International funds allow investors to participate in global economies and benefit from rupee depreciation. It offers wealth generation opportunities by investing across economies holding growth potential.
Addressing the topic of international investing, Jinesh Gopani, Head-Equities, Axis Mutual Fund in conversation with Nishant Patnaik, Associate Editor, Cafemutual shared the opportunities that global investing offers.
Here are the key highlights of the session.
Moving beyond domestic boundaries
There are several global companies like cloud computing, e-commerce, fintech and artificial intelligence, which are currently unavailable in the Indian listed space. Moreover, new business models have been emerging globally across various segments like healthcare, biosimilar, internet and technology, which have generated significant wealth for the shareholders in the last seven-eight years. Global investing allows Indian investors to participate in these business models.
Be it the US, China, Europe or any other part of the world, there will be those four-five names in a particular country that will create wealth for investors. Thus, it makes sense to participate in the global space.
Understanding international valuations
Valuation is a function of cost of capital and the power of money available in the world. As the cost of capital has collapsed globally, it has resulted in higher valuations.
During global financial crises, the US pumped $ 2 trillion in two years, whereas it pumped close to $ 4 trillion in two months during covid-19. Further, the funds pumped during times of global financial crises have not been reversed. Additionally, the cost of capital has come down dramatically, US 10 year G-sec which used to be around 4%-5% seven-eight years back, has fallen to 1.2%-1.3%. Moreover, 20%-30% of the total outstanding bond market money is available at 0% to 1%.
Assuming US 10-year G-sec goes to 3% after five years, the entire valuation framework will change. Conversely, if it continues to remain at the current level and money is flushing around the world, there may be higher valuations for some of the companies.
Knowing the risk and market triggers/drivers
Country-specific risks and regulations, geopolitical tension, the relationship between two countries, are some of the risks associated with international investing. Taking these into account helps in determining the extent of exposure to be maintained in each country.
The Indian market has exhibited a good rally, where Nifty rose by 42% in the last year. The situation has also been better globally, except for the massive sell-off in the emerging market where Hong Kong Index is down 3% YTD (Year to Date). India is still up 12% YTD. Overall, the valuations are elevated and there is a lot of retail money participating in markets across the world which is a sign of worry in a way. On the domestic side, a lethal covid third wave is also a risk on the downside.
However, if covid third wave is not severe then the Indian economy will go along well and there will be momentum picking up. This will help companies to deliver numbers and will also help many of the listed companies with a strong balance sheet to gain market share in the next leg of growth.
Evaluating the extent of exposure and economies to explore
Depending on investors’ profile and goals, Jinesh recommends investors could hold 10% to 15% of their portfolio in the overseas bucket. Through Axis Global Equity Alpha Fund of Fund and Axis Global Innovation Fund of Fund, Axis MF offers investors a platform to participate in overseas funds.
Talking about economies in specific, the US is by far the largest innovative market in the world while other economies like Europe and China are catching up in this space. In addition to the US, taking into account relevant factors Axis MF invests across economies like Europe, China, Japan and Korea.
