Forex volatility: Doomsday for NRI investors

Lovaii NavlakhiInternational Money Matters

The email that I got on Friday the 13th (of December) was ominous. My client from Singapore wanted to have a call with me to discuss his portfolio on the weekend. Like most NRI clients, Venky had a decision to make with one part of his money – whether to invest in equities in his home country (Singapore, in his case) or in India. For 2013, the Singapore Straits index had fallen 3% while the Nifty (50 stock index on the National Stock Exchange in India) had risen 4.5%. I started feeling relieved till I found out that the Singapore Dollar (SGD) had risen 10.5% during the year. In comparable terms, despite the fall in the local stock index, Venky was marginally better off remaining invested in his home country in 2007.

Before my US and UK clients also called me, I decided to dedicate my entire weekend to completing an analysis of how their stock markets had performed in absolute terms as well as after reflecting the exchange rate movements. (Note: in this article, the equity indices compared are Dow Jones, Nasdaq, FTSE and Singapore Straits; the currencies are USD, GBP and SGD.) What I arrived at is some rules for NRI investors based on analysed information over the past decade:

• Asset allocation is the key.


• Past performance does not guarantee future performance.


• Winners rotate in all markets.


• Staggering investment entry can reduce risks.


• Global factors are difficult to comprehend; directional change can be swift.

Here is what the scoreboard of the previous 5 years (2003-07) looked like then: Rupee up:  18% vs US Dollar; 1% over SGD. The British pound (GBP) was up a marginal 1.5%. Nifty was up 461%. Straits index was a distant runner up with 160%; Nasdaq 112%; and the Dow Jones and FTSE just around 60%. Who wanted to forego a three to six time return differential, with a currency gain thrown in as well?

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Since the financial crisis, the Nifty has more than doubled in value. That is still better than the FTSE, Straits Index and Dow Jones (45% to 80% in the same time frame), but worse than the Nasdaq (185%). For someone who may have moved funds to India from overseas around that time, the loss has been on account of the currency depreciation: 29% vs. the USD, and 45% vs.  SGD and GBP. In currency neutral terms, the returns on the FTSE and the Nifty are equal (nearly 110%); all other indices are better.

Nothing is really constant in the markets. While the Nasdaq has been the clear winner in the past 1, 2 and 5 years, the Nifty is miles ahead when we compare returns across the last decade. The GBP is the currency with the highest appreciation vs. the INR in the past one and two years, while the SGD is the leader over longer periods.

What clearly stands out is that currency is certainly an important factor in evaluating whether to move funds to India or not; but it cannot be the only one. Despite a weakening of the INR by 36% vs. the USD and 85% vs. the SGD in the past 10 years, the currency neutral returns of the Straits index, the Nasdaq and the Nifty are almost identical (221%, 221% and 228%, respectively). These are comparisons from a point-to-point basis (31 December 2003 to 13 December 2013). The one sure-shot way to reduce risks is to stagger the investment entry.

If an NRI investor had moved funds from the USA to India at Rs. 39.24 in end 2007, the loss in currency is 58% (or 8% p.a.). The financial planner approach would be to make a plan to transfer a certain percentage of annual savings to India, thereby increasing the average exchange rate at which the funds were brought into India. Of course, the planner would not have invested all funds at one go into equities, and a staggered, systematic entry could have cut risks of investing in the asset class as well.      

The current mood in the Indian markets is somber. As opposed to 2007, investors want to move no funds to India. In the past 2 years, the Dow Jones and Nifty have matched returns in absolute terms, but not in US dollar terms. If your allocation to India was 10% of your financial assets, and that has dropped to 8%, my (a financial planner’s) suggestion would be to “top up” the Indian allocation. Past performance is certainly no guarantee of future performance – and that applies even on the downside. 

The author-Lovaii Navlakhi, CFP is the CEO of International Money Matters and The Financial Alphabet.