Global vs Indian Investing: Why diversification matters for your portfolio?

Most Indian investors have primarily focused on the domestic market for various reasons, including strong economic growth and solid fundamentals. This has led many to overlook investment opportunities abroad. Additionally, restrictions on transferring large sums of money outside India and the additional paperwork involved have further contributed to the India focus.

Global opportunities and diversification

On the other hand, most global investors want to harness opportunities available globally in multiple markets to diversify their portfolio. Think about it for a moment; can you find similar opportunities like Google, Nvidia, Microsoft, Sony, Tencent etc in the Indian markets? The moment we start looking at the world as our investment platform, innumerable such large and high quality businesses become available. Such investments not only provide the benefits of diversification but also contribute to higher growth.

By not investing globally, investors are missing out on many high growth sectors where Indian companies are either absent or very small. Case in point is sectors like gaming, artificial intelligence, robotics, semi-conductors etc. In most of these sectors, there are hardly any investment opportunities in Indian markets. These new age sectors are likely to define humanity in the next few decades. Therefore, even from this narrow perspective, global investing makes sense.

Another significant advantage of global investing is the valuations at which you buy stocks. We all know that Indian markets have traditionally been expensive, and reason sighted are the fewer choices as well as limited floating stocks being chased by large investment flows.

For instance, Pfizer India trades at a price-to-earnings (PE) ratio of 45 on NSE, while it trades below 20 in the United States. This is despite the fact that Pfizer’s business in the US is much larger and more profitable than the Indian business. Similarly, Hindustan Unilever has a PE ratio of 62 in India, compared to Unilever’s 20 PE in the U.S. The lower valuations of these and many such businesses is typically attributed to more depth, large floating stocks and institutional driven markets.

In India, the limited floating stock and fewer opportunities often result in higher valuations. For any investor, valuation is one of the most critical criteria in equity investing, as buying expensive stocks increases the risk of downside during market downturns or during earnings downgrades.

Global growth comparison

A lot of us also think that India is the only country witnessing a high growth story. Agreed, India has performed exceptionally well, but it’s not that other markets haven’t grown too. If we look at the performance of stock indices from countries such as the UK, the US, and various European nations over the past decade, we find that they have delivered strong results in both dollar and rupee terms. For instance, in the last 10 years the S&P 500 has delivered a 10.5% dollar return (CAGR).

To add to the benefit of diversification and growth, another factor in favour of global investing is the positive currency equation. INR has seen consistent depreciation over the years and this trend is likely to continue. Since the discussion is about global investing, any depreciation of INR adds to the overall returns.

Previously, investments in foreign assets were taxed at 20% with indexation and were therefore not very tax efficient relative to investment in Indian equities. In the new budget, a level playing field has been established for Indian equities and foreign equities. If you invest in foreign equities, you will be taxed at 12.5%, similar to Indian equities. This is an advantage as the tax treatment is now equalised.

Indian investors should utilise the LRS (liberalised remittance scheme) of remitting USD 250,000 per annum and start building a global portfolio for long term growth of capital.

Raghvendra Nath, MD Ladderup Wealth Management Pvt. Ltd.