Why Dollar based investing matters

Wednesday, January 15th, 2020

It is natural for Indian investors to think about investing in rupee terms. Our money is invested in Indian assets and we also spend our money in India in Rupees and therefore the default is to take the Rupee based returns of our investments.

This contrasts with global investors who tend to think of their returns in the global reserve currency which is the dollar. Should this matter to us?

I would argue that it does because, without realising it, we are spending more and more of our money in dollar terms. Indians spend a lot more today on foreign trips or to send their children for further studies abroad than ever before. Even for those that can’t afford this, the electronics we buy are all imported. That latest iPhone or Google Pixel is first priced in dollar terms before being converted into rupees.

The Rupee has had a tendency to depreciate over longer periods of time given the inflation differentials and macroeconomics of our country relative to the rest of the world. This means that a number of our purchases that are priced in dollars will continue to get more and more expensive.

It is therefore critical for us to look at our returns using a dollar base. If, for example, an investment we have made goes up by 5 per cent in rupee terms but the currency has depreciated by the same amount then we are back to square one.

The Dollex is the dollar based return of the Sensex. We can see from the chart below that, over the last decade, the Sensex has returned roughly 9 per cent annually in Rupee terms. But the dollar based return of that is roughly 5 per cent.

One of the first things that investors are told when they first start thinking about the stock markets is to buy what they know and understand.

Lets take a hypothetical consumer: She will have a Xiaomi Android Phone, drive a Hyundai car, watch Amazon Prime on her Samsung TV, use an LG Washing Machine, do work on a Dell laptop and maybe have a Cadbury chocolate in her break time. None of these companies are listed on the Indian stock markets. If we are increasingly consuming brands that are global, why should we restrict our investments to the local markets?

Such a strategy would diversify away the risk from investing in one country while increasing exposure to the growth drivers of global companies. How would such a strategy have played out over the last decade?

If we see the chart above; the S&P500, in red, which tracks the US markets has had the best performance by far in the last 10 years with an annual return of roughly 11 per cent. This is not to say that this performance will be repeated in the next decade but it disproves the commonly perceived notion that Indian equities are the highest returning assets globally given our high growth rates. While the Dollex, in blue, has done much better that the MSCI Emerging market index, in green, we are still underperforming a broader basket of global equities, the MSCI World in purple, which has given an annual return of 8 per cent. We use data for these charts from Investing.com

It is therefore critical for investors to start thinking about their investments in dollar terms and also for them to look at international investing to diversify their risk and possibly hedge their returns in dollar terms.

How would one go about it? Asset allocation would be a prudent strategy: having a mix of exposure both to Indian assets and International assets makes the most sense. More risk averse investors can look at Gold instead of International equities to hedge the currency risk. There are a number of mutual funds available to Indian investors that invest in dollar-based funds. I would suggest that you first speak to a qualified investment advisor to determine if such a strategy is appropriate for you before investing your funds.

Disclaimer: Please note that all the information mentioned above is for educational and informational purposes only. Please consult a qualified financial advisor prior to making any investment decisions.

About the author

Rishad is the founder of Kairos Capital. He started his career with Standard Chartered Wealth Management and has extensive experience in markets, particularly in terms of mutual funds and stocks.

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