If you want to shield your portfolio against the risk of a tumbling rupee, there are essentially three ways to do this.
‘Buy export-oriented companies’ — may be the first suggestion that crops up. But looking through the actual performance of exporting companies over the past five years shows that randomly buying exporters’ stocks and expecting them to gain from a weakening rupee would be futile.
Sure, combined profits of the listed software companies rose by some 30 per cent between March and December 2011, as the rupee depreciated 16 per cent.
But the same companies reported a 3 per cent profit drop in the June 2012 quarter though the rupee weakened by 8.6 per cent to a dollar.
Pharma companies as a class have proved an uncertain hedge against a sliding rupee too.
Their aggregate profits actually fell both during the 2011 and 2012 episodes of rupee depreciation.
With the risk of client defaults, pricing pressure and derivative losses, smaller export oriented companies from textiles and gems and jewellery have proved even more risky when global markets are shaky.
They have limited scale and bargaining power relative to the global giants they supply to.
The problem with expecting exporters to shield your portfolio from a sliding rupee is that, episodes of rupee weakness usually coincide with turmoil in global markets.
In such cases, a lower exchange rate may help realisations of exporters, but this is often overshadowed by shaky prospects for their core business, in the form of fewer deal wins, pricing pressures or clients going bust. Exporters who have foreign currency borrowings may find gains on realisations offset by bloated debt obligations.
On a stock specific basis, a few leading companies that have benefited from rupee weakness in the past are pharma names such as Sun Pharma, Ipca Labs, Cipla and IT companies such as HCL Technologies.
Select global funds
For those who are unable to make such tricky stock-specific choices, equity funds that invest in stocks listed overseas make a good rupee diversifier.
These global funds, as a category, have fared much better than funds investing in Indian stocks during phases of rupee depreciation.
In the market crash of 2008, even as the CNX 500 fell by 57 per cent and domestic equity funds crashed by 55 per cent on an average, international funds contained losses at 41 per cent. That may not sound impressive, but must be seen in the light of the global meltdown in equities.
Between June and December 2011, another period of sharp rupee depreciation, global funds got away with a 3 per cent loss, while Indian markets lost 20 per cent and the average equity fund 18 per cent.
However, when it comes to diversifying your risk, you need to be selective about global funds too.
Funds focussed on themes such as emerging markets and commodities have tended to give way quite easily during global crises, proving an uncertain hedge against a sliding rupee.
It is funds playing on US markets (Motilal Oswal Nasdaq ETF) or asset classes such as real-estate that have weathered the turmoil much better.
However, one investment that has consistently proved its mettle as a hedge against rupee weakness is gold exchange traded funds.
With gold holding up very well during periods of global turmoil and a strong dollar adding to these returns, holders of gold exchange traded funds have had a whale of a time whenever the rupee has slipped over the last five years.
Based on your preferences therefore, you can mix and match stocks, global funds and gold ETFs to make up your anti-rupee portfolio.
Remember that this is only a diversifier. Allocate 10-15 per cent of your long-term portfolio to investments that can keep you safe from a sliding rupee.