– By Harsh Gahlaut
In the aftermath of the Covid-19 pandemic, the global economic landscape has undergone a tectonic shift. The preceding years were marked by liquidity-driven, high-risk-high-return investment trends. As 2023 concludes, we are witnessing a shift towards a more risk-off approach and a return to fundamental realignment on a global scale.
While that might have worked for some people who were lucky enough to buy the dip, let me give you five reasons why it might not be the best idea to go for overseas diversification of your investments:
Geo-Politics: The souring economic relationship between the US and China, tension between Israel and the Middle East, and the war between Ukraine and Russia pose significant risks to economies and countries associated with these conflicts. Additionally, there is a challenge to the US dollar domination. Together, these factors substantially change the risk associated with overseas investing for the next few years.
Inflation and Stagflation: Inflation is rearing its ugly head worldwide, including in India. However, the risk of stagflation in some developed economies poses a significant threat not only to their stock markets but also to their economies as a whole.
Crude Oil and Gas: OPEC seems to be in no mood to reduce oil prices. The West is trying to cut off supplies from Russia, Venezuela shares a terrible relationship with the Western world, and the US is attempting to increase shale production. The current oil price band of USD 80 to 100 is the upper limit of tolerance for most economies. If oil were to cross USD 100, it would further aggravate the inflation/stagflation problem.
Liquidity & Growth: Most central banks have been aggressively tightening liquidity to control inflation, risking economic growth. This problem does not seem to be going away soon, and it might be a few years before we see the next liquidity and high growth wave. Typically, without these two components, stock markets struggle to provide great returns.
Taxation: Overseas investments come with tax complications. Your tax filing process changes, and there might be currency risks attached. Any returns you make are taxed as debt unless funds maintain a certain percentage of Indian equities. It’s a classic case of over-complication and over-diversifying your investments just to end up paying higher taxes.
The spotlight is now on India to spearhead growth, innovation, and industry, making the concept of decoupling from the global economy more relevant than ever. The world wants to invest in India; let’s not miss the wood for the trees.
India stands out not merely due to ‘TINA’ (There Is No Alternative) but in defiance of ‘TARA’ (There Are Reasonable Alternatives). It’s not just the favourable demographics-based consumption that sets India apart; significant structural changes in the Indian economy contribute to its prominence. Banks boast the cleanest balance sheets in recent memory, bankruptcy laws are in effect, GST collections exhibit robust trends, exports are on the rise, digital transactions lead globally, and inflation appears to be under control. In essence, India holds the crown with ‘TIARA’ (This Is A Realistic Alternative).
With confidence, one can assert that a growth-oriented investment portfolio should now be focused on the domestic Indian market. The potential for exponential returns over the next 10-15 years is substantial, but not without accompanying risks. While the stock market presents lucrative opportunities, it will also challenge investors with its inherent volatility.
For investors, resilience will be a significant asset. The opportunity to create wealth in India is promising, but staying invested amid information overload will be a formidable task. Disciplined and strong-minded investors, focusing on realistic goals, will position themselves favourably. Building an investment portfolio that provides resilience is crucial, allowing you to cut through the noise and stay invested during periods of market turbulence.
An individual’s long-term portfolio should carry a substantial exposure to Indian equities, be it through mutual funds or individual stocks. However, more critical than choosing specific stocks or funds is establishing a resilient investment process, as high returns also mean high volatility. Without a robust investing process, resilience remains elusive.
One recommended investing strategy is to maintain a keen awareness of India’s trajectory over the next 10-15 years, investing systematically and with discipline. In conclusion, as Indian investors navigate the global markets in 2024, discipline emerges as the guiding principle. ‘Think Macro, Execute Micro.’
(Harsh Gahlaut is the founder and CEO of FinEdge.)
(Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.)