Money Wise: Be Wary Of Your Overseas Equity Investments

Global markets have been interconnected for a while. And so it behooves the pragmatic Indian investor to be at least peripherally aware of happenings in the major economies around the world. Specifically, pay close attention to monetary policy in the U.S.

The U.S. economy is yet to show any major signs of prices heating up because of the weaponisation of tariffs undertaken by President Donald Trump. In fact the latest retail inflation print could even be interpreted as benign. But eventually, these policies will likely come back to bite. From our perspective, as the tariffed nation, our focus is on the increase in cost. Already, the U.S. administration has collected billions of dollars in tariffs. But who ultimately pays these tariffs? In a lot of cases, it is the U.S. consumer, because it is ultimately impossible for companies to absorb 25% and even 50% tariffs.

At the same time, the U.S. is seeing a sharp rise in jobless claims – this week's data was the highest in four years – and that's an indication of a slowing economy. A rate cut by the Federal Reserve when it meets next week is almost a given. In the runup, Wall Street has surged to all-time highs, the dollar has weakened and bond yields have fallen.

It might seem a little contrary to hear that Wall Street is trading at all-time highs at a time when the economy is slowing, but a look under the hood will tell you that the rise this year is primarily propelled by a handful of stocks. For one, NVIDIA shares have doubled in value since April. What's more, Oracle's 40% plus rise earlier this week on the back of earnings has led to increased mutters about a bubble in U.S. AI and tech stocks. And concentration is higher than it has been in a while. The weightage of the top five stocks by market capitalisation in the S&P 500 is nearing 30% - higher than tech stocks enjoyed during the dot com bubble.

Does that mean a crash is imminent? That's not what I'm saying. Instead, I'm asking you to be cautious when you look for investment opportunities overseas when you see the massive rise in the value of the U.S.' frontline stocks. In any case, the Reserve Bank of India's and by extension, the SEBI's, limits on overseas equity investment by mutual funds have curtailed options for the Indian investor. And maybe that's not such a bad thing.

The Indian government's reform push – through the overhaul of the indirect Goods and Services Tax – and the relative underperformance of the Indian equity market compared with its global peers should be seen as an opportunity. The systematic investment plan is your friend. And indeed, these flows have remained strong in August – close to the record high. So have the flows into actively managed equity schemes – particularly into diversified flexicap and multicap funds.

I mentioned that the dollar has exhibited weakness. This is interesting, considering that the rupee has slid in recent days to an all-time low against the greenback. This is being attributed to outflows of dollar on account of continued selling by foreign institutional investors among other factors. If you're looking to offset the decline of the rupee – some reasons could be to fund a trip overseas or to fund a foreign education – you could look at adding gold to your portfolio. It is a natural hedge to rupee depreciation. This is because India is a large importer of gold – the second largest in the world. As a result, it is a price taker and follows the global price of gold, which is denominated in dollars. Directionally, with the Federal Reserve expected to cut rates further, and with global central banks continuing to buy gold in an attempt to de-dollarise, the price of the yellow metal could well be heading higher. Do remember, that financial advisors say you shouldn't have more than 10-15% of your overall portfolio in gold and preferably in digital form.

Until next week, happy reading!

Alex