William Shakespeare’s famous quote “The world is my oyster”, is apt for equity investments today. Consider this: opening an oyster’s shell requires a lot of hard work, and most of the time you just get an oyster, but sometimes you do find a pearl. If we were to use this analogy to equity investments, a pearl can be defined as a stock of high quality that is significantly undervalued. And this the pearl that a smart investor is looking for. Her chances of finding that pearl are enhanced significantly if she expands her investment horizon to include global stock markets.
While the Indian equity market has thousands of listed stocks, there are only a few of substantial size. Globally, large-cap stocks are defined as those with a market capitalisation of more than $10 billion. In the domestic market, there are 30-35 stocks that qualify at different market levels as large-caps. There are about 80 stocks which would qualify as mid-caps with market caps in the range of $2-10 billion, and about 225 which would qualify as small caps. The remaining are micro-caps or smaller. But how does it matter?
A large-cap is typically a company with a stable business model. But mid- or small-caps might not be as stable. So it is important to compose the core of your equity portfolio with large-cap stocks. Since one should have at least 20-25 companies in the core portfolio, there is hardly any choice if one has to choose 20 stocks from 35. Now, if one just adds the US stock market to her equity horizon, she would have about 400 to 500 large-caps. Include the European, the UK and Japanese stock markets, and you will have about 1,000-1,200 large-cap stocks to choose from. So you see, by adding just four new markets to your portfolio, the size of the investment universe has increased nearly 40-fold. Now this expanded exposure provides much higher chances of finding undervalued stocks. Since one is choosing stocks from the developed markets, the chances of finding stable companies would also be higher. Revenues of these companies is huge. These companies have exposure to numerous countries and currencies with diversified macroeconomic variables, and thus, provide more stability across business cycles.
