With the rapid development of technology in the 21st century, the world is becoming smaller by the day. The invention of SmartPhones and high powered portable computers has been a pivotal moment for humanity. Now, one has access to over 1.2 million terabytes of data right at their fingertips. Moreover, Continuous innovation in technology has led to an exponential advancement in the financial world. Investors have transparent access to their portfolios, and the power to make secure trades easily at the tap of a button. They are equipped with the right tools to tap into markets across the world within the comfort of their own homes. Global markets have been a raging success due to the inflow of international investments. With rapidly growing markets and higher returns on foreign equity, Indian investors are seeking diversification in their current portfolios and adding their skin to the global game.
In India, investors now have the opportunity to seek offshore equities and increase their global footprint. Global investments provide Indian investors the best of both developed and emerging markets, and the ability to diversify their risks. They are no longer bound by geography, and can now create a centralized portfolio securely that consist of equity investments from across the world. In addition, citizens can now begin to adjust their financial goals for the next generation of “global citizens.” In essence, one can obtain US Dollar (USD) assets for any future USD liabilities. Alongside, they can generate a natural hedge against the Indian Rupee (INR) depreciation against the dollar that is recorded at a compounded annual growth rate (CAGR) of 4.7% in the last ten years.
Over the last decade, the INR has been depreciating consistently against the USD. Side by side, the NASDAQ has continued to outperform the Sensex and Nifty. The outperformance is even starker after accounting for the depreciation of the INR. Just over the last year, the NASDAQ had outperformed the Sensex by almost 9% CAGR and the Nifty by over 12% CAGR delivering stronger returns than the Indian stock market. The NASDAQ has continued to provide stronger returns over a ten year period with a CAGR of 11.5% while the Sensex held a CAGR of 2.8% and Nifty of 3.1%. With the era of technology dominance, markets like the United States of America (US) and China will continue to outperform the Indian Markets as the companies at the forefront of innovation and technology are not available domestically.
During this period the Dollar has continued to surge, while the Rupee tumbles under global economic pressure. Since the beginning of 2018, the rupee has suffered more than 6% of depreciation against the Dollar starting at Rs.63.50 in January 2018 to Rs. 67.44 in May 2018. Parallel to the strengthening of the Dollar, One of the critical factors for the drop in INR is the steady price rise of Crude oil affecting India’s current account deficit (CAD). India has not seen a surplus in the current account for over 15 years. As the prices of Crude Oil increases, India’s current account dives deeper into deficit. An increase of over $10.00 per barrel of crude oil can cause an increase in CAD by over $10 billion leading to a reduction of 0.5% of overall GDP in the economy. Although Foreign Direct Investment (FDI) has increased to $36 billion in FY18, about $8 billion went into equities while the remainder was infused into bonds, not favoring an INR appreciation.
On the other hand, the US economy has been expanding significantly with access to the largest consumer market in the world, a historically low unemployment rate, and rising interest rates. The US dollar has remained the gold standard for trading on a global scale with over 50% of US dollars held in foreign reserves held by banks around the world. The united states offer a transparent legal system, low taxes, and superior infrastructure making it an investor’s heaven.
As the rupee continues to depreciate, investors should begin to look at investing in international equities and diversify their returns. They should start to think in a single currency, the US dollar, and make strategic investments according to it. At Valtrust Capital, we notice an inherent need for international equity. We offer investors an opportunity to grow their portfolio without borders and continue to aid them in maintaining a good standard of wealth and security.