The Ukraine conflict has caused the values of Russian assets such as stocks and bonds to plummet. It has also brought down the Russian currency, ruble, Ukraine’s currency hirvina has also been affected. The conflict highlights the risk of a single currency – single country risk for Indian investors, whose investments are mostly in domestic stocks and bonds.
Indian equities Have enjoyed good returns for a long time. Viewed in dollar terms, the MSCI India Index has outperformed the MSCI All Country World Index in the last 3 years and 5 years, though not in the last 10 years. Since the index is denominated in US dollars, it also takes into account the depreciation of the rupee. India’s outperformance compared to other emerging markets is particularly stark. The MSCI India Index delivered a CAGR of 16.67%, 13.93%, and 8.68%, respectively, over the past 3, 5, and 10 years, outperforming the MSCI Emerging Markets Index for a total of 3 time periods. The latter gave returns of 7.56%, 8.68% and 4.53% respectively. However, in the long run, returns mean upside and hence the outperformance may not continue indefinitely.
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Single country and single currency risk It is the risk of holding all your investments in only one country and currency, even if it is your own country by citizenship. Political, economic and military issues can cause the value of such investments to drop sharply. Over the past few years, Indian investors have been gradually investing in foreign stocks such as American tech companies. The mutual fund industry has also launched several foreign funds during this period to provide global diversification. However, the process came to a halt after mutual funds reached the industry-wide $7 billion limit set by Sebi in early February. All new investments in international mutual funds (other than those investing in ETFs) have been suspended for almost a month. Investors can invest outside India through the Liberalized Remittance Scheme (LRS) of RBI. Under this route, investors can remit and invest up to $250,000 per year in foreign stocks and bonds.
“Any period of financial crisis arising out of country-specific reasons is likely to see a simultaneous weakness in the currency along with a correction in the stock markets. In such a period, if any investments are made outside the home country, they can protect an investor’s portfolio to an extent – as foreign investment may not be affected,” said Praleen Bajpai, Founder, Finfix Research & Analytics Pvt Ltd. Said. Highlighting the cushioning effect of denominated investments in foreign currency.
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