FOII - Fear of Investing in India
Investors are missing out on India's growth story. It's been 20 years in the making already....
Typically, investors who are considering single country exposures, are worried about volatility driven by local market nuances that they are not well versed in. Be it a governance concern in India, war in Russia, differentiated political system in China or an election in Turkey. Investors tend to be more tolerant of economies and markets that they feel they have a handle on i.e. US, Western Europe and UK, Japan and Australia, given a similar political system, rule of law and corporate mindset.
When it comes to investing in Emerging Markets investors tend to prefer to put the "fear of the unknown" into one basket and trust/outsource the decision of country and stock selection to broad based experts. These experts "miracoulously" apply their trade and navigate multiple economic and political systems, varied market regulations and regulators, corporate ethos of large conglomerate or family holdings from hubs like New York, London, Paris, Sydney and Singapore.
In an asset class like Emerging Markets, underlying economies are non-homogenous and in an era of deglobalisation, are unlikely to be travelling in the same direction. This makes it hard to have a compelling case to invest in a basket of all 24 countries, possibly "washing out" the benefits with some "good" and "bad" dynamics.
Single country exposures return profiles are heavily influenced by their currency and the cross currency comparison with the AUD. This can increase the volatility associated with investing in the region. Particularly, individual emerging market currencies or even the entire basket, can be vulnerable due to capital flight and concentrated economic/sectoral exposure.
However, in a world of increasing deglobalisation where return dispersion amongst countries increasing, investors are missing out on growth opportunities and the benefits of diversification by making allocations to broad offerings which can dilute their logic (capital growth and diversification) for seeking the allocation in the first place.
The chart above highlights that allocating to a country like India (as an AUD based investor) makes a stronger case than the broader Emerging Markets, due to the underlying fundamentals of the country i.e. young and aspirational population, strong macro fundamentals and well positioned corporate balance sheets.
In fact evidence on the last 20 years indicates that on 75% of rolling 5-year periods the MSCI India has trumped MSCI EM. This also equates to a return of 11.4% p.a. vs 5.9% p.a. over the 20 year period.
An objection frequently raised is the volatility (standard deviation) around investing in a single country like India compared to investing in a broader allocation like Emerging Markets. Several feel its easier to justify allocating money to a broader group as the "blame" can be passed onto the outsourced expert (i.e. manager) in the event of failure. We assess this hypothesis below:
We can see that India is indeed more volatile, from a standard deviation perspective, relative to Emerging Markets over time. However, there are some interesting aspects to consider on this:
- The volatility of investing in India's equity markets is receding towards the volatility of investing in Emerging Markets over time. Some of the reasons for this include increasing local investment (with local investors now having the same weight as foreign investors in market cap) as well as a less volatile currency (supported by strong forex reserves and improving macro).
- Most of the higher volatility is associated with upside capture of India's market relative to Emerging Markets i.e. upside volatility is not a bad thing!
- The correlation of Indian equities to Australia equities and Developed Market equities is far lower than Emerging Market equities correlation to the same asset classes. This is because India is a commodity importer which makes a strong case for inclusion (based on lower correlation diversification) in AUD domiciled portfolios.
Never miss an update
Enjoy this wire? Hit the ‘like’ button to let us know.
Stay up to date with my current content by
following me below and you’ll be notified every time I post a wire
Mugunthan Siva is Managing Director of India Avenue, an Australian based boutique investment management company, domiciled in Sydney, with a presence and advisory network in India. He has over 30 years experience in Australia and is lead portfolio manager for the two long-only equity funds managed by the firm; the India Avenue Equity Fund and the India 2030 Fund.
........
This document (‘Document’) has been produced by India Avenue Investment Management Limited (‘IAIM’) ABN 38 604 095 954, AFSL 478233 and has been prepared for informational and discussion purposes only. This does not constitute an offer to sell or a solicitation of an offer to purchase any security or financial product or service. Any such offer or solicitation shall be made only pursuant to a Product Disclosure Statement, Information Memorandum or other offer document (collectively ‘Offer Document’) relating to an IAIM financial product or service. A copy of the relevant Offer Document relating to an IAIM product or service may be obtained by writing to us on info@indiaavenueinvest.com or by visiting www.indiaavenueinvest.com. This Document does not constitute a part of any Offer Document issued by IAIM. The information contained in this Document may not be reproduced, used or disclosed, in whole or in part, without the prior written consent of IAIM.
Past performance is not necessarily indicative of future results and no person guarantees the performance of any IAIM financial product or service or the amount or timing of any return from it. There can be no assurance that an IAIM financial product or service will achieve any targeted returns, that asset allocations will be met or that an IAIM financial product or service will be able to implement its investment strategy and investment approach or achieve its investment objective.
Statements contained in this Document that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of IAIM. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. Additionally, this Document may contain “forward-looking statements”. Actual events or results or the actual performance of an IAIM financial product or service may differ materially from those reflected or contemplated in such forward-looking statements. Any trademarks, logos, and service marks contained herein may be the registered and unregistered trademarks of their respective owners. Nothing contained herein should be construed as granting by implication, or otherwise, any license or right to use any trademark displayed without the written permission of the owner.
Certain economic, market or company information contained herein has been obtained from published sources prepared by third parties. While such sources are believed to be reliable, neither IAIM or any of its respective officers or employees assumes any responsibility for the accuracy or completeness of such information. None of IAIM or any of its respective officers or employees has made any representation or warranty, express or implied, with respect to the correctness, accuracy, reasonableness or completeness of any of the information contained in this and they expressly disclaim any responsibility or liability therefore. No person, including IAIM has any responsibility to update any of the information provided in this Document.
Neither this Document nor the provision of any Offer Document issued by IAIM is, and must not be regarded as, advice or a recommendation or opinion in relation to an IAIM financial product or service, or that an investment in an IAIM financial product or service is suitable for you or any other person. Neither this Document nor any Offer Document issued by IAIM takes into account your investment objectives, financial situation and particular needs. In addition to carefully reading the relevant Offer Document issued by IAIM you should, before deciding whether to invest in an IAIM financial product or service, consider the appropriateness of investing or continuing to invest, having regard to your own objectives, financial situation or needs. IAIM strongly recommends that you obtain independent financial, legal and taxation advice before deciding whether to invest in an IAIM financial product or service.
4 topics
Mugunthan Siva is Managing Director of India Avenue, an Australian based boutique investment management company, domiciled in Sydney, with a presence and advisory network in India. He has over 30 years experience in Australia and is lead...
Expertise
Mugunthan Siva is Managing Director of India Avenue, an Australian based boutique investment management company, domiciled in Sydney, with a presence and advisory network in India. He has over 30 years experience in Australia and is lead...
Expertise
Comments
Comments
Sign In or Join Free to comment