Indian resident or NRI: No matter where you live in the world, a portion of your investment should be allocated to US equities. The case for investing in US stocks only gets stronger if you are a US-based NRI.
As the largest market in the world, the US stock market provides a stable, liquid investment opportunity for any investor. For NRIs residing in the US, investment in US equities is essential to a well-diversified portfolio due to the scale of the US market, access to global growth, and inflationary hedge against the relatively more volatile rupee. As a resident of the US, one has the same access to all financial products and will be taxed just as an American citizen.
US: A Global Powerhouse
The US is a global powerhouse with both the world’s largest economy and stock market.
The US economy, with a nominal GDP of $20.5 trillion in 2018, contributes almost 24% of the global economy. When adjusting GDP for purchasing power parity (PPP), which allows for comparison between countries with different currencies, you may be surprised to know that China has the world’s largest economy with $25.3 trillion in GDP by PPP versus $20.5 trillion for the US. Under those same parameters, India is third with a GDP by PPP of $10.5 trillion.
The total capitalization of all domestic stocks in the US market, the largest in the world, is $30.4 trillion, larger than the next nine largest stock market capitalizations combined. The US alone comprises 44% of the aggregate value of stock markets worldwide, while the stocks in the S&P 500 represent over 70% of the total market capitalization of all US-traded stocks.
Although there are more publicly listed companies on exchanges in India than anywhere else in the world, including the US, the aggregate market capitalization of US companies is significantly larger than that of India.
This translates to greater market depth in terms of total shares outstanding per company and liquidity, as defined by average shares traded daily. To put this in perspective, in 2018, the trading volume in US stock exchanges was $ 33 trillion, whereas the same for India was comparatively a paltry $ 1.25 trillion. The S&P 500 and other US-based market indices provide greater liquidity than Indian equities based on the sheer scale and size of the underlying companies.
S&P: Solid Long-Run Historical Returns
The average annual return of the S&P 500, including dividends, from inception in 1926 to 2018, is 9.8%. The NIFTY 50, a relatively newer index, has averaged roughly 10% in USD terms since 1998. However, the S&P’s historical volatility has averaged 15%, while the NIFTY ’50s has averaged 24.5%, making the S&P a solid and relatively safer investment for some portion of any NRI portfolio. The longevity of the track record also weighs in favor of the US stock market. The US stock market has also outperformed other asset classes such as Real Estate and Gold over the long run.
Global Brand Recognition
The world is rapidly shrinking, with brand awareness growing globally. This extends beyond food and fashion to technology, auto, consumer goods, and appliances. Many of the best-known brands originated in the US, from Apple to Nike to Disney to GE. The US consistently ranks high in brand recognition with 19 of the top 25 brands by brand value, according to Interbrand’s annual survey, originating in the US. Although technology has an outsized share of brand recognition, most of the below names will be recognizable brands in India as well. If you are a believer in investing in what you know, then some portion of the funds should be allocated to US equities.
US Equities Provide Global Exposure
Investment in the US stock market doesn’t mean exposure only to the US economy. A significant proportion of US companies earn their revenues outside the US. In 2018, companies listed in the S&P 500 earned 42.9% of their revenues outside the US, and S&P 500 earnings outpaced US growth. This infers that investment in the S&P 500 is in and of itself geographically diversified, providing exposure to Asia, Europe, Africa, and other markets while minimizing any country-specific investment risks.
One reason for investing in the emerging markets is the expectation that they will eventually close the gap with the developed markets in a globalized world and that their growth rates would be higher owing to their smaller base. But this phenomenon can also be captured by investing in many US stocks as they sell their products or services in these developing markets. For instance, Netflix expects most of its future growth to come from emerging markets.
Hedge Against Inflation and Currency Risk
When considering the impact of inflation, the US has historically been a more stable economy than India. For US-based NRIs, this makes it especially important to invest in the US. Between 2000 and 2017, US inflation averaged 2.2%, while inflation in India averaged 6.4%. Between 2005 to 2019, the rupee depreciated from 43.7 INR/USD to 70.9 INR/USD, making the dollar relatively stronger.
Investment in US companies means one benefits not only from stock price appreciation but also a strengthening US dollar. Given the historical depreciation of the rupee, NRIs should invest some portion of their funds in USD to benefit from the US relatively stronger currency and lower inflationary environment. Also, with almost no capital controls in the US, it becomes easier to move your funds abroad should you choose to move to a different country or move back to India.
For any investor, investment in the US is an essential part of a diversified portfolio. With its outsized representation in global markets, the US is a generally reliable avenue to obtain long-term capital appreciation, hedge against inflation and currency risk in India, and invest in some of the most well-known and innovative companies in the world.