Amid Inflation and war, should investors return to domestic markets?
Rising inflation and falling equity markets around the globe paint a bleak picture of uncertainty. Investors are caught perplexed in the face of undulating geopolitical waves and worldwide market rebalancing.
The Russian invasion of Ukraine has agitated the global supply chains, resulting in commodity and energy prices shooting up to new heights; clipping the buying power of the common person.
The brunt of these macroeconomic events is largely borne by investors that have globally diversified portfolios. In a cursory examination of events, the return to the domestic market may seem viable and prudent.
As an investor, you might be tempted to curtail further dilution of your global investments in volatile geographies, but a deeper and provident assessment will state otherwise. In long term, your time in the market overshadows the ability to time the market.
Let's first check the reasons that have led to the current state of affairs:
Reasons that have contributed to the present economic state
● Aftereffects of the Ukraine-Russia war
The war has caused disruption in the global commodity supply chains and hikes in prices of energy, wheat, and metals, ending the fragile balance of the world’s imports and exports for a toss.
● High interest rates and economic slowdown
During the pandemic, large amounts of money were injected by the governments to assuage the economic slowdown. This sudden increase in money has only preponed the inflationary times, with high-interest rates escalating the pace.
● Market readjustment post the pandemic boom
Tech companies witnessed a huge influx of capital, resulting in inflated valuations in the pandemic. As the pandemic bubble burst, the market entered a readjustment phase filled with high volatility.
Let's explore the reasons why returning to the home market may not be the correct course of action.
Why global investments are still a better choice?
1. Exposure to developed and mature equity markets
Foreign investments expose your portfolio to developed markets and powerful currencies that exhibit lower standard deviation. The benefits of these mature markets are evident in less volatility and slower devaluation from inflation.
The average returns of the US equity market have consistently been greater compared to the Indian stock market. Investors can leverage the current dip to enter erstwhile costly markets and gain financial footholds in mature economies.
Restricting investments to only the domestic market can deprive you of the benefits of stronger economies that are marked by higher market depth signifying resilience during chaotic times of mass buys and sell-offs.
More often than not, investment localization results in increased risk.
2. True diversification with low correlation
Localizations in investments can dramatically increase the risk by pooling the complete investment corpus in one single stock market. This goes against the most basic investment principle - diversify to reduce risk. Reliance on a single market catapults risks and can lead to corpus dilution when the market crashes.
True diversification is achieved across different geographies through different assets. Foreign economies with a low correlation index can help you tide over the local crisis by creating a decoupled investment portfolio - where a crash in one market does not propagate to another.
For example, India and the US have a correlation index that varies between 0.13 and 0.16 generally.
3. Balanced portfolio across themes and sectors
Global investments can make your portfolio balanced across different themes and industries. Domestic markets could be underrepresented in certain industry sectors. The Indian equity market makes up 2-3% of the global markets and is largely composed of FMCG, banking, and pharma sectors while lacking tech and commodities stocks.
On the contrary, the US stock market comprises companies that draw a major chunk of revenue through global economies. In essence, US-listed stocks loosely reflect the world economy and provide convenient exposure.
Likewise, rare-earth metals production will make up a huge portion of Myanmar, India, and Australia’s economies. Pushing capital into their market will provide you with the safety and stability of owning hard assets.
4. Access to future tech stocks
Investing in future technology and sectors will secure our returns in the times ahead. Technology, by nature, is based on disruption and innovation, irrigating the ground for tomorrow.
Financial ingenuity lies in investing early in spearheading techs like autonomous cars, data centers, and machine learning that will become big players later. Global investments offer exposure to high-growth stocks of tech giants like Meta, Amazon, and Netflix that can bag exponential returns in the future.
ShiftAltCap’s #AllinTech stack, which is based on future technology, has consistently outperformed S&P 500 index.
5. Combat global expenses with global investments
It is common for HNIs to have liabilities and cash burn in foreign currencies while only generating revenue in their home country. A balanced investment portfolio, thus, will have global stocks from different markets in proportion to the liabilities in those currencies.
Distributing your investment corpus across different markets is wise to combat dues and liabilities incurred in those markets. While our expenses are already transacted in global currencies, the idea is to link our investments to these currencies as well.
Conclusion
In turbulent times, shifting your investment plans from global investments to the domestic market can quickly increase the risk manifolds and is advised against. Distributed investments will promote stability and help you ride the impending recession better.
It is always worth remembering that time in the market beats timing the market. Your investments should be oriented toward longer time scales to smoothen out the intermittent fluctuations along the way.
This global market crash could be an opportunity to buy the dip and invest in expensive and premier stocks that might reap returns later. As the world economy rebalances, sensible and deliberate investments will pay off eventually.
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