Existing investors: Rebalance US equity funds portfolio, avoid exiting mkt

New investors should look beyond one-year data; enter via SIP route with a seven-year horizon

Equity funds focused on the United States (US) market have witnessed a sharp run-up over the past year. Returns range from barely positive to as high as 71 per cent. Both new and existing investors are currently worried about the prospects of these funds.

Tech-led rally that broadened

2022 was a difficult year for US equities, especially for the FANG (mega-cap tech) stocks. “Worries on account of the Russia-Ukraine war and high US inflation led to a correction in them,” says Kaustubh Belapurkar, director-manager research, Morningstar Investment Advisor.

In 2023, the rally was led by stocks dubbed The Magnificent Seven (Apple, Alphabet, Meta, Amazon, Nvidia, Tesla, and Microsoft). “The excitement surrounding artificial intelligence was a key driver,” says Vidya Bala, co-founder, Primeinvestor. Their earnings growth also remained steady.

In the latter part of 2023, the US market rally broadened. “This happened because the constant threat of recession, the US economy remained resilient,” says Bala.

 

Around this time, as inflation came under control, the focus shifted from interest rates rising further to stabilising or declining in 2024. “The changed view on inflation and interest rates also contributed to the market’s performance,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.

Risks evenly balanced  

The US economy is trying to achieve a soft landing. The US Federal Reserve has been walking the tightrope between fighting inflation with interest rate hikes while trying not to weaken the economy so much that it dips into a recession. The market’s fate will depend on how policymakers fare. While high interest rates could adversely affect equities, on the positive side, Wall Street is projecting better earnings growth for a broader range of companies.

New investors: Okay to enter now

Experts believe that new investors’ fears about entering an overheated market are unfounded. They say the decision should not be based on one-year data. “If you look at two-year data, the market recouped in 2023 what it lost in 2022. Returns are not that steep over two years,” says Dhawan. Exposure to US equity funds is critical for geographical diversification. “The Indian market’s correlation with the US market is low and reducing. Hence, investors should complement their domestic market investments with exposure to the US market,” says Bala.

The US market should be the first port of call for an investor who ventures overseas. “The US market represents the world’s largest economy and has a large variety of companies. Many of them are global multinationals that generate revenue not just from the US but from across the globe,” says Belapurkar.  

Existing ones should rebalance

These investors should check how much their exposure to US equity funds has changed (it will vary, depending on the time of entry). If a review shows that their US equity exposure has increased by a considerable margin, say, originally it was 15 per cent and now it is 20 per cent, they should rebalance and bring it back to the original level. “Avoid selling and exiting US equities entirely,” says Bala.

Not a short-term bet  

US funds should continue to be a part of all long-term portfolios. Those with a seven-year or longer horizon should take a 10-15 per cent exposure (of the equity portfolio) to them.

Dhawan cautions against having exaggerated return expectations after the recent run-up. “The US election towards the end of 2024 may also cause volatility,” he adds.

With valuations on the higher side, Belapurkar suggests avoiding lump sum investments and entering via the systematic investment plan (SIP) route.

Returns in US equity funds come from two sources: market returns and currency returns. Both go through cycles. There are periods when the rupee appreciates, which lowers returns from these funds. Then the opposite happens. “With volatility coming from two sources, exposure to this market must be long-term,” adds Bala.