• HDFC securities
• 22 Mar 2022
• Knowledge Centre

Rising vaccine coverage, easing restrictions and a rebound in economic activities are some of the factors driving global recovery. The World Bank estimates global growth at4.4% for 2022. However, this recovery will be uneven, depending on new Covid variants, access to vaccines, and central bank policies. As monetary policies in major economies continue on a tightening path to reduce inflation, emerging markets like India will face headwinds in the near term, associated with capital flows, forex rates and fiscal positions.

This could be a good time to invest in global ETFs, to diversify away from country-specific risks. These country-neutral ETFs invest in a basket of stocks listed abroad, often based on popular and high-performing indices, such as the S&P 500, FTSE 100 or Nasdaq. All this comes at an advantage of a much lower cost than investing in individual foreign stocks.

Here are some factors that make investing in global ETFs a good choice.

Better Diversification

Country-specific ETFs are exposed to risks arising from the domestic economy. If you invest in a global ETF, you will be able to tap into markets that have a low correlation with the Indian economy. This will help geographically diversify your portfolio, giving it more stability. This could be a fruitful strategy, since supply chain disruptions, energy price volatility and uncertainty around inflation are likely to impact different economies in different ways.

Rupee Depreciation

The commencement of monetary tightening by the US Federal Reserve, followed by other central banks, will continue to put pressure on the Indian Rupee. As per Fitch Solutions, the INR could depreciate3% in 2022 against the US dollar. This downward movement of the Rupee could make it advantageous to invest in countries with stronger currencies. Depreciation in the INR could add to the potential returns.

However, it’s important to note that declining currencies favour companies that export products, and also help shrink trade deficits. For instance, the FTSE 100 is not usually moved by an appreciating Pound Sterling, as a majority of the companies are foreign-facing. Also, India has huge reserves of foreign exchange and surplus BOP, which gives the RBI scope to handle Rupee volatility in a much better way than a decade ago. Rupee depreciation beyond₹78/US dollar is unlikely in 2022.

Indexation Benefit

International ETFs are taxed like debt funds. If you hold them for more than 3 years, a 20% capital gains tax will be applicable, along with the benefit of indexation. A higher purchase price means lower profits. You will be able to lower your long-term capital gains and reduce taxable income.

Exposure to Global Trends and Technologies

Global ETFs are a low-cost method to invest in the world’s biggest companies, like Google, Tesla and Facebook. You might also gain exposure to emerging technologies like AI, cloud computing, cybersecurity and blockchain, for which you might not find listed companies in India. You could also get exposure to companies in the renewable energy sector, which are expected to gain from the global commitment to addressing climate change. For many developed economies, reducing their carbon footprint is a critical goal they wish to achieve by 2030. This, and a greater focus on sustainability, inclusivity and diversity, has led to a rise in ESG investments.

Thanks to the massive stimulus by the US Fed, following the pandemic, global liquidity surged and led to a stock market rally across countries. Some of the largest companies have led a bull run over more than 18 months now. Now, Indian investors have the opportunity to diversify abroad and take advantage of these market rallies. As per the Reserve Bank of India’s Liberalised Remittance Scheme, you can invest up to $250,000 in stocks, bonds and ETFs in a single financial year.

However, before you invest, make sure to understand country-specific economic fundamentals for an informed decision.