Opportune time to diversify internationally as US benchmarks recover

Enter for the long haul as the US economy and market could witness turbulence in the months ahead

Funds focused on the United States (US), which many Indian investors have allocated to in their international portfolios, appear to be on a comeback trail. Technology-heavy indices, which suffered significant losses in 2022, are at the forefront of this revival.

Year-to-date, the Motilal Oswal NASDAQ-100 Exchange Traded Fund (ETF) (up 30.9 per cent) and the Mirae Asset NYSE Fang+ ETF (up 62.1 per cent) have led the bounce back. These funds had posted negative returns of 25.8 per cent and 33.5 per cent, respectively, in 2022.

Funds based on broader indices, such as the Motilal Oswal S&P 500 Index Fund and the Navi US Total Stock Market Index Fund of Fund (FoF) had experienced smaller declines in 2022 and have consequently risen more moderately YTD: 9.8 per cent and 9.3 per cent, respectively.

Further rate hikes unlikely

Inflation-related concerns had elicited a hawkish response from the US Federal Reserve (Fed) last year. The steep and fast-paced rate hikes had then fuelled fears of a possible recession in the US.  

“The US Fed is not expected to hike rates further. The markets had started pricing in rate cuts in the latter half of 2023 from the beginning of this year itself. US economic data has also been resilient so far,” says Alekh Yadav, head of investment products, Sanctum Wealth.

A good time to enter   

Experts believe this is a good time to enter international funds. “With benchmark indices in the US far from their previous peaks, this is a good time for new investors to start accumulating units of US funds,” says Nirav Karkera, head of research, Fisdom.

Investors who have built well-diversified domestic portfolios should diversify geographically. “A 10-15 per cent allocation to international equities will ensure your portfolio is not dependent entirely on the Indian market,” says Rohit Karkera, co-founder and head-investments, Cervin Family Office & Advisors.

New investors must enter these funds with at least a seven-year horizon.

Exposure to US equities is essential

The US economy is the largest in the world. Its market accounts for about 60 per cent of total global market capitalisation. “Given the size of both the GDP and the market cap, the US market can’t be ignored in any international portfolio,” says Karkera of Cervin.

This market is also liquid, efficient and well-regulated. “The US market can provide Indian investors access to stocks and sectors not available domestically,” says Karkera of Fisdom.

The Indian rupee tends to depreciate 3-4 per cent annually against the US dollar over the long term. “By investing in a dollar-denominated fund, investors can earn 3-4 per cent each year from currency movement alone,” says Yadav. 

Investing in US-focused funds also comes in handy for people who have dollar-denominated goals, such as a world tour or a child’s education in a foreign university.

Turbulence ahead

The US economy and markets are not completely out of the woods. “The impact of the steep rate hikes has not been reflected in the economic data yet. But it could happen in the months ahead as the impact is usually felt after about a year. The Fed started hiking rates in March 2022, so the US market could correct in the months ahead,” says Yadav.

The collapse of regional banks and the debt ceiling related tussle have also kept the US market volatile.

Diversify across geographies

After the sharp correction in US funds in 2022, experts say investors should not limit themselves to the US alone in their international portfolios. “Invest in Europe and emerging market funds as well. Investing across geographies will reduce your portfolio’s volatility and improve its risk-return profile,” says Yadav.

Build an international portfolio using passive funds initially. “Around 80-90 per cent of active funds in the US fail to beat their benchmarks, so it is better to build the core of your international portfolio using passive funds. Later, you may include a few active fund managers who have a sound track record,” says Karkera of Cervin. He also suggests building the core portfolio with diversified offerings, and adding sector or thematic offerings later on.