Case 1: Swati Bagchi, 46, is pleasantly surprised to see that the valuation of her international investments, which she had acquired on the basis of specific advice given to her by a professional, has increased handsomely. She calls her adviser, the latter waxes eloquent about global equities. The name that she hears repeatedly is Taiwan.
Case 2: Shashank Sethia, 25, a few months into his first job, does not want Indian stocks any more. Instead, he is looking at newer ways to invest in the Nvidias of the world. He anticipates that new-age tech operating in foreign countries will surge to even higher levels.
The two investors, although dissimilar in lots of ways, have a connection: global investments. Both of them want to increase their allocations abroad. Indian equities are not their sole objective any longer. And the reason is clear — there is sufficient room for growth in the USA and select other economies in Western Europe and Asia. Their belief is buttressed by surging valuations in South Korea, Taiwan, Austria and elsewhere. At the other end of the spectrum is India, from where FIIs have taken out billions of dollars. Faced with oil risk and other headwinds, Indian equities have suffered. The strained situation, many believe, may yet persist.
The trend spawns a few vital questions — how should ordinary investors view international markets, what are the best ways to allocate abroad, and to what extent should portfolios accommodate global opportunities? These queries are right now being commonly heard in investing circles. The situation is understandable — for nearly two years now, the hitherto-strong India narrative has flipped for the worse.
What does the average Indian see when he looks at foreign shores?
- Investors realise they should not remain bound to an India-only portfolio. This is especially relevant when big-impact action happens elsewhere.
- The latest situation in the USA, for instance, merits their attention. Valuations in American markets have evidently surged. US equities are riding on the back of the artificial intelligence boom. The S&P 500, an index known universally, has repeatedly touched record highs in recent times. Investors are openly excited about semiconductor and AI infrastructure.
A more dramatic story is unfolding in certain pockets of Asia Taiwan and South Korea are excellent examples. In terms of market capitalisation, Taiwan has lately overtaken India. Companies that have done superbly are Taiwan Semiconductor, Samsung Electronics and SK Hynix. The last two have driven South Korea’s Kospi index.
Recency Bias?
I am quite sure that a large section of our retail investors (the ones who are now lining up to invest abroad) is already too mesmerised by the surging global trend. Recency bias is clearly a major driver for them — they are right now seeking a repeat of what has already happened.
As history lessons no doubt reveal, such bias can lead to dangers unknown. There have been countless instances in the past when investors have assumed that performance will be repeated. However, what has happened once already is unlikely to happen again and again.
India, I must remind readers, had recorded a stellar show between 2021 and 2024. Many investors had assumed that geographical diversification was quite needless. And yet, after about two years of sub-optimal performance, people are in no mood to accept India’s potential. On the contrary, some quarters are quite sure that India has too many structural challenges. Too many for them to stay committed to India, that is.
A few hard truths
No narrative can continue unbroken for long. Here’s a few hard truths:
- The rally in the US has remained markedly limited to a select group of ‘super-caps’.
- AI and semiconductors are disproportionately ahead of the rest.
- What will happen if the AI-led cycle slows down or even regresses? Even a simple regression will lead to a sharp impact, right?
- Let us not ignore the concentration risk that has most likely formed in ordinary investors’ foreign holdings. Those who swear by only headline index returns will surely face challenges, only a matter of time.
- The AI pack is not inexpensive any more. It is already being pointed out that South Korea (take it as an example) has become enormously speculative. There is considerable leverage, while retail participation is still advancing.
The way ahead
The argument that Indians have, by and large, historically remained under-diversified internationally cannot be denied. We have stayed too dependent on our own strengths and flaws. For almost all of us, it is a single economy, a single currency, a single eco-political infrastructure. This is not a very smart way to allocate assets. A meaningful international allocation is a critical way forward.
The writer is director of Wishlist Capital