How To Approach International Investing As FAANG Stocks Lose Bite

Frontline U.S. technology stocks, once the darlings of investors across the world, have been out of favour so far this year. Over the course of the last two years, investors who took exposure to these stocks through offerings by asset management companies have seen their capital erode.

Four of the five frontline U.S.-based tech stocks, popularly known as FAANG, have seen a significant fall in share price over the past year. While Meta—previously called Facebook—and Netflix have seen a decline of over 50%, Amazon Inc. and Google—now known as Alphabet—have dropped 44.3% and 35.5%, respectively. Apple, the exception, has witnessed peaks and troughs over the past 12 months and is largely unchanged.

The aftermath of the Covid-19 pandemic in 2020 saw a boom in the services of both technology and healthcare companies. The resultant surge in the fortunes of the big tech companies led to a clamour to create options for Indian investors to participate in their growth story.

A number of asset management companies introduced funds that either invested directly in equity listed in the U.S. and other key markets or in exchange-traded funds.

The interest in this avenue to diversify equity investment was such that the mutual fund industry very quickly came close to breaching the $7 billion limit for investments in overseas securities. What followed was a restriction imposed by the Securities and Exchange Board of India starting Feb. 1 this year.

Funds that invest in ETFs abroad have a separate limit of $1 billion, and this route was left open.

In June this year, the markets regulator allowed mutual funds to open subscriptions in schemes that made investments in securities abroad within the original limits. Schemes are, as a result, allowed to open for fresh investments if they see redemptions.

Several schemes, especially those that invest in ETFs, are currently open.

The biggest change this year in several large economies, including the U.S., has been the central banks’ campaign against raging inflation. In the U.S., the Federal Reserve undertook four rapid-fire rate hikes of 75 basis points each just this year.

At the same time, growth slowed, and there is a consensus that the largest economy in the world is heading toward recession. The astronomic valuations assigned to leading tech stocks during the pandemic began to get questioned, and several saw their fortunes wane.

The decline in tech stocks is underlined by the underperformance of the tech-heavy Nasdaq index, which has fallen over 29% over the past year. And that takes into account Thursday’s over 7% rise in the index.

The result has been the relative underperformance of several international funds in India, at least over the past couple of years. Over the long term, however, a systematic investment plan approach to investing would still have yielded positive results.  

The primary reason to invest in funds that have exposure to overseas equity is diversification, according to Prableen Bajpai, founder of FinFix Research and Analytics.

The idea here is to avoid putting "all the eggs in one basket." And diversification works best when markets or asset classes do not move in tandem.

For example, while the U.S. market has underperformed, the benchmark Nifty 50 in India is higher by 1.4% over the past year. The opposite has also occurred in the past. The drop in prices, in fact, provides an attractive opportunity to invest for the long term, Bajpai said.

Besides, investing in leading tech companies is not a bad idea even though prices have fallen in the recent past, according to Harshvardhan Roongta, co-founder of Roongta Securities.

“The valuations of the leading tech stocks may have been a concern, but despite that, it is clear that even here in India, we are consumers of their products and services. Their future is secure,” he said.

Roongta is of the opinion that a passive approach to investing in these stocks should be undertaken.

Both Bajpai and Roongta advocate a 10-15% allocation to overseas equity within an individual's equity portfolio.