India, it is believed, is an economy
which has phenomenal potential and one of the major economies which can grow
over 5%, in real terms for decades. We had all believed that Indian economy has
structurally shifted to a much higher plane, in terms of GDP growth at 8.5-9%,
a few years back. Some of the worthies even started talking about double digit
growth. In hindsight, it had just been wishful thinking, without substance for
we never put in place the infrastructure or the enabling environment for such
high growth to take root.
The dream lies in tatters. All in the BRIC
grouping are in doldrums, with only China in a reasonably good shape. We
thought that since we are a developing economy ( by many indicators we are
actually under developed ) and since the population is young, there will be
lots of growth here. By corollary, we expected the “developing” economies like
ours to offer much higher returns on our investment, due to the explosive
growth rate.
Again, this remains on paper. When the
global meltdown happened, our market, along with other emerging economies
tumbled much more than the US markets! This happened, inspite of the fact that
it was the epicentre of the crisis itself!
Now, what about the returns since… The
annualised returns that Sensex has offered is a 5% & 4.5% for three and
five year periods. Nasdaq has given returns of 16.8% & 7% respectively, for
the same time periods. It is instructive to look at the performance of various
markets. Emerging markets as a group have done worse than the US & UK
markets, in terms of annualised returns. Malaysia was an exception.
Please refer to the table.
Name
|
Type
|
As of Date
|
1-Year
|
3-Year
|
5-Year
|
|
Morningstar Stock Indexes
|
Broad Market
|
|
|
|
|
|
US Market
|
TR
|
41461
|
28.25
|
18.87
|
6.5
|
|
|
|
|
|
|
Name
|
Type
|
As of Date
|
1-Year
|
3-Year
|
5-Year
|
|
|
|
|
|
|
Other Domestic Stock Indexes
|
DJ Industrial Average TR
|
TR
|
41461
|
25.69
|
18.97
|
7.54
|
NASDAQ Composite PR
|
PR
|
41461
|
22.54
|
16.86
|
6.99
|
NYSE Composite PR
|
---
|
41461
|
24.41
|
12.83
|
0.44
|
Russell 2000 TR
|
TR
|
41461
|
31.79
|
18.49
|
7.46
|
S&P 500 TR
|
TR
|
41461
|
27.82
|
18.61
|
6.19
|
S&P MidCap 400
|
TR
|
41461
|
30.66
|
19.61
|
7.88
|
Foreign Indexes
|
DJ Malaysia PR USD
|
TR
|
41461
|
17.49
|
15.49
|
8.49
|
|
|
PR
|
41461
|
24.64
|
2.84
|
-6.51
|
Euronext Paris CAC 40 NR EUR
|
TR
|
41461
|
29.81
|
7.45
|
-0.99
|
Euronext Paris CAC 40 PR EUR
|
PR
|
41461
|
26.1
|
4.29
|
-4.18
|
FSE DAX PR EUR
|
PR
|
41461
|
29.94
|
8.01
|
0.3
|
FSE DAX TR EUR
|
TR
|
41461
|
34.35
|
11.81
|
3.94
|
FTSE 100 TR GBP
|
TR
|
41461
|
21.93
|
11.99
|
5.52
|
FTSE 250 PR GBP
|
PR
|
41461
|
30.34
|
13.9
|
7.33
|
Hang Seng Hong Kong Composite PR HKD
|
TR
|
41553
|
17.56
|
3.15
|
-2
|
Hang Seng HSI PR HKD
|
PR
|
41553
|
17.11
|
3.34
|
-1.51
|
Nikkei 225 Average PR JPY
|
PR
|
41553
|
59.76
|
12.3
|
-0.73
|
S&P BSE SENSEX India INR
|
PR
|
41461
|
16.7
|
5.01
|
4.53
|
S&P/TSX Composite PR
|
PR
|
41461
|
6.74
|
2.46
|
-3.74
|
Shanghai SE Composite PR CNY
|
PR
|
41461
|
-3.59
|
-4.16
|
-7.86
|
What should Indian investors do?
When we invest, we will definitely have a
home country bias. This is a universal phenomenon. However, we have clear
proof that inspite of poor GDP numbers, the US & UK stock markets have
given far better returns than most emerging markets. It will indeed be prudent
to invest a portion of one’s assets in such markets. While we can debate
the quantum of investments in markets abroad, upto a 20% allocation seems fair.
How to invest?
Participating in these markets is best done
through mutual funds, as a normal investor or even their advisor may know
nothing about those markets or the companies there. Now, choosing correct
schemes to invest is also a massive exercise in itself as there are thousands
of schemes out there. Also, the entry load in most of these schemes is high at
4%or more, for retail investors.
The workaround is to participate in Indian
MF schemes, investing abroad. Again, even here, those managing the investments
from India would either have access to research from abroad or have a feeder
fund which invests in a fund abroad. A feeder fund is preferred as the main
fund ( which receives the investment ) would be an existing performing fund,
managed by fund managers sitting in those markets and managing the investments.
Also, since these Indian schemes collect and invest as an institution, the entry/
marketing charges are normally not there. This benefits the Indian investor,
though he may pay another 0.5-0.75% more for a feeder fund, as compared to a
normal indian equity MF scheme.
What kind of funds could one invest in?
The funds that invest into broad index or
are diversified would be the ones to look out for. Since markets abroad are far
more efficient, index funds may be a better bet as outperformance could be very
difficult for managed funds. Apart from index funds, once can look for specific
funds that invest in different themes like real assets ( as opposed to
financial or IP assets ) like L&T Global real assets fund, real estate like
ING Global Real Estate Fund, Index oriented like MOST Nasdaq 100 etc. One
can look at broad emerging market funds too, which invest across the globe.
There is one more major advantage to
investing in these global funds. Companies which form a part of these global
funds have global foot print and hence anyway participate in the growth
happening worldwide. That way, though these are US or UK head quartered
companies, they are truly global.
There is a word of caution. The investments
are subject to currency movements and that can affect returns. Need to keep
that in mind while investing.
We need to change & emerge out of our
reverie. There are other markets which are performing better and we
should have an open mind to diversify our investments there. No point in
adopting an ostrich approach, thinking Indian markets can beat all other
markets. We know better now!
Published in Business standard on 12/6/2013; Author - Suresh Sadagopan ; www.ladder7.co.in
