The Hindu Business Line : Scratch more than just surface to grasp true domicile of cos

Time was when our fund houses had only Indian stocks to invest in. Developments taking place in markets across the world did not really concern them. Mexico was as alien to them as Turkey, Brazilian stocks were as foreign to them as South Korea’s, while the Russian equity scenario was as impregnable as its Chinese counterpart.

Not any more. Stocks from these countries and a lot of others are set to play a bigger role for the average Indian investor, courtesy funds that are being lined up by various local players, big and small. Already, several new offers, each ready to invest part of its assets in overseas markets, have come to the fore. A few others are waiting to be launched.

India’s asset management sector, it seems, has finally started looking seriously at investing in companies domiciled abroad. And that may well be a good thing too – considering the merits of moving out of the confines of a single country and choosing to invest in emerging markets.

Is there really greater scope for putting a certain part of your funds portfolio into products that seek exposure to overseas markets? Are you sure other emerging economies will get you better returns compared to the fast-growing Indian economy?

Before you answer that question, check out what Morningstar has observed lately about “foreign-domiciled firms”. “A few decades back, it was simple. Investors dedicated a set percentage of their portfolio to foreign-domiciled firms and received proportionate exposure to foreign economies. Not anymore. Globalisation has blurred the lines. A firm’s address is no longer an accurate indicator of where it does the bulk of its business”, it has pointed out.

Incidentally, it has also been observed that roughly 45 per cent of S&P 500’s underlying revenues come from outside the US. Assuming that domicile is not always a precise determinant, investors need to scratch more than just the surface to grasp the true “geographic makeup” of companies, it is argued.

Other experts have in recent times declared that emerging markets selectively are attractive investment destinations for long-term participants. Franklin Templeton, for instance, have lately pointed to Latin America, billing it as one of the top performing regions. In Europe, key markets like the Czech Republic and Hungary logged a robust show. Poland and Turkey also fared well as a result of a weaker US Dollar.

Asian markets

How did the major Asian markets perform recently? Well, as Franklin Templeton maintains, China, Thailand, South Korea and India (partly due to a strong rupee) outperformed their emerging market counterparts. This is despite “political issues in Thailand and overheating concerns in China and India”.

Most of this is good to read and talk about, no doubt. The point is, our fund houses will have to keep an awful lot more in mind before they start investing abroad. So, they will have to factor in China’s puffed-up trade surplus, Brazil’s newly-upgraded sovereign rating, South Korea’s financial sector reforms, Mexico’s recent deceleration on the GDP front…. not to mention acquisition of Turkish companies!

We are being a little flippant here, of course. Fund houses that have foreign principals need to identify good feeder funds into which money will flow. In fact, a few players have already done this.

Kotak and Tata are some of the most recent examples. More tie-ups are likely to materialise in the days ahead.

Feedback may be sent to nilanjan@thehindu.co.in