"We are going to do something so special. It will be so special. It will be an amazing day. It will be called Brexit plus plus plus," Mr Donald Trump told his supporters at a rally just before America went to vote. And as Trump predicted, his unexpected victory in the U.S. Presidential elections was nothing short of Brexit (when UK voted out of the European Union)—both of which sent international markets in a frenzy.
Trump's win surprised many in the U.S. and also came as a shock to the rest of the world. With Trump supporters celebrating the win, anti-trump factions took to the streets shouting slogans such as "Not My President". As America remains dazed on whether they have done the right thing, stock markets worldwide are in a state of flux.
Despite Trump's victory sparking panic in markets worldwide on the day of the election results, most global indices partially recovered. However, as traders evaluated the situation, Asian and European stocks took a beating the next day – in Friday's trade.
Performance Of Global Indices
|
9-Nov-16 |
10-Nov-16 |
11-Nov-16 |
| India - Sensex |
-1.23% |
0.97% |
-2.54% |
| China - Shanghai |
-0.62% |
1.37% |
0.78% |
| Australia - ASX All Ord. |
-1.94% |
3.26% |
0.70% |
| Japan - Nikkei 225 |
-5.36% |
6.72% |
0.18% |
| Russia - RTSI |
1.82% |
0.35% |
-2.38% |
| Eurozone - Euro Stoxx 50 |
1.09% |
-0.32% |
-0.54% |
| UK - FTSE 100 |
1.00% |
-1.21% |
-1.43% |
| US - S&P 500 |
1.11% |
0.20% |
-0.14% |
(Source: ACE MF, PersonalFN Research)
Experts warn that the US and global economy faces a very uncertain future. There are still two-and-half months to go before the President-elect, Donald Trump (a Republican) finally enters the White House and takes over from Barack Obama (a Democrat) in January 2017. Global markets will be watching Trump closely to see if he goes ahead with the harsh policies outlined during his campaign.
Once he takes office, Trump's rejection of free trade and free markets could lead to raising tariffs on imports from China, Mexico and other countries. This will have a cascading effect on the global economy.
But there will be other policies which will be a part of his agenda, such as dealing with immigration, reducing taxes and Obamacare. This could lead to market volatility over the medium term, given the lack of clarity as to what Trump will prioritise in office.
Will Trump be a boon or a bane for the markets? And is now a good time to take exposure in offshore mutual funds (also known as global funds or foreign funds)? To help you decide, PersonalFN takes a deeper look at the performance of these schemes.
Investing In Global Funds
In times of exuberance, and propagating diversification (which is one of the tenets of investing) mutual fund distributors / agents / relationship managers did recommend investing in these schemes. Most were launched at a time when international markets were booming. In 2007 and 2014 there were a burst of these schemes… and it's important to note, that the number of foreign fund offers in the prior years will be higher, as many global funds which lacked retail participation, were merged with other schemes.
Today, there are 39 global funds (including exchange traded funds) available for investment. Here too, there is no dearth of choices. You can choose schemes which invest in stocks of a particular country or schemes which will diversify your investment across the globe or with a specific theme such as "emerging markets".
Foreign Fund Offers
(Source: Ace MF, PersonalFN Research)
But should you really include global funds in your portfolio as a means of diversification; are they worth it?
Let's see how global funds have fared…
Over the past one year, schemes investing in global gold mining companies gained the most, followed by schemes investing in emerging markets. On a three year basis, schemes which invested in US assets topped the list.
On comparing the performance of the schemes with the BSE 200 index over a one-year and three-year period, the BSE 200 index outperformed most of the international equity schemes. Clearly, investing in Indian equity funds over this period would have been a prudent choice. But, this is over a single market phase, a phase where Indian equity outperformed. You need to analyse how the funds performed over different market cycles.
Performance Across Market Cycles
(Source: Ace MF, PersonalFN)
As seen in the table above, majority of the global funds moved in tandem with the Indian market, represented by the BSE 200 Index. In the bear phases, except for the "World Gold" funds and a few other schemes, all the funds declined in value. In the bull phases, most of the schemes were in the black. As you can see, though international market cycles have been in sync, the magnitude of returns have differed due to country-specific factors and others such as fundamentals and valuations of the underlying stocks which influence returns.
Evaluating these dynamics, especially of the international markets, is extremely challenging even for skilled traders, leave alone retail investors. You need to be cognisant of the risk exposure which is a function of variety of factors before investing your hard-earned money in such schemes. Global funds may be suitable for diversification only if the outlook of your domestic economy is bleak, while international investment opportunities look promising. So, in a sense there needs to be negative correlation with the domestic market – only then investment in international equity would support your portfolio.
It is noteworthy that, global funds do not enjoy the same tax advantage as equity funds where the returns are tax-free after a holding period of 1 year. Global funds are classified as non-equity schemes where gains are taxed similar to debt schemes. So, be aware of the taxation as well.
A final word:
Investing in global funds due to geopolitical events such as Trump coming to power may not be the right way to invest. This is because your investment is based on speculation of how the markets will react. When investing in equity you need to take a long term view, which can often be difficult to judge based on recent events. If Trump does take harsh decisions on US policies, it may have repercussions the world over.
In uncertain times like these, gold can be an effective portfolio diversifier, a safe haven, a hedge to your investment portfolio…and therefore allocating a portion of the investible surplus to gold would be a prudent strategy. Allocate at least 10% to 15% of your entire portfolio to gold and hold it with a long term investment horizon. It would act as store of value in times of economic uncertainties. You may buy gold ETFs, gold funds, and/or subscribe to Sovereign Gold Bonds – which are a smart way to invest in gold.
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