- July 21, 2020
- Posted by: Shivani Chopra, CFA
Speakers: Vijayanand Venkatraman, CFA, Yogesh Sundaram, CFA, Rajesh Bansal, CFA and Manu Iyer
Moderated By: Meera Siva, CFA and Ravi Saraogi, CFA
Contributed By: Deivanai Arunachalam
When there is a lot of volatility, does it help to stick with the geography you know or diversify globally? This was the question that was debated in a session organized by the Chennai chapter of the CFA Society India. In a first-of-its-kind, a 2-member per team virtual debate format was tried for the ‘India vs USA: Invest Local or Diversify Global’ event on July 4, 2020.
Speakers for Team India were Vijayanand Venkatraman, CFA and Yogesh Sundaram, CFA and for Team USA, it was Rajesh Bansal, CFA and Manu Iyer. Meera Siva, CFA and Ravi Saraogi, CFA moderated the debate.
Ravi Saraogi set the background on the trends and methods of how Indians can invest abroad. He noted that international investment in debt and equity has doubled over the last few years, aided by an impressive performance of the US markets and the ease of international investing. He pondered on whether this increase in international investment is a tactical increase or if it is a structural change as a result of increased awareness and market development.
There are two routes the investor can take to invest abroad – Liberalised Remittance Scheme (LRS) where Indian residents can invest up to $250,000 per year overseas; Non-LRS route is also available wherein one could invest in an international fund managed in India. Examples are ICICI Prudential US Blue-chip Equity Fund as well as investing in a fund managed abroad through a feeder fund setup in India.
Vijayanand started by busting the myth that investing internationally diversifies the portfolio. He offered a visual representation of 5-year rolling correlations of monthly returns of BSE Sensex (USD) and SPX. He noted that returns were uncorrelated till the late 90s after which they picked up. As of 2019, the correlation was close to 0.65. So they do not behave as if they are 2 different asset classes. Therefore diversification is no more a valid argument. The key motivator for investing in the US gives exposure to USD, which is a reserve currency.
He provided data to show that in a period when the dollar weakens, the Sensex outperforms. Similarly, when the dollar strengthens, the S&P outperforms. He said that we are now close to the peak of a dollar cycle. When the dollar starts weakening, it is time to bring money back to India, if you have been investing in the US.
Rajesh, for Team USA, said that diversification reduces the volatility of portfolio returns and reduces risk. The US market should be an asset class in the portfolio that focuses on just one economy. Adding that whether you wish to overweight or underweight depends on the cycle and the investor’s views. He said that USD being a reserve currency, there is real benefit in investing. Also, 90% of forex trade involves USD, 60% of international debt and 65% of forex reserves are in USD. And an average Indian’s consumption is heavily weighted by the US portfolio of consumer goods – be it phones, cars, shoes or laptops.
Yogesh quoted Ray Dalio in emphasizing that fundamentals matter less today than they did before. Today the economy and the markets are driven by the central banks and the coordination with the central government. Capital markets are not free markets allocating resources in traditional ways. Central banks have no option but to print money and keep the economy alive.
He brought up the current risks in the US market, as it is election year. Republicans believe in reducing taxes and regulations. They have diluted the Volcker rule. If Republicans, who are market friendly, return to power, we can expect the market momentum that we have seen in the last 45 days to continue. He offered data from the past 50 years to show market performance in elections years, especially when the incumbent loses. Historically there have been 2 instances when modern US presidents failed to win a second term – Jimmy Carter and George Bush lost when elections coincided with economic downturns. Given that we have an economic downturn now, accompanied by the high US unemployment (more than 10% now) rate, Trump could lose and this can be negative for the market, based on history.
Data shows us that since 1996 (the inception of Nifty 50), returns between Nifty in USD terms and S&P are almost the same. This is the price return. When you look at total return, including dividend reinvestment, S&P offers a 1.3% higher return than Nifty 50, given that Indian companies retained their earnings and did not pay out dividends. Compare this to large wealth creators in India – they have delivered 10-year CAGRs, similar to that of US marquee names. US investors are bullish on India and they are going through greater uncertainty than India. All these facts make India a more exciting investment destination now.
Manu emphasised that the main reasons to look at the US as an investment destination is the diversity of options to diversify. Investors can look at plain vanilla stocks, index trackers, vanilla ETFs, sector-specific ETFs, bonds, high yield bonds, investment grade bonds, residential and commercial real estate, Treasury Inflation Protected Securities (TIPS) and so on.
As investors have differing views, US offers plethora of avenues to actualize these views. Bullish on Cleantech? There’s a fund that helps you take your stance. Are you concerned about inflation? Consider TIPS. The NASDAQ Biotech Index helps you get exposure to pharma companies that are likely to do well as a result of Covid developments. An investor who invests only in India, doesn’t have the luxury of using any of these options. Risk adjusted returns for 3-, 5-, and 10-year periods showed us that the DJIA had consistently outperformed the Sensex.