Last week, Bertie brushed his navy-blue suit that was hanging limp in his wardrobe and collecting dust. After the bout of sneezing had subsided, he wore it and instantly felt uncomfortable. This was followed by a strong urge to peel it off, but after a few deep breaths, he decided to soldier on. The occasion demanded it as Bertie had been invited by a friend who works for his favourite newspaper to address a gathering of individual investors. The topic was the merits of international investing; again, something that Bertie feels strongly about. Of late, it has dawned on our man that he has become a kind of go-to expert on the subject. When his introduction, proclaiming as much, was read out at the event, it reminded him of the old saying, “In the land of the blind, the one-eyed man is king.”
Bertie did not expect a large turnout because whenever Bertie had broached the subject of international diversification with Indian investors, he had been given a polite ear, but their demeanour showed him that when it came to investing their money, India was the only place they really cared about. Therefore, Bertie was pleasantly surprised to see a full house at the event, attended by knowledgeable investors whose depth of understanding was reflected in their questions. When he mentioned that over the past year, 19 out of the top 25 global markets had performed better than India, nobody in the audience bristled with patriotic outrage. There was an acceptance that markets outside the US offered a good risk-reward profile for incremental investment.
Bertie realized that the pain points for international investing were high transaction costs, taxes collected at source whenever money is remitted overseas, and a lack of access to markets other than the US. Apart from the logical reason of diversification, many investors were looking to secure US dollar returns on their investments as their kids would likely head overseas for their higher education.
While the official discourse was supposed to be about international investing, the discussion invariably veered to the home market. For any market, Bertie began, there are three sources of investment returns for a dollar investor. The underlying earnings growth, expansion in earnings multiple and the currency effect, i.e. how the local currency behaves against the dollar. Bertie is of the view that in India, the pace of the first two is slowing. Overall earnings growth would be slower than the past five years, and there isn’t much scope for the valuation multiples to expand at the headline index level. However, Bertie feels that the days of 2-3% annual depreciation of the rupee against the dollar may be behind us. This is so because the US fiscal position and high public debt will act as a heavy counterweight to the dollar’s traditional status as a reserve currency. In general, investment returns in dollars could converge towards local currency returns in many markets, including India.
Generally, by the time the discussion gets to currency dynamics, the audience’s attention span is exhausted and gets redirected towards the dinner buffet. This audience surprised Bertie some more when they unanimously agreed to let the session spill over the appointed hour. It might sound like wishful thinking, but is this the new dawn of international investing out of India?
Bertie is a Mumbai-based fund manager whose compliance department wishes him to cough twice before speaking and then decide not to say it after all.
