Invest abroad for gains in hard times

Most stock market investors would like to forget the year 2011. This is the year when realisation dawned that the Indian economy was not immune to what happened in the outside world. The year has seen the fall of the rupee, the fall of the stock markets, the fall in the value of fixed income paper and profits of Indian companies. The only things that kept going up were interest rates and inflation. And the price of gold rose in direct proportion to the nervousness of investors.

It is worth noting that more countries bought gold in 2011 than ever before as part of their “sovereign” treasury. One avenue that has been less explored is the parking of wealth overseas. The government permits each citizen to remit each year, a sum equivalent to US$ 2,00,000 for investment overseas. If we take a family as a five member unit, it is a million dollars (almost `5 crore) every year! For details please check out http://www.rbi.org.in/scripts/FAQView.aspx?Id=66 [1] at the RBI website.

If we want to hedge ourselves against a weakening rupee, we should use this facility as liberally as possible. Given our continuing trade deficits and high inflation, the rupee will keep falling. Only strong capital inflows can reverse this, but capital flows are ephemeral. Politics and economics both matter and here India is clearly not a favourite of global money. So, assuming a rich family can invest a million dollars a year overseas, what are the choices? Well, equities are one, real estate is another and bank deposits are also on. These three avenues are the preferred routes. One interesting thing would be to use part of the money to invest in gold overseas. Perhaps we get a better price and if the rupee falls, we get further upside.

If one thinks that real estate in Europe / USA has become cheap, this facility can be used to acquire assets which can earn good rentals. Surely, rental yields abroad would be better than in cities like Mumbai or New Delhi. Of course, there are many banks and global wealth managers who are soliciting mutual fund and portfolio investments. However, most of them come with high management fees and one should be careful. Instead of a mutual fund, I would rather pick up some great US domiciled companies whose stocks are available at decent prices and fairly attractive dividend yields.