The Mutual Fund Show: Why Holding On To Your Global Funds May Help

Prableen Bajpai: It is definitely a time when a lot of investors with global allocations are probably wondering whether it was the right call to make, to diversify outside India. But at the same time, it's very important to look at some of the reasons why, especially the U.S. markets probably aren't doing well, the way they should have been. 

Although different movements at different points in time is actually the reason or the core of diversification. You invest into other markets, other geographies and economies only because you know that probably all of them are not going to grow at the same pace or have the same sort of return trajectory. 

So, let's start with the U.S. So, U.S.-centric funds. We saw the pandemic, it was a bad time in 2020 for the Indian markets and the U.S. markets and then the Indian and the U.S. markets, everybody rebounded. The U.S. economy also rebounded but that was on the back of a very strong fiscal stimulus which those markets were getting. 

That stimulus, I think the Federal Reserve this year sometime in July, actually accepted that they saw a huge increase in the consumption across sectors, but there wasn't really much difference in the production that was taking place. There has been a lot of price tensions which happened because of that.  

According to their own report, there has been a 2.5% inflationary impact only because of the fiscal stimulus that Fed has pumped into the U.S. economy. 

The timing has been such that… February of this year again, Ukraine and Russia war that started and all of this together with the Federal Reserve's policy stance of monetary tightening has definitely engulfed the U.S. economy into a time where they are seeing a drop in consumption demand, which is the main stimulus to their economy, which is a huge part of their GDP. 

This is further sort of putting pressure on spending, especially in real estate. We saw some figures come out… So, we have a very subdued sort of projection for the U.S. economy for this year. It's about a 1.6% for this year and about 1% next year that we are seeing. 

So, overall, because a lot of growth stocks and tech stocks are part of the U.S. exchange, which are the biggest stocks in terms of market capitalisation, and these are the sectors which are hugely impacted by any sort of interest rate movements because the cash flows are discounted at higher rates. That's why we are seeing the bloodbath of the U.S. economy, and also that some of the important sectors–technology and health care–which are a huge component of their indices, saw too much of a run during the Covid times because these two sectors actually performed.

Now, if we see year-to-date, it is only energy which is up in the U.S. Even in the last one year, data suggests that sector is up by about 52% and all other sectors are currently in the red. 

So, it is a difficult time but investing outside India, just like Indian equities, is for the long term. So, investors need to stay put and not sort of exit in haste.

Vishal Dhawan: So, there's two or three different angles to this that are very important. One is clearly this story of our performance of India versus the rest of the world. Very clearly, what happened in the last 12 months, and since we are talking Samvat, it's good to talk Samvat to Samvat. 

You will really see that the Nifty, for example, is down roughly about 2% in this period. Global markets, if you use the S&P 500, for example, as a good benchmark are down maybe about 20-23%. 

But you need to add the U.S. dollar strength on top of it and then you suddenly see that if you look at it on a rupee basis, the difference is not as significant as it appears to be. 

Of course, global markets have underperformed but the difference reduces because the rupee has also lost about 11% against the U.S. dollar in the same time frame. 

So, one of the big reasons why investors also need to diversify overseas is to manage currency better. 

What has happened in the last 12 months is the asset class impact of underperformance in equity has been larger than the impact that has come up on the currency side. 

Therefore, we are saying that when you look at your numbers, just look at them in the same currency always. Don't look at one number in one currency and one number in the other currency because it may end up enabling you to make wrong decisions just because you are looking at the absolute number in the local currency. 

Besides that, the important element is if you go back in history and look at data, it's very common to see one geography outperform another year on year. 

In fact, it actually feels a bit like you being able to predict the future because if we pick the best performing market in a particular year, it's very likely that that's going to be amongst the worst performing markets in subsequent years, and vice versa. 

While no one knows whether that will happen next year or not, probabilities are always in that favour, that you don't want to chase the winners of the last year because that normally tends to be a bad strategy. For a lot of equity investors, they really spent a lot of time looking at valuations. 

If you look at global valuations versus India valuations, you can clearly see that a very large number of global markets now are either in line with long-term averages or actually at a discount. 

Whereas if you look at India, India is clearly at a big premium towards long-term averages. 

Therefore, you also want to keep in mind that you might be buying a more expensive geography, if you now start to think about tilting your portfolio towards India, and you may end up therefore repeating a mistake that may have happened earlier where you may have chased the higher return from a particular international geography and then found that valuations have actually normalised. 

So, I would say that it's very, very important for you just like you have asset allocation amongst equity, debt, gold, etc. You also have a clear idea in terms of what is going to be my mix of domestic versus international equities in my portfolio. 

If, let's say, you have decided that that mix is going to be 80-20 and that mix is now shifted towards 65-35 because equity markets internationally have corrected much more, then you want to go back and rebalance, which means that you want to actually buy more international equities by selling down Indian equities and not vice versa. So, clearly, if you are running an SIP, you might want to redirect that SIP towards international so that you can minimise taxes and still achieve the same objective.

Vishal Dhawan: It's again important to look at China from the perspective of how do valuations in China look like. So, there is a clear GDP slowdown that is being talked about. Of course, this quarter's numbers were actually a little above what people expected, at 3.9%. 

But maybe, as time passes, a lot of the Zero Covid strategy will start to play out with maybe more damage. But the important element here is how much of that slowdown is priced into equities already, because all of us know that equities are a very forward-looking asset class. 

Therefore, a lot of the news gets priced in very quickly, in terms of both good and bad. Therefore, our belief is that while you might decide to go a little slower on China as a result of maybe some of the news that is emerging around how the new Chinese structure is going to be, how maybe growth is going to be slowing down, etc., you also don't want to end up in a situation where you have the second largest economy in the world not a part of your portfolio at all. 

Because at the end of the day, you still have a very large domestic consumption story in China, which is completely dependent on the local Chinese consumer who's actually very wealthy. 

So, we would say that if you are a little negative towards China, you might want to reduce your exposure, but it's unlikely that you will want to make it zero, just because there is so much news flow which is currently negative around that geography.

Prableen Bajpai: So, when it comes to international investing, I have spoken about this earlier that I think U.S. or the developed world should be the first choice. I think exposure to China or the Greater China region comes at the second level. So, it's for the more savvy investors, it's not for the first-time investors. 

Having said that, there is potential in those markets. It's a contributor of 16% to the global GDP. It is in terms of its economic strength, a strong economy. You had tweeted some time back that the inputs of India's imports from China have actually risen. 

China is working at sort of restructuring its own economy because it also understands, with the China plus narrative going around. They have had trouble in their own real estate sector. So, I think the government in China is also looking to revamp its own economy. They are giving stimulus in terms of monetary and fiscal packages. They have the potential because unlike all other geographies as of now, they don't have the problem of inflation. 

Having said that, China brings with it certain sorts of regulatory risks, political risks, and economic risks. So, the regulatory and political risks are not really present in terms of economies like the U.S. They are more transparent and easier to understand. 

So, for the second-level investors, more savvy investors, China can be a good area to invest in, but not at all for first-time investors. 

Those who have already invested, now is the time when they are actually looking to invest and rebuild their economy because in terms of electric vehicles, you will see, in terms of mega solar wind projects, all the regulatory hassles, most of it is over. …things are getting slightly back on track. 

But, of course, the Taiwan-China issue again came up. So, a stay-put for those who have already invested, but it is a no for a retail investor who doesn't have exposure to other geographies.

Prableen Bajpai: For those, we have a lot of funds. We have the PGIM Global Equity Opportunities Fund, DSP Fund is there where we have exposure to Europe also, partly China as well, the U.S., so it's a mix of different geographies. So, in times of chaos, it is also an opportunity for those who do not want to add on new funds or are not comfortable taking the exposure. It's okay to stay away from those. 

But for those who have already invested, maybe incremental exposure can be taken only if they have a long-term view. 

We know that Europe is not in a good situation. We know that there is weakness in the U.S. and there is a crisis in China. But at the end of the day, we are in a globalised world. So, India cannot also grow in isolation. We are much stronger, we have better macros …but we are part of the global set-up. I feel some exposure outside can also insulate things (if they) don't go that well. 

In India also, we will have elections in 2024. There might be some other issues. We still have people who would want to send their children abroad. We are still buying iPhones. So, if you look at your own personal life and consumption and your life decisions, how much is actually going to impact the current situation. 

That means that we are consumers of products outside. We are still going to visit these geographies. So, from that point of view, it's a tough time but the better way is to either add incrementally or stay put and do nothing as of now.

Vishal Dhawan: Yes, so, I think very clearly two things are happening. One is there has been this event that happened at the start of 2022 around how International funds can actually take money in. That may have actually worked well for some of these hybrid sort of funds, which had a combination of domestic and international, because even though they may not have wanted it, the international exposure has petered down by default because they haven't actually had an ability to add more. 

Now, this could actually be bad news in the long-term, but at least in the short-term it has probably helped the fund. So, you were talking about something like a Parag Parikh, for example, where the allocations have gone down from 30% to 18%, just because there are no fresh allocations happening.  

As far as HDFC Developed Index Fund is concerned, very clearly the biggest advantage that it gives you is access to the equivalent of the MSCI World Index and the way we look at it is that most of the geographies in that, 70% of that exposure is actually the U.S., about 14% is Europe, 6% is Japan and the rest of the 10% is across other developed geographies. 

Most of that money actually therefore ends up going to the U.S., which has corrected quite sharply. In fact, if you look at some of the big tech names that you were referring to, a lot of those make up the top five names in those portfolios and they are roughly about 15% of the portfolio. 

So, it's a good idea because you do see that the correlations over long periods of time between the Nifty 50 and the MSCI World are roughly about 0.4, which is a very good diversification tool, even though in the short term, when you look at the same correlation numbers, they are in closer to between point 0.65 to 0.7. You get access to all of this, of course, at a low cost because these are index products. So, expenses are only 21 basis points. Fund sizes are decent. 

If you look at long-term data, you will actually find that the MSCI World has outperformed the Nifty 50 in dollar terms with smaller standard deviation as well. So, it's very interesting that the short-term could look very different from how the long-term looks. 

Therefore, our suggestion is that you go ahead and continue with adding money in, use SIPs and STPs, gradual investing strategies, so you can deal with some of this macro uncertainty that everyone is so concerned about. 

But we have always found that while macro is important, it shouldn't end up becoming the only thing that drives portfolio construction. Portfolio weightages are also very important when you are constructing these.

Prableen Bajpai: So, we currently just had a NFO by Axis for Nasdaq 100. We overall have about seven to eight funds which are providing exposure to this index. So, it is one of the best large-cap indices in the U.S. and it's a very good passive strategy to take exposure to the largest economy. 

It's one index which really provides exposure to all sorts of innovation which is taking place, whether it is cloud computing, Zoom, or cybersecurity robotics. 

Certain sectors like cybersecurity are currently at about $180 billion and are projected to be the size of about $450 billion in the next seven to eight years. 

Robotics is there and cloud computing, which is about $480 billion and is going to be about $1.5 trillion in the next 10 years. So, there is potential there but the negative impact of the interest rate movement is definitely hammering a lot of technology stocks. 

Second, they have healthcare and biotech as the second largest unit. That's also a huge component in the index, not the second largest, but a huge component. Again, after Covid, you know that sector also has seen sort of a lull. 

Overall, this is one of the good indices where investors who are investing outside India and are looking to invest in U.S. can take exposure. 

Also a JP Morgan Report has certain five-year projections. According to them, IT will be the top performer in the next five years again, followed by consumer discretionary. So, these are sectors and stocks where (there is) definitely a lot of hard times currently. But I think from a long-term view, my personal view is positive. So, continue with the SIPs for sure.