Do you invest in offshore funds? If someone had asked you this question a decade back, you would have probably scoffed at the idea itself. After all, the Indian economy was growing at a rapid pace and comparisons were being drawn with China. Investors in the developed world were looking at emerging market equities that seemingly offered higher returns. However, as things stand today, the Indian economy has expanded below 5 per cent for two straight quarters, and given the coronavirus-led slowdown, the target of 5.0 per cent for FY20 looks tough. A couple of years back, India was a ray of hope for the global economy amid the structural slowdown in China. Growth hungry investors were pouring money into Indian equities expecting better returns than developed market equities.
As strange as it may sound, while sceptics saw the subprime crisis like a death knell for the US economy, US stock markets have outperformed global markets by a wide margin in the last decade. In the last decade, the S&P 500 gained a whopping 190 per cent while India’s Nifty 50 gained 134 per cent. China’s Shanghai Composite Index lost almost 7.0 per cent in the same time period. These returns do not include dividends.
Is the slowdown structural or cyclical?
Now, let's come to the vital question: should you invest in offshore funds now given India’s growth slowdown? Firstly, let us acknowledge that this is not a cyclical but a structural downturn. Chinese and European markets sagged last decade amid moderating growth. Looking at the Indian economy, barring government expenditure, almost all of the sectors are witnessing a growth slowdown. The government has been hoping that its higher investments in the infrastructure sector and tax cuts to corporates would revive growth. However, while these measures have increased the fiscal deficit, growth still hasn’t revived.
Markets are expecting earnings growth above 20 per cent next fiscal year. However, with almost every sector from consumption and corporate investment to exports stagnating, that seems like a tall order, even with a low base effect. Fiscally, India does not have much room to maneuver while rising inflation is also impeding further monetary easing. As for valuations, they are roughly 20% above their 10-year average even as growth is stagnating near multi-year lows.
What does offshore investment offer?
Offshore funds offer diversification as well as exposure to companies like say an Apple or Alibaba. Offshore funds can help investors diversify their portfolio and hedge the currency impact of their domestic businesses and portfolios. For domestic investors, their earnings, as well as businesses, are anyways correlated to the Indian economy. Allocating some money to funds that invest in overseas equities would be a good diversifier.