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Merits of global investing

An investment universe that is not restricted to a single country provides investors additional diversification and has the potential to mitigate country-specific risks, Harshendu Bindal explains

September 12, 2012 12:02 IST | India Infoline News Service

An investment universe that is not restricted to a single country provides investors additional diversification and has the potential to mitigate country-specific risks, Harshendu Bindal explains


Globalisation continues to work its way through our lives—it has changed the way we shop, eat, communicate, travel and generally live. As economies and societies integrate, the world is shrinking but this in turn is throwing up more opportunities for businesses and investors alike. By its very nature, globalisation has made investing-only-in-home markets less relevant. There is growing evidence that investing beyond home frontiers can help add significant value to the portfolio by spreading risk and enhancing returns. We discuss the merits and ways to overseas in greater detail in the article below.


Research indicates investors can achieve true diversification by investing across various countries and boost the risk-reward profile of their investments. A fair question would be - Given the performance of Indian markets, why consider global investments?


A simple answer is—Winners rotate and diversification pays! An investment universe that is not restricted to a single country provides investors additional diversification and has the potential to mitigate country-specific risks. A comparison with some of the leading developed as well as emerging equity markets over the past 10 years (2002-2011) provides an insight into the relative calendar year performance of the Indian equities market.


2002 2003 2004 2005 2006
Russia 13.9% Turkey 122.4% Turkey 38.5% Russia 69.5% China 78.1%
Korea 7.4% Brazil 102.9% Brazil 30.5% Korea 54.3% Russia 53.7%
India 5.9% China 81.1% Korea 20.0% Turkey 51.6% India 49.0%
Japan -11.0% India 73.9% India 16.5% Brazil 50.0% Brazil 40.5%
China -16.2% Russia 70.3% France 16.3% India 35.4% Germany 33.0%
UK -17.8% Germany 60.1% UK 15.5% Japan 24.1% France 31.7%
France -22.2% France 37.8% Japan 14.7% China 15.9% UK 26.2%
USA -24.0% Japan 34.6% Germany 14.4% France 7.8% USA 13.2%
Brazil -33.8% Korea 32.6% USA 8.8% Germany 7.7% Korea 11.2%
Germany -34.1% UK 27.2% Russia 4.1% USA 3.8% Japan 5.1%
Turkey -36.5% USA 26.8% China -0.8% UK 3.7% Turkey -9.2%
2007 2008 2009 2010 2011
Brazil 75.3% Japan -30.5% Brazil 121.3% Korea 25.3% USA -0.1%
India 71.2% USA -38.6% India 100.5% India 19.4% UK -6.1%
Turkey 70.0% France -44.9% Russia 100.3% Turkey 18.4% Korea -12.8%
China 63.1% Germany -47.2% Turkey 92.0% Russia 17.2% Japan -16.2%
Germany 32.5% UK -50.6% Korea 69.4% Japan 13.4% France -19.3%
Korea 30.0% China -51.9% China 58.8% USA 13.2% Germany -20.1%
Russia 22.9% Korea -55.9% UK 37.3% Germany 6.0% China -20.3%
France 10.9% Brazil -57.6% France 27.6% UK 5.2% Russia -20.9%
UK 4.7% Turkey -63.4% USA 24.2% Brazil 3.8% Brazil -24.9%
USA 4.1% India -65.1% Germany 21.3% China 2.3% Turkey -36.8%
Japan -5.4% Russia -74.2% Japan 4.4% France -6.7% India -38.0%
Source: MSCI

There has been some push back since 2008 against global investing citing the increased correlations across markets and asset classes. While it’s true that market direction was largely in sync, the magnitude of fall differed—some markets were more resilient than others and many recovered earlier than the others, unlike what is commonly perceived. Hence despite the increasing correlation —there is room for reducing risk. A look at the long-term correlation of MSCI India with that of key global markets/regions corroborates the same.


Region R-squared Country R-squared
AC Asia ex-Japan 0.65 Brazil 0.51
Emerging Markets 0.64 Japan 0.46
Europe 0.53 Korea 0.53
AC World Index 0.57 Russia 0.45
G7 Index 0.54 Turkey 0.49


France 0.51


Germany 0.50


UK 0.52


USA 0.50


China 0.56






Source: MSCI. R-squared computed for the 10-year period ending February 29, 2012

Apart from risk diversification, investing beyond home frontiers can help expand the opportunity set available to the investor. After all, India accounts for only 2.6% of world GDP (nominal basis; IMF estimates) and 2.2% of world market-cap. Assuming India’s share of world market capitalisation increases in line with GDP share—even then there will be significant opportunities available outside of India and allocation to foreign securities can help take advantage of these.


By ignoring investment prospects outside India, investors also miss out on opportunities in businesses and industries/subsectors that do not exist domestically. Similar is the case with investment styles—for example, an investment strategy focusing on dividend yield is likely to find limited opportunities in India. This is because the dividend income portion in total returns is typically higher in overseas markets compared to India. Templeton India Equity Income Fund, which has a dividend yield focused investment mandate, therefore has the flexibility to deploy up to 50% of assets overseas and this in turn has enabled the product provide superior risk-adjusted returns.


Overall, while returns in India are attractive, Indian investors need to be made aware of the benefits of diversifying across currencies and countries, to reduce the volatility of their investments.  Historical performance of a portfolio with exposure to international equities clearly suggests diversification reduces risks and helps navigate downturns well.


    1 Year 2 Year 3 Year 4 Year 5 Year
(Nifty 90%+ G7 10%) Returns 1.39% 5.27% 24.23% 0.98% 6.82%
Risk 6.19 5.57 7.24 8.21 8.33
(Nifty 80%+ G7 20%) Returns 1.82% 5.96% 23.60% 1.20% 6.10%
Risk 5.54 5.01 6.69 7.55 7.84
(Nifty 75%+ G7 25%) Returns 2.03% 6.30% 23.28% 1.31% 5.73%
Risk 5.24 4.74 6.42 7.25 7.59
(Nifty 70% + G7 30%) Returns 2.24% 6.64% 22.96% 1.41% 5.36%
Risk 4.95 4.50 6.14 6.95 7.34
(Nifty 60% + G7 40%) Returns 2.66% 7.32% 22.32% 1.63% 4.60%
Risk 4.43 4.06 5.61 6.41 6.83
(Nifty 50% + G7 50%) Returns 3.08% 8.00% 21.67% 1.84% 3.81%
Risk 4.01 3.71 5.10 5.93 6.32
G7 Returns 5.19% 11.31% 18.30% 2.88% -0.52%
Risk 4.06 3.91 4.00 4.89 4.55
S&P CNX Nifty Returns 0.97% 4.58% 24.85% 0.76% 7.52%
Risk 6.89 6.18 7.80 8.91 8.79

  Dec 31, 07 to Mar 31, 09 Oct 29, 10 to Nov 30, 11
  Returns Risk Returns Risk
 (Nifty 90%+ G7 10%) -41.68% 9.74 -14.89% 5.46
 (Nifty 80%+ G7 20%) -40.06% 9.04 -11.53% 4.87
 (Nifty 75%+ G7 25%) -39.26% 8.71 -9.85% 4.60
 (Nifty 70% + G7 30%) -38.46% 8.41 -8.18% 4.36
 (Nifty 60% + G7 40%) -36.86% 7.85 -4.83% 3.95
 (Nifty 50% + G7 50%) -35.27% 7.37 -1.50% 3.66
G7 -27.48% 5.94 15.02% 4.01
S&P CNX Nifty -43.31% 10.53 -18.27% 6.13

How to invest?


Indian investors can access overseas markets and assets through two routes—through domestic mutual funds (including fund-of-funds) investing abroad and directly under the $200,000 liberalised remittance route. The latter can be quite cumbersome though and investors need to bear in mind various factors:  

  • Regulations & tax: Each country has different regulatory & governance standards and tax structures—these parameters hold implications while investing in equity and other asset classes in different regions.

  • Economic & political conditions: Clear understanding of macro drivers, the health of the local economy and stability of the government is the key for picking out securities. Currency fluctuations that depend on these factors also need to be factored in.

  • Trading & transaction costs: Given the varied nature of the markets across regions, one needs to keep in mind the time zones as well as transaction costs for executing investment decisions.

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