India 
A Case for Global Diversification
The 2021 edition of the Indian Premier League (IPL) had to be suspended midway due to the rising Covid-19 cases in India. But the good news for the diehard IPL fans is that the IPL will resume in the UAE in September-October this year. India, a nation where cricket is a religion, found something to look forward to even in these gloomy times.
We are now in the 14th edition of the tournament and the excitement level is very much intact. Well, that’s primarily because the matches are not played between two countries but are played among teams which comprise some of the best cricketing talent from the world. Each team has some of the finest batsmen, pacers and spinners picked from a global cricketing pool. When such diverse cricketing talent across the globe comes together in an IPL tournament - it results in a delight for spectators.
This is often true with an Investment Portfolio as well. Not clear? Let’s understand how. Like an IPL team which is a combination of talented domestic and overseas cricket players; an investment portfolio too needs to be diversified not only across asset classes, but also across geographies. While most investors believe in the India growth story, there are several periods when other global markets perform better than India. We can clearly see in the below chart that winners rotate, and India is not always the best performing market.
Just as different players within an IPL team excel in different skills, each country has its own strengths & weaknesses. Because of this, different global markets react differently to the same event/news. This is evident from how different markets reacted differently to the Covid-19 led panic selling and recovery thereafter.
As seen in the chart, while all indices reacted negatively in the first quarter of 2020, Nasdaq composite index rose sharply in the recovery phase and was the best performer with absolute gains of 53% from 31 December 2019 till 31 May 2021. An investment portfolio that had some exposure to global markets may have fared better during these volatile times as compared to a portfolio with exposure only to the Indian markets. This is not just a one-time phenomenon but has been seen across time frames (see “Winners Rotate” chart above).
In the “Winners Rotate” chart, India and the US markets have historically moved inversely in most years. While the US markets have topped in 6 out of the last 10 calendar years, India has topped in 2 out of 10, among key global markets that were analyzed. Hence, diversifying across geographies via global funds could help to cushion the volatility of portfolio returns.
Besides diversification, global funds can also help to achieve goals such as foreign education for kids besides providing an opportunity to invest in some of the leading global brands like Facebook, Amazon, Apple, Netflix, Google (now Alphabet)*, etc. since they are not listed on Indian bourses. Additionally, an investment portfolio with a global exposure could earn higher INR return vis-à-vis USD returns whenever there is depreciation of the INR. For example, from Jan’20 to May’21, the INR fell by 1.7% against the USD. Those who had invested in global funds got more INR returns (in % terms) as compared to USD returns is evident from the below chart.
In summary, there are 4 key takeaways for investors. One, investing globally helps to diversify portfolio risks as the Indian market may not always be the best performer since winners rotate. Two, global funds provide an opportunity to invest in some of the leading global brands, since they are not listed on Indian bourses. Thirdly, they help to meet goals which need foreign currency spending like foreign education of kids, foreign vacations, among others. Lastly, when INR depreciates, the INR value of global investments increases resulting in higher INR returns. Hence, it is important to consider allocating some part of one’s portfolio to Global Funds.
*Franklin Templeton is not associated with these brands in any manner and may or may not have these stocks / securities in their fund portfolio. They are used for illustration purposes only. This is neither a recommendation to buy or sell nor an investment advice, a view on quality or profitability of investing in these securities. The recipient should not assume that investment in the securities listed was or will be profitable.
