Investors in dollar-denominated assets likely to benefit from depreciating rupee against USD
Generation of long-term returns and preservation of capital should be the primary objective of making an investment.
The primary objective of making an investment should be generation of long-term returns and preservation of capital. This is intertwined with a number of other factors that are primary or fundamental, such as the state of the economy, the level of inflation, nature of government policies, corporate profitability and the overall liquidity conditions.
Apart from these factors, there are secondary drivers that determine returns. One such secondary factor is currency exchange rate, which is particularly relevant when one makes cross-border investments. Investors in dollar-denominated assets are likely to benefit from the current trend of depreciating rupee v/s the US dollar, as their realisations in rupee terms will be higher. This, in turn will shore up returns as well.
Rationale for cross border investments
Along with the risk of short-term volatility, cross-border investments also face the risk of currency movement. Mere high returns coming from an overseas investment due to depreciation in local currency should not be the primary consideration while making cross-border investments. Returns should be justifiably higher for the higher level of risk involved due to currency fluctuations.
In the current context, keeping in mind the US dollar-rupee example, the dollar-denominated investments by Indian investors have done quite well. There are two reasons for the same - (1) the US economic growth has gathered pace, and (2) corporate profitability in the US has improved, sending US stocks higher. The recent depreciation in the rupee versus US dollar has added to the gains.
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Advantage of foreign stocks/funds
Investors can benefit from an allocation to international funds/stocks. The US dollar-based funds have generated returns in the range of 25-30% and some even higher in the last one year. This is almost double the returns from domestic equities for the same period. However, one must be aware of the rapidly changing global investment landscape that not only brings opportunities, but also throws up new challenges. Buying into a Microsoft, Google, Apple could just give you the edge you were looking at and, that too, from within the comforts through a feeder fund available in India. At the same time, currency risk is always critical. An appreciating local currency will eat into returns.
BY: Bhavesh Sanghvi
(The author is CEO of Emkay Wealth Management)
Source: DNA Money