You want to take your family for a vacation. A road trip through rugged terrain and cloudy skies looks attractive. So, would you invest in a 4×4?
The US is and will be the biggest capital market — it represents over 50% of the global market capitalisation. The depth of the market (number and types of investors) makes it conducive for new firms to list their shares. It is easy to see why several tech majors trade on US exchanges.
It is also easy to make a case for 50% allocation to US equities.
However, this does not work for everyone. The core problem remains the currency — income and expenses are INR-denominated, and not USD. Any change in the USD should not affect your INR goals.
If we try to hedge this exposure using futures — over the long term, it would cost ~3.6% every year.
You just realised that you spend only 4 vacations in a year, and a 4×4 is simply too expensive. But, are you going to stick to your old Hyundai?
With only-India equity, there is complete exposure to India-specific risks.
Consequently, there is a natural diversification of returns with the US — a little lesser exposure to India.
A look at daily returns over the last 25 years shows that for 44% of the days, India and US returns were opposite to each other.
During days when both US and India reported negative returns, US returns were down lesser than India returns, 60% of the time. Also, during days when US and India returns were in opposite directions — US was down on average ~0.7% (when India was up) compared to India, which was down ~1.0% (when the US was up). These metrics carry the same direction across time periods.
Both these point to a lower downside with US exposure.
We eliminate currency risks by keeping allocations small. We will include only 10% of your equity allocation to the US (much lesser than 50%). If you have existing allocations to the US, in the form of company shares or ADRs, we will not allocate until your stock allocation falls below 10% (of your equity allocation).
Maybe you can get a 4×2 crossover — all you need is a good suspension to smoothen the road ahead.
There is a downside with taxes. Foreign allocations carry debt taxation — we need to wait for three years to get indexation benefits.