Investing in U.S. and international stocks
Wall Street today is not in a bear market territory which is defined by a drop of 20% or more from its peak. Even if the markets continue to slide from the current levels on the back of macroeconomic and geopolitical headwinds that we are witnessing today, the average U.S. bear market has lasted for about 9.5 months in the past, while the average bull market has persisted for over 2.5 years. Additionally, stock indexes lose about 36% on an average during a bear market but gain about 114% in a bull market scenario. In summary, the predictions indicate that the current downtrend won’t last too long and the market is likely to bounce back in the second half of the year.
When we look at the past, the sharp market drops have often been followed by larger and longer rallies. Look at the pandemic-triggered sell-off that we witnessed in February and March 2020, when the S&P 500 index lost about 33% in its value and by the end of August 2020, the markets had seen a reversal and gained back all its losses. Having said this, let’s find out the advantages of investing in U.S. markets.
Investing in U.S. stocks and international companies offer various benefits to Indian investors:
- Global exposure – U.S. companies operate around the world unlike Indian companies with limited geographical operations.
- Diversification – invest in disruptive technology ranging from AI, cloud computing, space tourism, semiconductors, etc.
- Strengthening dollar – a strengthening USD adds to one’s U.S. stock investments total returns.
- Fractional Investing – invest in shares for as less as $1, without the need to purchase one full share of a company.
Invest in the largest companies of the world
When we look at the table below, 16 out of the 20 largest companies (by market cap) in the world are based out of the U.S. Investing in U.S. stocks provides Indian investors an opportunity to be part of these companies’ growth story. Moreover, Indian investors can also invest in companies across geographies like the Chinese or the Taiwanese, through stocks of tech giants like Tencent (TME) and Taiwan Semiconductor Manufacturing Company (TSM) via American Depository Receipts (ADRs) listed on the U.S. exchanges.
Saudi Arabia ETF to help investors gain from rising crude oil prices
Investors can buy iShares MSCI Saudi Arabia ETF (KSA) that tracks the index of Saudi Arabian firms covering 99% of the market cap spectrum, to benefit from the gains of oil-producing behemoths like Saudi Arabian Oil Company (or Saudi Aramco) – the second largest company after Apple (by market cap.) in the world.
Exhibit 1: Largest companies in the world by market capitalisation
Source: companiesmarketcap.com, Data as of 2 June, 2022
Invest in disruptions
We are living in the age of the innovation economy where innovation in products and operations heralds economic growth, and the U.S. economy is the best example of how a country can grow its wealth by means of technological and scientific breakthroughs. Investing in U.S. stocks offers investors the option to participate in the growth of companies that are making strides in areas like metaverse, semiconductors, artificial intelligence, self-driving cars, electric vehicles, renewable energies to name a few.
Strengthen your portfolio with a stronger U.S. dollar
The Indian rupee has hit a record low against U.S. dollar twice in the week that ended on May 13, 2022 and has continued on a downward trend since then. India is an energy and commodity importer which is hurting the Indian rupee as prices of commodities are on a rise this year.
Exhibit 2: USD/INR performance history and historical returns (in percentage)
Source: Investing.com, Data as of 31 May, 2022
USD has gained about 20% against the INR over the last five years
A stronger U.S. dollar offers added returns to the value of the investments made in U.S. stocks. Investors in the long term stand a high chance of benefiting from a strengthened USD as they get more rupees while redeeming their U.S. assets back in INR form. When we look at the chart below, we see that the USD has gained about 4.12% so far in 2022 and over 20% in the last five years, which benefited the investors who hold their portfolios in dollar terms.
Exhibit 3: USD-INR exchange rate over the last five years
Source: xe.com, data as of 3 June, 2022
Indian rupee is among the weakest currencies against U.S. dollar
The rupee has gone from being almost the strongest currency amongst the top 26 USD pairs to now being almost the weakest. The shift occurred post the RBI interest rate shock. In the exhibit below, the above 50 denotes the rupee outperforming and the below 50 shows rupee underperforming. For example, 8% for the week ending 20th May means only 8% out of the 26 currencies have fallen more than rupee against US dollar in that particular week.
Exhibit 4: Percentage of currencies weaker than INR vs USD, weekly performance
Source: Anindya Banerjee, May 2022
Foreign investors continue to sell Indian stocks for the eighth consecutive month in May
Foreign portfolio investors (FPIs) continued their selling spree for the eighth straight month as investors pulled out nearly INR 40,000 crores ($5.15 billion) from the Indian Equity markets in the month of May, on the fears of interest rate hikes in the domestic markets and globally. The net outflows by the FPIs from the Indian equities touched a high of INR1.69 lakh crores ($21.75 billion) so far in 2022 and a massive net outflow of INR 2.07 lakh crores ($26.64 billion) for the last eight months (October 2021 – May 2022) as per the data from depositories. Most analysts predict that the FPI flows into India and other emerging markets are likely to remain volatile on the back of prevailing geopolitical risks, rising inflation, and tightening of monetary policies by central banks. Sell-off in the Indian markets can be largely attributed to the following reasons:
- Rising inflation in the domestic market
- Headwinds from elevated crude prices
- Tightening monetary policy, both in India and the U.S., and
- Subdued quarterly earnings by Indian corporations.
To conclude, FPI selling is likely to continue as long as the U.S. dollar and Bond yields (in the U.S) continue to rise and inflation numbers would remain the key for the markets or investors to take any further actions in terms of being net sellers or buyers in the emerging economies in the coming months.
Exhibit 5: Net investments by foreign institutional investors in Indian Stocks ($ billion)
Source: Live Mint, May 2022
Investors embrace RBI’s LRS scheme as the limit on mutual funds continue
Indian investors are availing the benefits under the RBI’s Liberalised Remittance Scheme (LRS) that allows resident individuals, including minors to remit up to $250,000 in current or capital account transactions every fiscal year. Investment outflows in international stocks and bonds rose to an all-time high with a 58% growth in FY2022. As per latest data from the RBI, the investment outflows from India have touched an all-time high of $747 million in FY22, from the previous $472 million seen in FY21. On Stockal, we have seen a steady rise in Indian investors investing in the global markets through stocks and ETFs apart from Stacks (curated basket of stocks) which are the most preferred asset classes on our platform for new investors.
The rise in overseas investments through the LRS route comes after SEBI has asked mutual funds to stop investments in overseas securities in January this year to ensure industry-wide limits are not breached. Under the current rules, domestic mutual funds can invest up to $7 billion in overseas stocks and $1 billion in exchange-traded funds (ETFs). The Association of Mutual Funds in India (AMFI) is in talks with SEBI and RBI to address this issue. However, several factors will be considered by the RBI to revise these limits on the outflows from the country as India is running into a current account deficit.
Valuations look attractive post the recent corrections on the U.S. indexes
When we look at the valuations on the S&P 500 index at the current levels, we see that it’s trading below the historical averages. The forward 12-month price-to-earnings (P/E) multiple of 16-16.5 seen on the index is below the five-year average P/E of 18.6 and 10-year average of 16.9. We saw a 12-month forward P/E of 21-21.5 in January this year when the S&P 500 was trading at a record-high level of 4,800. This is a good sign for international investors looking to invest in the U.S markets once again which has led to sell-offs in some of the emerging economies including India.
Coming down to the large corporations and stocks at current levels, many good companies including the leaders have seen significant declines in the current market sell-off but the competitive advantages and the fundamentals of these companies remain and these companies are likely to remain resilient and come out of this period of volatility. The current market scenario is particularly a good time to buy as the previously inflated valuations and share prices have come back down to a more normal range for many of the growth stocks and technology names.
Exhibit 6: Snapshot of Indian and U.S. Macroeconomic Environment
|Unemployment in April 2022
|Consumer Price Inflation in April
|Gasoline (1 litre, in USD)
|GDP per capita (current prices, in USD)
Source: globalpetrolprices.com, Data as of 30 May, 2022
Inflation remains a concern across economies
Inflation, now, has become a global economic concern due to the geopolitical crisis-induced hike in crude oil and commodity prices all over the world. However, India- being a net importer of crude oil- stands in a much vulnerable position to face the headwinds arising out of rising oil prices.
The Reserve Bank of India’s May rate hike came in as a huge surprise or rather a shock to the Indian markets, even though the RBI has been accused of acting slower in response to the heating inflation that has gone beyond its target range of 2%-6%. According to a majority of analysts polled by Reuters who were exceptionally split on the size of the move, the RBI will follow its surprise May rate rise with another hike at its meeting this month.
Exhibit 7: Analysts’ expectations ahead of RBI’s June policy meet
Source: Reuters, May 2022
Exhibit 8: Analysts’ expectations for U.S. Federal Reserve interest rate hike for 2022
Source: Reuters, May 2022
Fed rate hikes to continue
The Fed is expected to hike rates by another 50 basis points for the next two months, according to 54 of 89 economists polled by Reuters, before slowing to 25- basis-point hikes for the remaining meetings this year. A majority of poll respondents now expect the federal funds rate to be at 2.50% – 2.75% or higher by the end of 2022, six months earlier than predicted in the previous poll, and roughly in line with market expectations for a year-end rate of 2.75% – 3.00%.
Be greedy when others are fearful – Warren Buffett
Market sentiments in India and the United States are marked by inflation’s fear. However, Warren Buffett’s Berkshire Hathaway (BRK) has used the major sell-off in the U.S. markets as an opportunity to increase their spending on stocks, marking 2022 as a year of multi-billion dollar investments for the company.
In the past few months, Berkshire has boosted its stake in energy companies like Occidental Petroleum (OXY) and Chevron (CVX) as they have been the best-performing stocks so far this year. In addition, energy stocks offer an edge against inflation besides being available at lower valuations currently. Other key investments of Berkshire this year are HP (HPQ), Citi (C ), Ally Financial (ALLY), and Paramount Global (PARA).
Exhibit 9: Top holdings of Berkshire Hathaway by percentage of portfolio
Source: CNBC, Berkshire Hathaway Portfolio Tracker, May 2022