The fear generated by the Covid-19 pandemic has caused a rout in stock markets globally. Many Indian investors have forayed into global equities both directly and via the international mutual funds available in India. If you are one of them, hold on fast to these investments. This is definitely not the time to press the panic button and exit.
Not every stock will take a hit
Though the Covid-19 scare has caused markets across the world to go into a tailspin, not every stock will be adversely affected. Some, in fact, even stand to benefit from the pandemic. "E-commerce has been a beneficiary of the current practices of social distancing and work from home. Companies like Amazon have actually hired more people and enlarged their employee base," says Rajeev Thakkar, chief investment officer, PPFAS Mutual Fund. Thakkar is the fund manager of Parag Parikh Long-Term Equity Fund, which has about 30 per cent of its portfolio in foreign stocks.
While both Indian and US stock markets have been hit, investors who have taken exposure to US equities will be protected to some extent by currency movements. They will be cushioned to some extent by the decline of the rupee against the dollar.
The large-cap rally in India over the past year or so, as you would perhaps be aware, was very concentrated in nature. With foreign institutional investor (FIIs) investing in the Indian markets via the exchange-traded fund (ETF) route, many Indian blue chips had become far more expensive than those in the US. Many investors have found greater comfort in the valuations prevailing in the US markets. “This remains true even today,” says Thakkar.
Current events have, in fact, validated the logic for geographical diversification. Even though China was the epicentre of the Covid-19 pandemic, the SSE Composite Index has fallen by 8.6 per cent and the Hang Seng is down 20.1 per cent. Both these indices have, in fact, fallen much less than the Sensex, which has tumbled 31.2 per cent over the past month.
Basic premise behind international investing still holds true
If a stock investor has a value bent, the primary reason he ventures beyond his country's stock market is that he gets to pick bargains stocks from an exponentially bigger pool of stocks. Markets across the globe are in different stages. Some are overvalued, some are reasonably valued, and others are undervalued. Once you widen the scope of your hunt to foreign markets as well, you have a greater chance of finding stocks whose market price is lower than their intrinsic valuation.
Another reason investors venture abroad is to have geographical diversification in their portfolios. "You increase portfolio risk if you have single-country exposure. Most Indian investors have nearly 100 per cent of their portfolios in Indian stocks and mutual funds, which means that they are missing out on global economic growth," says Vinay Bharathwaj, founder and executive Chairman, Stockal. Stockal is a global investment platform that allows investors, including those in India, to invest in multiple markets abroad. Hitching your investment cart to a single country's stock market indeed increases risks. If you look up the periodic table of returns (many are available online), it becomes apparent that market performance tends to rotate. No single market remains an outperformer all the time, which is why it makes eminent sense to be globally diversified.
As consumers, Indians already spend liberally on global brands, such as Amazon, Apple, Google, Facebook, Pizza Hut, Starbucks, etc. So why not profit from their growth as investors? "Entering foreign markets like the US gives you the option to invest in global wealth creators," says Nandkishore Purohit, head–digital strategy and analytics, HDFC Securities.
All these reasons for investing in foreign markets remain valid even today, hence there is no reason for investors to develop cold feet. In fact, the downturn has only made valuations more attractive. “If you are a value investor this is the right time to pick stocks with good fundamentals that are priced fairly. Even in the past, value investing has shown superior returns in the long term, especially after an economic crisis,” Bharathwaj.
Beware of the risks
One of the key risks of investing in foreign markets is lack of familiarity. This can sometimes induce a panic reaction in investors when markets witness a precipitous fall. "Suppose that an Indian investor holds both HDFC Bank and JP Morgan in his portfolio. Imagine a situation where both fall 30 per cent. He is likely to be far less perturbed about the decline in the former than in the latter," says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisers. Such knee-jerk reactions need to be avoided.
One of the key risks that comes with investing in foreign stocks is the lack of information. However, this can also be looked upon as an advantage. If you are investing in an emerging market stock about which very little is known, that can also be an advantage. Fewer bargain stocks are available in markets that are heavily covered by analysts.
What should you do?
At present, it may appear like an apocalyptic scenario, with stock markets across the world falling in tandem. "This is a short-term phenomenon. Over the longer term, there is a low correlation, especially between the Indian markets and those in the developed world," says Dhawan. He suggests that investors should treat their foreign investments as a long-term asset allocation cum diversification decision, and not get fazed by the current rout.
Investors who are all at sea should take the help of a financial advisor, who will be able to guide them through this turbulent phase. As Shankar Sharma, vice chairman and joint managing director, First Global, an international brokerage firm, says: “People venturing out to invest globally, without getting proper advice or guidance on asset allocation, are destined to lose. It's a difficult game, not to be done blindly via ETFs and feeder funds.”