Khaleej Times - Dollar-based investments vital for Indians

Vijay Valecha, Special to Gulf News November 28, 2021

The dollar index, a gauge of the dollar against a basket of six currencies, rose to a nearly 11-month high of 94.5 on September 30, 2021. Those having dollar-denominated investments would undoubtedly have one reason to be cheerful when markets across the globe are reeling. Meanwhile, the ones having investments in emerging markets like India would be losing on both fronts – investment loss and currency loss.

Despite many financial gurus repeatedly talking about the need to invest in currency-denominated solid assets, this is one area that many investors mostly ignore. Moreover, with Nifty offering stellar returns of over 50 per cent in the last year, clearly outstripping its US counterparts-SPX 500 and Nasdaq 100, this critical financial advice will further be ignored by many amateur investors, especially Indian investors. And there is no better way to explain the importance of Dollar-based investments other than highlighting statistical facts.

Over the past 14 years, starting 2007, the Nifty 50 Index has offered stellar returns of 253 per cent; however, when the return is measured in Dollar terms, it drops significantly to almost a third at 90 per cent. That’s the impact of currency depreciation! Over the past 14 years, the rupee has depreciated over 85 per cent against the dollar.

While investors are unquestionably multiplying their wealth while investing in Indian markets, their buying power is not increasing at the same rate because of rupee depreciation.

Instead, it turns out, Indian investors would have been better off investing in US stocks over the last couple of years. $25,000 invested in Nifty 50 on September 30, 2009, would have grown to $56,508 on September 29, 2021.

On the other hand, $25,000 invested in SPX 500 and Nasdaq 100 would have grown to $103,586 and $216,544 respectively. To state it in Rupee terms- ₹1 million invested in Nifty would have grown to ₹3.48 million, while in SPX, it would have grown to over ₹6.38 million, and in the tech-heavy Nasdaq index, it would have grown to a whooping ₹13.30 million. It’s important to note that despite the massive run-up in Nifty, a key reason why the US indices outclass the Indian market is because of the Indian currency’s depreciation. Another way to say it, the dollar Strength is eating away a significant chunk of the returns.

Except for last year, Indian equities have clearly underperformed the global markets. The world of global equities is dominated by US listed companies, which account for over 50 per cent of the total market capitalisation. In the last ten years, Dollar-denominated returns in the Nifty 50 Index would tally at 126 per cent; however, during the same period, SPX 500 and Nasdaq 100 offered substantial returns of 314 per cent and 766 per cent, respectively. To state in rupee terms, if Nifty 50 has provided 248 per cent buy and hold returns since 2009, Nasdaq 100 has offered a whopping 1235 per cent over the same period.

While currency risks can work both ways, emerging market currencies have generally depreciated over the long term. It, therefore, makes sense for Indian investors to diversify their portfolios and invest in global markets. Besides, the US is the world’s foremost superpower. It has some leading Multinational companies and other tech giants of the world, such as Amazon, Microsoft, Alphabet, Apple, and Facebook, that are not available for investment in India. Many of these themes have had an incredible run in the last decade, leading to a robust performance of the US Indices. The past is, of course, not a reliable guide to the future, but technology has and will continue to occupy a more significant share of our lives. Rather, the pandemic has exacerbated the significance of tech companies and their services to the broader economy.

SIP-based investment in global markets with stable currencies is one of the best possible options to diversify the currency risk. SPX 500 & Nasdaq 100 could be great investment options in the long run. It would be best to get in touch with a professional financial company, where a consultant will devise the best strategy for you, depending on your investment goals and risk profile.

Investment in precious metals like gold and silver will also diversify the currency risk as they are dollar-denominated assets. Besides, gold is also considered a safe-haven and will likely offer some hedge to the portfolio.

Alternatively, investments in the UAE real estate option will also allow you to diversify the currency risk as the UAE dirham is pegged to the Dollar. Although the real estate market in UAE hasn’t seen massive upside capital gains, they could prove to be fruitful investments in the long run because of dollar appreciation. Besides, you also get to enjoy the dollar-denominated rental income.

To sum it up, diversification is the key to give your portfolio inbuilt safety. There are no sure shots in life, and if your home currency depreciates massively at any point, that will erode the purchasing power of your investment savings.