ATM :: How can one invest in global equities

SHREYASH DEVALKAR | Tue, 14 Jun 2016-06:40am | dna


Today investors are spoiled for choice when it comes to avenues available for allocating fund and investing money. They can choose from fixed income products, domestic equities, global equities, derivative products, currencies and much more. With the freedom of options comes the responsibility of choice. Hence, it becomes important that we as informed investors study the advantage and risks associated with such asset classes and invest our money judiciously.

Great strides in technology have seriously shrunk the world, making every corner of the earth accessible to humans. Our daily lives are surrounded by evidence of the global economy. The phones we use are manufactured in Korea, our televisions are made in Japan, our cars are from different pockets of the world and our favourite Lebanese food is just a phone call away. In such an environment it is important to consider investment options beyond the domestic boundaries. Global equities are slowly emerging as a good investment option for domestic investors. The benefits of investing in global equities are myriad.

A fundamental reason to consider international investing and in particular global equities is diversification. Investment in global equities helps in spreading out the risk associated with equity investing as it entails investing in different markets which may not be highly correlated with each other. What this means for the average investor is that since all markets do not move in tandem, losses in one equity market can be offset by gains in another.

By diversifying into global equities the investor may be able to earn the same kind of returns as with a non-diversified portfolio, but with lesser risk, or be able to achieve higher returns, but with the same amount of risk.

International investments have shown an ability to improve risk-adjusted returns. The historical volatility of returns (as measured by standard deviation) for the global portfolio was almost 10% lower.

The MSCI World Index, which captures large and mid-cap companies’ across developed markets and covers approximately 85% of the free-float adjusted market capitalization in each country, the five year and ten year annualised Sharpe ratio is at 0.53 and 0.28, respectively. The corresponding numbers for the MSCI Emerging market index is at -0.15 and 0.18, respectively. In addition to diversification, global equities have the advantage of offering an investor exposure to faster growing economies and provide access to some of the world’s most successful companies.

Some of the world’s top performing markets in CY2015 were Argentina, Hungary, Denmark, Iceland and China while on the other hand the worst performing ones were Colombia, Peru and Bermuda. India’s returns figured in the bottom 50% of the returns computed for 74 of the top stock markets in the world. Quantitative easing might have pushed the European and US markets to multi year highs. However, flow of funds is likely to be directed towards countries which are showing better prospects of growth and fiscal discipline. Excluding India, markets like Taiwan, Vietnam and South Korea are expected to give good risk adjusted returns. Some funds can also be allocated to European equities.

Since the level of expertise and knowledge required in investing in global equities is quite high, the best option for an individual investor is to seek guidance from experts or fund managers of professionally managed funds.

Mutual funds offer various schemes where a portion or the entire fund may be exposed to global equities. In this case, professional fund managers study global markets and allocate the fund’s corpus to the countries where they expect good growth and returns.

The writer is fund manager with BNP Paribas

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