, Canada and Mexico became effective. NAFTA was designed to create jobs in all the three signatory nations and increase trilateral trade. It did.

From 1993 to 2015, America's real per-capita GDP grew 39.3 percent, Canada's 40.3 percent, and Mexico's 24.1 percent. Although for the past year, the Trump administration has kept the stakeholders on tenterhooks, the opportunities created beyond borders were an eye-opener for investors of all three nations.

Barring the meaningful 2008-09 aberration, Wall Street has never looked back since then.

Even the Australian investor was extremely domesticated. It took the combination of superior performance of international markets and tenacious effort by the financial professional community to financially educate the population. The kangaroo finally hopped out of its comfort zone in the early 90s. Australia’s benchmark index saw a phenomenal run until 2008.

Despite some analysts discounting it, globalisation is very much alive. Imagine, just an iPhone has parts from dozens of countries. A high-end Boeing aircraft has components manufactured in over 140 countries. This is all part of global investments.

What about the Indian investor?
We, in India, are perfectly happy to buy a long list of durable as well as non-durable imported items for our consumption. From foreign brand cars, clothes, FMCG items, healthcare products to “sin goods” (liquor, tobacco etc.), the huge amounts spent is a clear testament of our trust in their quality and safety. Yet, we would maintain an arm’s length distance from considering an investment in those very names that are growing in large part on the back of our consumption power.

What keeps us from looking beyond our geographic comfort zone of investments (without curtailing domestic investment)? Is it the fear of the unknown, pre-conceived notion of everything “outside” being dangerous and everything “inside” being safe, or sheer complacency?

The habit of global diversification is hard to cultivate.

The argument in favour of global investing stems from the fact that different economies perform differently at different times; so do their financial markets.

I am not even singling out just the financial products and services for global diversification. The many success stories of manufacturing, trading and services overseas have made innumerable listed as well as private Indian names very proud and wealthy. The reasons to look beyond borders, among others, include overall foreign exchange impact, eventual long-term global economic recovery and India’s consistently growing domestic wealth, coupled with a higher savings rate.

We have lately detected an increasing number of queries on offshore products and services: PE Funds, listed ETFs, foreign currency SIPs, EB5 Visa program of the US etc. These are opportunities.

Do you want to venture in to the waters or watch the waves from the shore? Getting your feet wet, as a start, may not be a bad idea.

The author is Senior Product Manager at Finolutions Wealthcare LLP & a former Global Portfolio Manager. The writer's views are personal.

The thoughts and opinions shared here are of the author.

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