Published Oct 6, 2020
1. Missing out on Opportunity – By investing only in India, investors are missing out on opportunities that are available elsewhere in the world.
a) India vs Global Equity Market Cap – India comprises only about 3% of global stock market cap.
b) India vs Global GDP – Even in terms of GDP, India comprises only 3% of global GDP. Adjusted for purchasing power parity, India is only 7.7% of global GDP at PPP.
c) Missing out on opportunity to invest in global leaders like – Google, Microsoft, Facebook, Amazon, Tesla, Alibaba, Tencent, Samsung, LG, Honda, Toyota, Saudi Aramco etc.
Only 6 of the Fortune 500 companies by revenues have their headquarters in India and none of the world’s top 20 most profitable companies are from India.
d) Each country has its own strength – The US is known for innovation, Germany for engineering, China for low cost manufacturing, India for low cost services. Having a global portfolio allows once to capture strengths of each geography.
2. Diversification – Investment in only one geography exposes investors to country specific risk. Political or economic instability in that country can significantly impact portfolios.
a) Correlation – Historically, global markets have had low correlation with each other. Hence, returns across geographies can stabilize portfolio returns
b) Winners Rotate – No country has consistently outperformed every year.
3. Currency depreciation can add to returns – Over the last 10 years INR has depreciated by 4.7% annually against the USD. Hence, any foreign investment would automatically grow by 4.7% annually in local currency terms.
4. Global Wealth Plan – As the world is getting more interconnected a lot of Indians have foreign currency expenses like children’s foreign education, holiday abroad, etc. As currency depreciation adds value to foreign currency assets when converted to local currency, it would eat into the value of local currency assets when converted to meet foreign currency expenses. Every year local currency investments need to grow by 4.7% to make up for INR depreciation.