Is it opportune time to invest in international funds now?

Almost two years back, the world has witnessed something unprecedented with voluntary closure of each country's borders. The Covid pandemic has begun to unleash and none had a clue on how to counter it. Even we were unaware of how the virus spreads, mutates and impacts the human beings. This near-synchronized lockdowns across the nations has suddenly halted the world economic engine.

The central banks and governments have taken up the mantle to revive the economy and did what they know is the best. Unparalleled amounts of money was infused particularly across the western & developed world in a bid to avoid contraction of the economies. The flush of funds (Quantitative Easing, QT) did good for the lower rung of the population while it also boosted consumption for which there is a haphazard supply. This imbalance has led to steep increase in prices and thus set the inflationary conditions.

The restrictive conditions (mobility) and the oversupply of money created enormous demand for alternative forms of communication ensuring that the productivities are not completely dragged down. The biggest beneficiary is the tech industry which was able to compensate most of the traditional work shifted to remote. It has also attracted further investments in this sector, taking the stock prices higher.

This cycle reached peaks even as the policy makers debated if the inflationary conditions are transitory. At the beginning of this year, the Russian-Ukrainian conflict added further woes. Initially, it disturbed the recovering supply chains impacting the food grain supplies. The unresolved inflation was further exacerbated with the energy prices resuming an upward journey due to the fallout of the war.

Central bankers in a bid to control the zooming prices, which hit the records in more than four decades, went on a steep increase in interest rates. The consistent tweak in the rates which were artificially kept wrapped near or under zero simultaneously draining supply of money (Quantitative Tightening, QT) has parched the desired liquidity for the sectors earlier benefited by the QE. Most of these tech companies were using the easy money to expand the markets and spent more money on market penetration leaving scant attention to profitability. Suddenly as the conditions reversed, they were bereft of liquidity which helped them to grow. Investors who were willing to shell any amount to grab an opportunity to own these companies have now begun to shy away, resulting in price corrections.

Even as the companies scrambled to address the profits, they lost investor's confidence about their survival in certain cases. The tight liquidity conditions have impacted all asset classes as the risk premiums rose. Equities began to correct overall with highest pain in technology related companies. The popular broader index, NASDAQ has corrected by a huge level, slowly limping back part of the correction. In India, there were many international funds available to participate in the global markets, most of which are either UJS-centric or overweight on US equity indices. Of course, most of the exposure even in the MSCI global index is to US equities and it's natural for the funds also to position in that fashion. Among many Indian investors, US exposure particularly NASDAQ was done through international funds or index fund-of-funds which were tracking this index. The one-year return on this index stands at negative 29 per cent which went down over 40 per cent in between. So,what should investors do? Investors exposed to this could use the correction to average if they have invested in lumpsum. If the investment is staggered through Systematic Investment or Transfer Plans (SIP/STP) are better off containing the investments. The rationale being that many of these companies are not going to be vanished overnight though there would be an extended time of underperformance. Moreover, ensure that the exposure is not skewed towards these funds and ideally not exceed 20-25 per cent of the portfolio unless there's a specific need like overseas children's education. Also, an active timing of markets could backfire as the current conditions could prevail for few more quarters as the central banks are resolved to tame the inflation to their desired levels.

(The author is a co-founder of 'Wealocity', a wealth management firm and could be reached at [email protected])